All economic theories that excessively abuse mathematic apparatus belong to the class of a
common perversion that can be defined as the search for a superior justification for selfishness
See also Boulding's critical review of Samuelson, discussing the limits of the mathematicization
of economic theory. Of course Samuelson was the tip of the iceberg, and since then many overconfident
economic mathematicians have led to very serious financial problems. I had one stats professor who called
a complex theory on the blackboard "graffiti."
Mathiness is perfect tool for obfiscating facts and real
goals. In the world of for-profit finance, the return to obfuscation in communication with regulators
is much higher, so there is every reason to expect that mathiness would be used liberally, particularly
in mandated disclosure.
Of course this is not limited to economics and Richard Feynman described similar phenomenon long
ago.
In the South Seas there is a cargo cult of people. During the war they saw airplanes with lots of
good materials, and they want the same thing to happen now. So they've arranged to make things like
runways, to put fires along the sides of the runways, to make a wooden hut for a man to sit in, with
two wooden pieces on his head to headphones and bars of bamboo sticking out like antennas--he's the
controller--and they wait for the airplanes to land. They're doing everything right. The form is perfect.
It looks exactly the way it looked before. But it doesn't work. No airplanes land. So I call these things
cargo cult science, because they follow all the apparent precepts and forms of scientific investigation,
but they're missing something essential, because the planes don't land.
Now it behooves me, of course, to tell you what they're missing. But it would be just about as difficult
to explain to the South Sea islanders how they have to arrange things so that they get some wealth in
their system. It is not something simple like telling them how to improve the shapes of the earphones.
But there is one feature I notice that is generally missing in cargo cult science. That is the idea
that we all hope you have learned in studying science in school--we never say explicitly what this is,
but just hope that you catch on by all the examples of scientific investigation. It is interesting,
therefore, to bring it out now and speak of it explicitly. It's a kind of scientific integrity, a principle
of scientific thought that corresponds to a kind of utter honesty--a kind of leaning over backwards.
For example, if you're doing an experiment, you should report everything that you think might make it
invalid--not only what you think is right about it: other causes that could possibly explain your results;
and things you thought of that you've eliminated by some other experiment, and how they worked--to make
sure the other fellow can tell they have been eliminated.
Details that could throw doubt on your interpretation must be given, if you know them. You must do
the best you can--if you know anything at all wrong, or possibly wrong--to explain it. If you make a
theory, for example, and advertise it, or put it out, then you must also put down all the facts that
disagree with it, as well as those that agree with it. There is also a more subtle problem. When you
have put a lot of ideas together to make an elaborate theory, you want to make sure, when explaining
what it fits, that those things it fits are not just the things that gave you the idea for the theory;
but that the finished theory makes something else come out right, in addition.
In summary, the idea is to give all of the information to help others to judge the value of your
contribution; not just the information that leads to judgment in one particular direction or another....
Thomas Piketty's New Book Brings Political Economy Back to Its Sources
In the same way that Capital in the Twenty-First Century transformed the way economists look
at inequality, Piketty's new book Capital and Ideology will transform the way political
scientists look at their own field.
By Branko Milanovic
Thomas Piketty's books are always monumental. Some are more monumental than others. His
Top Incomes in France in the Twentieth Century: Inequality and Redistribution,
1901–1998 (published in French as Les hauts revenus en France au XXe siècle)
covered more than two centuries of income and wealth inequality, in addition to social and
political changes in France. His international bestseller Capital in the Twenty-First Century
(Le capital au XXI siècle) broadened this approach to the most important Western
countries (France, the United States, United Kingdom, and Germany). His new book Capital and
Ideology (to be published in English in March 2020; already published in France as Capital et
idéologie) broadens the scope even further, covering the entire world and presenting a
historical panorama of how ownership of assets (including people) was treated, and justified,
in various historical societies, from China, Japan, and India, to the European-ruled American
colonies, and feudal and capitalist societies in Europe. Just the mention of the geographical
and temporal scope of the book suffices to give the reader an idea of its ambition.
Before I review Capital and Ideology, it is worth mentioning the importance of Piketty's
overall approach, present in all three of his books. His approach is characterized by the
methodological return of economics to its original and key functions: to be a science that
illuminates the interests and explains the behaviors of individuals and social classes in
their quotidian (material) life. This methodology rejects the dominant paradigm of the past
half-century, which increasingly ignored the role of classes and heterogeneous individuals in
the process of production and instead treated all people as abstract agents that maximize
their own income under certain constraints. The dominant paradigm has emptied almost all
social content from economics and presented a view of society that was as abstract as it was
false.
The reintroduction of actual life into economics by Piketty and several other economists
(not entirely coincidentally, most of them are economists interested in inequality) is much
more than just a return to the sources of political economy and economics. This is because
today, we have vastly more information (data) than was available to economists a century ago,
not only about our own contemporary societies but also about past societies. This combination
between political economy's original methodology and big data is what I call "turbo-Annales,"
after the French group of historians that pioneered the view of history as a social science
focusing on the broad social, economic, and political forces that shape the world. The topics
that interested classical political economy and the authors associated with the Annales
School can now be studied empirically, and even econometrically and experimentally -- things
which they could not do, both because of the scarcity of data and unavailability of modern
methodologies.
It is within this context that, I believe, we ought to consider Piketty's Capital and
Ideology. How successful was his approach, applied now to the world and over a very long
time-horizon?
"The dominant paradigm has emptied almost all social content from economics and presented
a view of society that was as abstract as it was false."
For the purposes of this review, I divide Piketty's book into two parts: the first, which
I already mentioned, looks at ideological justifications of inequality across different
societies (Parts 1 and 2 of the book, and to some extent Part 3); the second introduces an
entirely new way of studying recent political cleavages in modern societies (Part 4). I am
somewhat skeptical about Piketty's success in the first part, despite his enormous erudition
and his skills as a raconteur, because success in discussing something so geographically and
temporally immense is difficult to reach, even by the best-informed minds who have studied
different societies for the majority of their careers. Analyzing each of these societies
requires an extraordinarily high degree of sophisticated historical knowledge regarding
religious dogmas, political organization, social stratification, and the like. To take two
examples of authors who have tried to do it, one older and one more recent: Max Weber, during
his entire life (and more specifically in Economy and Society), and Francis Fukuyama in his
two-volume masterpiece on the origins of the political and economic order. In both cases, the
results were not always unanimously approved by specialists studying individual societies and
religions.
In his analysis of some of these societies, Piketty had to rely on somewhat
"straightforward" or simplified discussions of their structure and evolution, discussions
which at times seem plausible but superficial. In other words, each of these historical
societies, many of which lasted centuries, had gone through different phases in their
developments, phases which are subject to various interpretations. Treating such evolutions
as if they were a simple, uncontested story is reductionist. It is a choice of one plausible
historical narrative where many exist. This compares unfavorably with Piketty's own rich and
nuanced narrative in Top Incomes in France in the Twentieth Century.
While I am somewhat skeptical about that first part of the book, I am not skeptical about
the second. In this part, we find the Piketty who plays to his strength: bold and innovative
use of data which produces a new way of looking at phenomena that we all observe but were
unable to define so precisely. Here, Piketty is "playing" on the familiar Western economic
history "terrain" that he knows well, probably better than any other economist.
This part of the book looks empirically at the reasons that left-wing, or social
democratic parties have gradually transformed themselves from being the parties of the
less-educated and poorer classes to become the parties of the educated and affluent middle
and upper-middle classes. To a large extent, traditionally left parties have changed because
their original social-democratic agenda was so successful in opening up education and
high-income possibilities to the people who in the 1950s and 1960s came from modest
backgrounds. These people, the "winners" of social democracy, continued voting for left-wing
parties but their interests and worldview were no longer the same as that of their
(less-educated) parents. The parties' internal social structure thus changed -- the product
of their own political and social success. In Piketty's terms, they became the parties of the
"Brahmin left" (La gauche Brahmane), as opposed to the conservative right-wing parties, which
remained the parties of the "merchant right" (La droite marchande).
To simplify, the elite became divided between the educated "Brahmins" and the more
commercially-minded "investors," or capitalists. This development, however, left the people
who failed to experience upward educational and income mobility unrepresented, and those
people are the ones that feed the current "populist" wave. Quite extraordinarily, Piketty
shows the education and income shifts of left-wing parties' voters using very similar
long-term data from all major developed democracies (and India). The fact that the story is
so consistent across countries lends an almost uncanny plausibility to his hypothesis.
It is also striking, at least to me, that such multi-year, multi-country data were
apparently never used by political scientists to study this phenomenon. This part of
Piketty's book will likely transform, or at least affect, how political scientists look at
new political realignments and class politics in advanced democracies in the years to come.
In the same way that Capital in the Twenty-First Century has transformed how economists look
at inequality, Capital and Ideology will transform the way political scientists look at their
own field.
Branko Milanovic is a senior scholar at the Stone Center on Socio-Economic Inequality at the
Graduate Center, City University of New York.
"... Early in any psychology course, students are taught to be very cautious about accepting people's reports. A simple trick is to stage some sort of interruption to the lecture by confederates, and later ask the students to write down what they witnessed. Typically, they will misremember the events, sequences and even the number of people who staged the tableaux. Don't trust witnesses, is the message. ..."
"... The three assumptions -- lack of rationality, stubbornness, and costs -- imply that there is slim chance that people can ever learn or be educated out of their biases; ..."
"... So, are we as hopeless as some psychologists claim we are? In fact, probably not. Not all the initial claims have been substantiated. For example, it seems we are not as loss averse as previously claimed. Does our susceptibility to printed visual illusions show that we lack judgement in real life? ..."
"... Well the sad fact is that there's nobody in the position to protect "governments" from their own biases, and "scientists" from theirs ..."
"... Long ago a lawyer acquaintance, referring to a specific judge, told me that the judge seemed to "make shit up as he was going along". I have long held psychiatry fits that statement very well. ..."
"... Here we have a real scientist fighting the nonsense spreading from (neoclassical) economics into other realms of science/academia. ..."
"... Behavioral economics is a sideline by-product of neoclassical micro-economic theory. It tries to cope with experimental data that is inconsistent with that theory. ..."
"... Everything in neoclassical economics is a travesty. "Rational choice theory" and its application in "micro economics" is false from the ground up. It basically assumes that people are gobbling up resources without plan, meaning or relevant circumstances. Neoclassical micro economic theory is so false and illogical that I would not know where to start in a comment, so I should like to refer to a whole book about it: Keen, Steve: "Debunking economics". ..."
"... As the theory is totally wrong it is really not surprising that countless experiments show that people do not behave the way neoclassical theory predicts. How do economists react to this? Of course they assume that people are "irrational" because they do not behave according to their studied theory. (Why would you ever change your basic theory because of some tedious facts?) ..."
"... The title of the 1st ed. of Keen's book was "Debunking Economics: The Naked Emperor of the Social Sciences" which was simply a perfect title. ..."
Early in any psychology course, students are taught to be very cautious about accepting people's reports. A simple trick is
to stage some sort of interruption to the lecture by confederates, and later ask the students to write down what they witnessed.
Typically, they will misremember the events, sequences and even the number of people who staged the tableaux. Don't trust witnesses,
is the message.
Another approach is to show visual illusions, such as getting estimates of line lengths in the Muller-Lyer illusion, or studying
simple line lengths under social pressure, as in the Asch experiment, or trying to solve the Peter Wason logic problems, or the puzzles
set by Kahneman and Tversky. All these appear to show severe limitations of human judgment. Psychology is full of cautionary tales
about the foibles of common folk.
As a consequence of this softening up, psychology students come to regard themselves and most people as fallible, malleable, unreliable,
biased and generally irrational. No wonder psychologists feel superior to the average citizen, since they understand human limitations
and, with their superior training, hope to rise above such lowly superstitions.
However, society still functions, people overcome errors and many things work well most of the time. Have psychologists, for one
reason or another, misunderstood people, and been too quick to assume that they are incapable of rational thought?
He is particularly interested in the economic consequences of apparent irrationality, and whether our presumed biases really result
in us making bad economic decisions. If so, some argue we need a benign force, say a government, to protect us from our lack of capacity.
Perhaps we need a tattoo on our forehead: Diminished Responsibility.
The argument leading from cognitive biases to governmental paternalism -- in short, the irrationality argument -- consists
of three assumptions and one conclusion:
1. Lack of rationality. Experiments have shown that people's intuitions are systematically biased.
2. Stubbornness. Like visual illusions, biases are persistent and hardly corrigible by education.
3. Substantial costs. Biases may incur substantial welfare-relevant costs such as lower wealth, health, or happiness.
4. Biases justify governmental paternalism. To protect people from theirbiases, governments should "nudge" the public
toward better behavior.
The three assumptions -- lack of rationality, stubbornness, and costs -- imply that there is slim chance that people can ever
learn or be educated out of their biases; instead governments need to step in with a policy called libertarian paternalism (Thaler
and Sunstein, 2003).
So, are we as hopeless as some psychologists claim we are? In fact, probably not. Not all the initial claims have been substantiated.
For example, it seems we are not as loss averse as previously claimed. Does our susceptibility to printed visual illusions show that
we lack judgement in real life?
In Shepard's (1990) words, "to fool a visual system that has a full binocular and freely mobile view of a well-illuminated scene
is next to impossible" (p. 122). Thus, in psychology, the visual system is seen more as a genius than a fool in making intelligent
inferences, and inferences, after all, are necessary for making sense of the images on the retina.
Most crucially, can people make probability judgements? Let us see. Try solving this one:
A disease has a base rate of .1, and a test is performed that has a hit rate of .9 (the conditional probability of a positive
test given disease) and a false positive rate of .1 (the conditional probability of a positive test given no disease). What is
the probability that a random person with a positive test result actually has the disease?
Most people fail this test, including 79% of gynaecologists giving breast screening tests. Some researchers have drawn the conclusion
that people are fundamentally unable to deal with conditional probabilities. On the contrary, there is a way of laying out the problem
such that most people have no difficulty with it. Watch what it looks like when presented as natural frequencies:
Among every 100 people, 10 are expected to have a disease. Among those 10, nine are expected to correctly test positive. Among
the 90 people without the disease, nine are expected to falsely test positive. What proportion of those who test positive actually
have the disease?
In this format the positive test result gives us 9 people with the disease and 9 people without the disease, so the chance that
a positive test result shows a real disease is 50/50. Only 13% of gynaecologists fail this presentation.
Summing up the virtues of natural frequencies, Gigerenzer says:
When college students were given a 2-hour course in natural frequencies, the number of correct Bayesian inferences increased
from 10% to 90%; most important, this 90% rate was maintained 3 months after training (Sedlmeier and Gigerenzer, 2001). Meta-analyses
have also documented the "de-biasing" effect, and natural frequencies are now a technical term in evidence-based medicine (Akiet
al., 2011; McDowell and Jacobs, 2017). These results are consistent with a long literature on techniques for successfully teaching
statistical reasoning (e.g., Fonget al., 1986). In sum, humans can learn Bayesian inference quickly if the information is presented
in natural frequencies.
If the problem is set out in a simple format, almost all of us can all do conditional probabilities.
I taught my medical students about the base rate screening problem in the late 1970s, based on: Robyn Dawes (1962) "A note on
base rates and psychometric efficiency". Decades later, alarmed by the positive scan detection of an unexplained mass, I confided
my fears to a psychiatrist friend. He did a quick differential diagnosis on bowel cancer, showing I had no relevant symptoms, and
reminded me I had lectured him as a student on base rates decades before, so I ought to relax. Indeed, it was false positive.
Here are the relevant figures, set out in terms of natural frequencies
Every test has a false positive rate (every step is being taken to reduce these), and when screening is used for entire populations
many patients have to undergo further investigations, sometimes including surgery.
Setting out frequencies in a logical sequence can often prevent misunderstandings. Say a man on trial for having murdered his
spouse has previously physically abused her. Should his previous history of abuse not be raised in Court because only 1 woman in
2500 cases of abuse is murdered by her abuser? Of course, whatever a defence lawyer may argue and a Court may accept, this is back
to front. OJ Simpson was not on trial for spousal abuse, but for the murder of his former partner. The relevant question is: what
is the probability that a man murdered his partner, given that she has been murdered and that he previously battered her.
Accepting the figures used by the defence lawyer, if 1 in 2500 women are murdered every year by their abusive male partners, how
many women are murdered by men who did not previously abuse them? Using government figures that 5 women in 100,000 are murdered every
year then putting everything onto the same 100,000 population, the frequencies look like this:
So, 40 to 5, it is 8 times more probable that abused women are murdered by their abuser. A relevant issue to raise in Court about
the past history of an accused man.
Are people's presumed biases costly, in the sense of making them vulnerable to exploitation, such that they can be turned into
a money pump, or is it a case of "once bitten, twice shy"? In fact, there is no evidence that these apparently persistent logical
errors actually result in people continually making costly errors. That presumption turns out to be a bias bias.
Gigerenzer goes on to show that people are in fact correct in their understanding of the randomness of short sequences of coin
tosses, and Kahneman and Tversky wrong. Elegantly, he also shows that the "hot hand" of successful players in basketball is a real
phenomenon, and not a stubborn illusion as claimed.
With equal elegance he disposes of a result I had depended upon since Slovic (1982), which is that people over-estimate the frequency
of rare risks and under-estimate the frequency of common risks. This finding has led to the belief that people are no good at estimating
risk. Who could doubt that a TV series about Chernobyl will lead citizens to have an exaggerated fear of nuclear power stations?
The original Slovic study was based on 39 college students, not exactly a fair sample of humanity. The conceit of psychologists
knows no bounds. Gigerenzer looks at the data and shows that it is yet another example of regression to the mean. This is an apparent
effect which arises whenever the predictor is less than perfect (the most common case), an unsystematic error effect, which is already
evident when you calculate the correlation coefficient. Parental height and their children's heights are positively but not perfectly
correlated at about r = 0.5. Predictions made in either direction will under-predict in either direction, simply because they are
not perfect, and do not capture all the variation. Try drawing out the correlation as an ellipse to see the effect of regression,
compared to the perfect case of the straight line of r= 1.0
What diminishes in the presence of noise is the variability of the estimates, both the estimates of the height of the sons based
on that of their fathers, and vice versa. Regression toward the mean is a result of unsystematic, not systematic error (Stigler,1999).
Gigerenzer also looks at the supposed finding that people are over-confidence in predictions, and finds that it is another regression
to the mean problem.
Gigerenzer then goes on to consider that old favourite, that most people think they are better than average, which supposedly
cannot be the case, because average people are average.
Consider the finding that most drivers think they drive better than average. If better driving is interpreted as meaning fewer
accidents, then most drivers' beliefs are actually true. The number of accidents per person has a skewed distribution, and an
analysis of U.S. accident statistics showed that some 80% of drivers have fewer accidents than the average number of accidents
(Mousavi and Gigerenzer, 2011)
Then he looks at the classical demonstration of framing, that is to say, the way people appear to be easily swayed by how the
same facts are "framed" or presented to the person who has to make a decision.
A patient suffering from a serious heart disease considers high-risk surgery and asks a doctor about its prospects.
The doctor can frame the answer in two ways:
Positive Frame: Five years after surgery, 90% of patients are alive.
Negative Frame: Five years after surgery, 10% of patients are dead.
Should the patient listen to how the doctor frames the answer? Behavioral economists say no because both frames are logically
equivalent (Kahneman, 2011). Nevertheless, people do listen. More are willing to agree to a medical procedure if the doctor uses
positive framing (90% alive) than if negative framing is used (10% dead) (Moxeyet al., 2003). Framing effects challenge the assumption
of stable preferences, leading to preference reversals. Thaler and Sunstein (2008) who presented the above surgery problem, concluded
that "framing works because people tend to be somewhat mindless, passive decisionmakers" (p. 40)
Gigerenzer points out that in this particular example, subjects are having to make their judgements without knowing a key fact:
how many survive without surgery. If you know that you have a datum which is more influential. These are the sorts of questions patients
will often ask about, and discuss with other patients, or with several doctors. Furthermore, you don't have to spin a statistic.
You could simply say: "Five years after surgery, 90% of patients are alive and 10% are dead".
Gigerenzer gives an explanation which is very relevant to current discussions about the meaning of intelligence, and about the
power of intelligence tests:
In sum, the principle of logical equivalence or "description invariance" is a poor guide to understanding how human intelligence
deals with an uncertain world where not everything is stated explicitly. It misses the very nature of intelligence, the ability
to go beyond the information given (Bruner, 1973)
The key is to take uncertainty seriously, take heuristics seriously, and beware of the bias bias.
One important conclusion I draw from this entire paper is that the logical puzzles enjoyed by Kahneman, Tversky, Stanovich and
others are rightly rejected by psychometricians as usually being poor indicators of real ability. They fail because they are designed
to lead people up the garden path, and depend on idiosyncratic interpretations.
Critics of examinations of either intellectual ability or scholastic attainment are fond of claiming that the items are "arbitrary".
Not really. Scholastic tests have to be close to the curriculum in question, but still need to a have question forms which are simple
to understand so that the stress lies in how students formulate the answer, not in how they decipher the structure of the question.
Intellectual tests have to avoid particular curricula and restrict themselves to the common ground of what most people in a community
understand. Questions have to be super-simple, so that the correct answer follows easily from the question, with minimal ambiguity.
Furthermore, in the case of national scholastic tests, and particularly in the case of intelligence tests, legal authorities will
pore over the test, looking at each item for suspected biases of a sexual, racial or socio-economic nature. Designing an intelligence
test is a difficult and expensive matter. Many putative new tests of intelligence never even get to the legal hurdle, because they
flounder on matters of reliability and validity, and reveal themselves to be little better than the current range of assessments.
In conclusion, both in psychology and behavioural economics, some researchers have probably been too keen to allege bias in cases
where there are unsystematic errors, or no errors at all. The corrective is to learn about base rates, and to use natural frequencies
as a guide to good decision-making.
Don't bother boosting your IQ. Boost your understanding of natural frequencies.
Good concrete advice. Perhaps even more useful for those who need to explain things like this to others than for those seeking
to understand for themselves.
"intelligence deals with an uncertain world where not everything is stated explicitly. It misses the very nature of intelligence,
the ability to go beyond the information given (Bruner, 1973)"
"The key is to take uncertainty seriously, take heuristics seriously, and beware of the bias bias."
Actually I think this is an example of an increasingly common genre of malapropism, where the writer gropes for the right word,
finds one that is similar, and settles for that. The worst of it is that readers intuitively understand what was intended, and
then adopt the marginally incorrect usage themselves. That's perhaps how the world and his dog came to say "literally" when they
mean "figuratively". Maybe a topic for a future article?
In 2009 Google finished engineering a reverse search engine to find out what kind of searches people did most often. Seth Davidowitz
and Steven Pinker wrote a very fascinating/entertaining book using the tool called Everybody Lies
Everybody Lies offers fascinating, surprising, and sometimes laugh-out-loud insights into everything from economics to ethics
to sports to race to sex, gender, and more, all drawn from the world of big data. What percentage of white voters didn't vote
for Barack Obama because he's black? Does where you go to school effect how successful you are in life? Do parents secretly
favor boy children over girls? Do violent films affect the crime rate? Can you beat the stock market? How regularly do we lie
about our sex lives, and who's more self-conscious about sex, men or women?
Investigating these questions and a host of others, Seth Stephens-Davidowitz offers revelations that can help us understand
ourselves and our lives better. Drawing on studies and experiments on how we really live and think, he demonstrates in fascinating
and often funny ways the extent to which all the world is indeed a lab. With conclusions ranging from strange-but-true to thought-provoking
to disturbing, he explores the power of this digital truth serum and its deeper potential – revealing biases deeply embedded
within us, information we can use to change our culture, and the questions we're afraid to ask that might be essential to our
health – both emotional and physical. All of us are touched by big data every day, and its influence is multiplying. Everybody
Lies challenges us to think differently about how we see it and the world.
I shall treat this posting (for which many thanks, doc) as an invitation to sing a much-loved song: everybody should read Gigerenzer's
Reckoning with Risk. With great clarity it teaches what everyone ought to know about probability.
(It could also serve as a model for writing in English about technical subjects. Americans and Britons should study the English
of this German – he knows how, you know.)
Inspired by "The original Slovic study was based on 39 college students" I shall also sing another favorite song. Much of Psychology
is based on what small numbers of American undergraduates report they think they think.
" Gigerenzer points out that in this particular example, subjects are having to make their judgements without knowing a key fact:
how many survive without surgery. "
This one reminds of the false dichotomy. The patient has additional options! Like changing diet, and behaviours such as exercise,
elimination of occupational stress , etc.
The statistical outcomes for a person change when the person changes their circumstances/conditions.
@Tom
Welsh A disposition (conveyance) of an awkwardly shaped chunk out of a vast estate contained reference to "the slither of
ground bounded on or towards the north east and extending two hundred and twenty four meters or thereby along a chain link fence "
Not poor clients (either side) nor cheap lawyers. And who never erred?
Better than deliberately inserting "errors" to guarantee a stream of tidy up work (not unknown in the "professional" world)
in future.
Good article. 79% of gynaecologists fail a simple conditional probability test?! Many if not most medical research papers use
advanced statistics. Medical doctors must read these papers to fully understand their field. So, if medical doctors don't fully
understand them, they are not properly doing their job. Those papers use mathematical expressions, not English. Converting them
to another form of English, instead of using the mathematical expressions isn't a solution.
Regarding witnesses: When that jet crashed into Rockaway several years ago, a high percentage of witnesses said that they saw
smoke before the crash. But there was actually no smoke. The witnesses were adjusting what they saw to conform to their past experience
of seeing movie and newsreel footage of planes smoking in the air before a crash. Children actually make very good witnesses.
Regarding the chart. Missing, up there in the vicinity of cancer and heart disease. The third-leading cause of death. 250,000
per year, according to a 2016 Hopkins study. Medical negligence.
1. Lack of rationality. Experiments have shown that people's intuitions are systematically biased.
2. Stubbornness. Like visual illusions, biases are persistent and hardly corrigible by education.
3. Substantial costs. Biases may incur substantial welfare-relevant costs such as lower wealth, health, or happiness.
4. Biases justify governmental paternalism. To protect people from theirbiases, governments should "nudge" the public toward
better behavior.
Well the sad fact is that there's nobody in the position to protect "governments" from their own biases, and "scientists"
from theirs.
So, behind the smoke of all words and rationalisations, the law is unchanged: everyone strives to gain and exert as much power
as possible over as many others as possible. Most do that without writing papers to say it is right, others write papers,
others books. Anyway, the fundamental law would stay as it is even if all this writing labour was spared, wouldn't it?
But then another fundamental law, the law of framing all one's drives as moral and beneffective comes into play the papers
and the books are useful, after all.
An interesting article. However, I think that the only thing we have to know about how illogical psychiatry is this:
In 1973, the American Psychiatric Association (APA) asked all members attending its convention to vote on whether they believed
homosexuality to be a mental disorder. 5,854 psychiatrists voted to remove homosexuality from the DSM, and 3,810 to retain
it.
The APA then compromised, removing homosexuality from the DSM but replacing it, in effect, with "sexual orientation disturbance"
for people "in conflict with" their sexual orientation. Not until 1987 did homosexuality completely fall out of the DSM.
The article makes no mention of the fact that no "new science" was brought to support the resolution.
It appears that the psychiatrists were voting based on feelings rather than science. Since that time, the now 50+ genders have
been accepted as "normal" by the APA. My family has had members in multiple generations suffering from mental illness. None were
"cured". I know others with the same circumstances.
How does one conclude that being repulsed by the prime directive of every
living organism – reproduce yourself – is "normal"? That is not to say these people are horrible or evil, just not normal. How
can someone, who thinks (s)he is a cat be mentally ill, but a grown man thinking he is a female child is not?
Long ago a lawyer acquaintance, referring to a specific judge, told me that the judge seemed to "make shit up as he was going
along". I have long held psychiatry fits that statement very well.
Thank you for this article. I find the information about the interpretation of statistical data very interesting. My take on the
background of the article is this:
Here we have a real scientist fighting the nonsense spreading from (neoclassical) economics into other realms of science/academia.
Behavioral economics is a sideline by-product of neoclassical micro-economic theory. It tries to cope with experimental
data that is inconsistent with that theory.
Everything in neoclassical economics is a travesty. "Rational choice theory" and its application in "micro economics" is
false from the ground up. It basically assumes that people are gobbling up resources without plan, meaning or relevant circumstances.
Neoclassical micro economic theory is so false and illogical that I would not know where to start in a comment, so I should like
to refer to a whole book about it:
Keen, Steve: "Debunking economics".
As the theory is totally wrong it is really not surprising that countless experiments show that people do not behave the
way neoclassical theory predicts. How do economists react to this? Of course they assume that people are "irrational" because
they do not behave according to their studied theory. (Why would you ever change your basic theory because of some tedious facts?)
We live in a strange world in which such people have control over university faculties, journals, famous prizes. But at least
we have some scientists who defend their area of knowledge against the spreading nonsense produced by economists.
The title of the 1st ed. of Keen's book was "Debunking Economics: The Naked Emperor of the Social Sciences" which was simply
a perfect title.
I
frequently refer to Gillian
Tett's Fools' Gold as an account of ethical mathematical practice. Tett explains how
J.P. Morgan came out of the 2008-2009 Financial Crisis because it used mathematics critically
rather than blindly accepting the outputs of "black boxes". I felt the approach Tett described
was oddly discordant with the attitude of mathematicians. During the crisis, I co-ordinated
a response from UK mathematicians, through the Council of Mathematical Sciences, to
criticism of the use of mathematics in finance, this information was also passed onto the UK
Science Minister of the time.
The standard response from (senior) UK mathematicians was along the lines that finance
hadn't used mathematics but abused it.
The solution was to have "more" and "better" mathematicians. This was underpinned by some
adopting a logical positivist line, attributed to Hume, that the role of mathematicians is to
describe the world as it is, not as it ought to be.
At the time I felt mathematicians were not examining the role of their discipline in the
crisis; they were not behaving ethically. This was the start of my journey that transformed
me from an "uncritical" (unethical?) mathematician to someone who feels mathematics is vital,
so long as it is critical.
The use of mathematics to model human reality; one of the more bizarre offshoots
that followed the mathematization of economic thought in the 20th century.
Game theory focuses on strategies used by competing actors to make rational decisions.
What should I do given my opponent may subsequently decide A, B, C, or D? It was pioneered by
John von Neumann, John Nash, and Oskar Morgenstern. The assumption that social life is a game
of logic between conniving actors is foundational to this view of economics. But do we really
behave in such a "me versus you" manner?
Game Theory's rational individualism closely resonates with neoliberal capitalism because
it reconceptualizes everyone as mini corporations who are totally selfish.
Individuals compete rather than share; seek to outsmart the next person rather than
empathize. Proponents of the approach often use the "as if" defense. The model might not
perfectly match reality, but we can approximate how someone behaves in the real world by
assuming they act "as if" they're Nashian plotters.
It's the normative assumptions underlying this "as if" that are problematic that at bottom
we're all greedy and impatient bankers. One could just as well argue that people act "as if"
they're trusting and altruistic socialists, but Game Theory won't have any of that.
"... During the two decades following the neoliberal economists' take-over of Western governments in the 1980s, many felt that the almost mystical terms of economics - such as derivatives, hedging, leverage, contangos, etc - were beyond the understanding of most ordinary people. ..."
"... They pursued them as a matter of faith in the market and its processes, despite the apparent warning signs of their imminent failure. ..."
"... as within many custom or belief systems, what economics enshrines is a social order. One where a dominant minority are able to take a small quantity of wealth from each member of the majority in order to maintain their higher status. ..."
"... idea of economics as an exploitative mechanism is echoed in the cover picture of the book, Bosch's The Conjurer ..."
"... Within its exposition of economics as a quasi-religious theory, Brian Davey's book helps us to understand why economic theory is driving us toward a global system failure - and why politics and economics are incapable of responding to the pressing ecological crisis which the pursuit of economic growth has spawned. ..."
Brian Davey's new book, Credo: Economic Beliefs in a World in Crisis, is an analysis of economic theory as if it were a system
of religious belief.
It's a timely book. The simplistic, perhaps 'supernatural' assumptions which underpin key parts of economic theory demand far
more attention. It's a debate we've failed to have as a society.
... ... ...
During the two decades following the neoliberal economists' take-over of Western governments in the 1980s, many felt that
the almost mystical terms of economics - such as derivatives, hedging, leverage, contangos, etc - were beyond the understanding of
most ordinary people.
And without understanding those terms, irrespective of our gut feeling that there was something wrong, how could we challenge
the political lobby those theories had put into power? In the end it took the
financial crash of 2007/8 to demonstrate
that those in charge of this system didn't understand the complexity and risk of those practices either.
They pursued them as a matter of faith in the market and its processes, despite the
apparent
warning signs of their imminent failure. Those outside 'orthodox' economics could already see where the economy
was heading in the longer-term.
Question is, did economists learn anything from that failure? Or,
through austerity, have they once again committed us to their dogmatic belief system, unchanged by that experience?
... ... ...
However, through simple hubris or optimism bias, the political
class has been convinced that 'fracking' is a solution to our economic woes
- even though there is a paucity of verifiable evidence to demonstrate those claims, and
it has already lost billions of investors money.
Economics is a reflection of power
Ultimately though, as within many custom or belief systems, what economics enshrines is a social order. One where a dominant
minority are able to take a small quantity of wealth from each member of the majority in order to maintain their higher status.
This idea of economics as an exploitative mechanism
is echoed in the cover picture of the book, Bosch's
The Conjurer - where a magician distracts
the public with a sleight of hand trick so that they can be more easily robbed by his associate.
Again, in a world where we're hitting the limits to human material growth, political models of well-being based upon wealth and
consumption are damaging to human society in the long-term. The evidence that we're heading for a longer-term failure is there, as
was the case with the warning signs before the 2007 crash. The problem is that those in positions of power
do not wish to see it.
... ... ...
Within its exposition of economics as a quasi-religious theory, Brian Davey's book helps us to understand why economic theory
is driving us toward a global system failure - and why politics and economics are incapable of responding to the pressing ecological
crisis which the pursuit of economic growth has spawned.
Contrary to the economic hubris of many world leaders, set alongside the reality of ecological limits humanity is not 'too big
to fail'.
"... I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone. ..."
"... A lady in the audience named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? ..."
This is the brief talk I gave at a conference celebrating 25 years of the
Critical Realist seminar series at Cambridge University. Critical realists argue against the
use of mathematics in economics; I argue here that it's the abuse of mathematics by Neoclassical
economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some
phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone.
I give the example of my own model of Minsky's Financial Instability Hypothesis, which revealed
the possibility of a "Great Moderation" preceding a "Great Recession" before either event had happened.
David Milburn, September 12, 2015 at 9:38 am
Steve,
Last week Prof Bill Mitchell was in London where he gave a talk on re-framing the language
used in the media that carried on the myth of the mainstream groupthink. A lady in the audience
named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of
cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What
a great name to use and doesn't it ring true? Barb Jacobson is spot on!
Sue Madden, September 13, 2015 at 8:28 am
Hi Steve,
I was really amused to see an interview a while back in the New Scientist, with the "research
chief" (!!) at the B of E. If you haven't seen it, you really must:
Opinion Interview with Andy Haldane: "Sackcloth and Ashes on Thread needle Street" New Scientist
25 March 2015
Corbyn was elected leader!!!! Now the sparks will fly. At least a public debate worthy of
the name might at last be heard in our sad country.
Thanks for your work in trying to enlighten us!!
Sue.
"... I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone. ..."
"... A lady in the audience named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? ..."
This is the brief talk I gave at a conference celebrating 25 years of the
Critical Realist seminar series at Cambridge University. Critical realists argue against the
use of mathematics in economics; I argue here that it's the abuse of mathematics by Neoclassical
economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some
phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone.
I give the example of my own model of Minsky's Financial Instability Hypothesis, which revealed
the possibility of a "Great Moderation" preceding a "Great Recession" before either event had happened.
David Milburn, September 12, 2015 at 9:38 am
Steve,
Last week Prof Bill Mitchell was in London where he gave a talk on re-framing the language
used in the media that carried on the myth of the mainstream groupthink. A lady in the audience
named Barb Jacobson suggested that using the name Neo-Classical gives it a certain degree of
cache and wants you guys to start calling it for what it is: "Scorched Earth Economics." What
a great name to use and doesn't it ring true? Barb Jacobson is spot on!
Sue Madden, September 13, 2015 at 8:28 am
Hi Steve,
I was really amused to see an interview a while back in the New Scientist, with the "research
chief" (!!) at the B of E. If you haven't seen it, you really must:
Opinion Interview with Andy Haldane: "Sackcloth and Ashes on Thread needle Street" New Scientist
25 March 2015
Corbyn was elected leader!!!! Now the sparks will fly. At least a public debate worthy of
the name might at last be heard in our sad country.
Thanks for your work in trying to enlighten us!!
Sue.
"... That is exactly what makes macro a pseudoscience (as Cassidy called it "Utopian economics".) You can't talk about economics ignoring existence of finance, because finance is an elephant in the room. A church of efficient stochastic equilibrium and an invisible hand that drives economics to it (the hand of God) is junk science, and always was. ..."
"macro rightly got a lot of stick by largely ignoring the role of finance,"
That is exactly what makes macro a pseudoscience (as Cassidy called it "Utopian economics".)
You can't talk about economics ignoring existence of finance, because finance is an elephant in
the room. A church of efficient stochastic equilibrium and an invisible hand that drives economics
to it (the hand of God) is junk science, and always was.
As much as I admire the mathematics, its use in macro is perverted and unscientific because
it relies on unrealistic assumptions. Its all pure mathiness.
Most of terminology that neoclassical economy introduced smells "fraud" or at least is detached
from reality. "Output gap" and related notion "potential output" can serve as an example. Look
at WWII production. For example, even potential output of a single plant (let's say three shift
work and full utilization of equipment) is pretty convoluted notion as there is a high level of
dependence on suppliers and somewhere typically "bottleneck" exists that prevent the factory achieving
this input. Still Hjalmar Schacht achieved wonders during WWII by just ordering German factories
to continue producing without waiting for orders to come.
== quote ==
Moreover, Keynes [1936, p. 177, 179] had denounced Walras's approach as wrong when he wrote
"Now the analysis of the previous chapters [of The General Theory] made it plain that this
account [in Walras] of the matter must be erroneous .this [Walrasian system] is a nonsense
theory".
== end of quote ==
And even worse, like most neoliberal economists, he tends to ignore Hyman Minsky important
contribution to understanding of source of instability in capitalist economics.
That fact alone IMHO makes his lectures junk science.
I remember that during 2008 events somebody called Bernanke not a specialist on Great Depression,
but a charlatan, who tried to explain Great Depression using neoclassic economics.
"I acknowledge that macro rightly got a lot of stick by largely ignoring the role of finance,
but I also point out that the poor recovery has involved a vindication of the core macro model:
austerity is a bad idea at the ZLB, QE was not inflationary and interest rates on government
debt did not rise but fell."
No shit Dick Tracy. Look at the devastation of the US of O (The United States of Oligarchy).
Let's join the Military in defending the shipping lanes, 3 hots and a cot.
I'm glad the core macro-model has been vindicated.
Is it my imagination or are the crazies around here getting crazier, and becoming increasingly
unable to even begin talking about macro in a serious way.
I mean, I don't mind a bit of vituperation or even limited amounts of incoherence and insanity,
if it is accompanied by at least earnest attempts to have substantive discussions. But it just
feels like the essential substance has become increasingly rare.
libezkova -> Sanjait... , -1
"Is it my imagination or are the crazies around here getting crazier, and becoming increasingly
unable to even begin talking about macro in a serious way."
If you think that neoliberal economists and their low-level supporters like some members of
this blog are crazy you are wrong. They are corrupt the same way as Mafia members are corrupt.
That's why they are unable to discuss economics in a serious way. Only "religious dogma" based
way is permitted.
Neoliberal Jesuits will defend their "flat earth" theory and ostracize heretics as long as
financial oligarchy is in power, because their well being is dependent on it, and they are paid
by financial oligarchy to do the job.
When neoliberalism was hatched it deliberately emulated methods of influence used by Communists
(and Austrians were intimately aware of them, because the country experienced communist revolution,
which failed) in trying to expand their influence at university departments and by creating think
tanks. Those subversive methods proved way too successful and they are now really entrenched:
neoclassic economic thinking permeates the society to the same or higher degree as Marx political
economy in the USSR.
See LSE discussion "Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics
"
I think that that one of the few better and more productive pathway of discussing economic events
is the one that stems from Hyman Minsky work with its idea of positive feedback loops in economics
with one from financial system that periodically destabilizes the capitalist economy and create
a financial crisis.
The neoclassical concept of equilibrium is way too primitive and attempts to build economics
as branch of physics. It should be discarded for good, as the way it is used now is close to pure
charlatanism.
We also have an uncertainty principle here as even the suggestion of the intervention can change
the dynamics of the system (look at "Fed talk" )
The role of the state now is so huge that any talk about the economy achieving equilibrium
by itself is fraud outside few special cases. And actually the introduction of neoliberalism was
the "revolution from above" -- a coup d'état, if you wish.
== quote ==
In microeconomic theory, cost-minimization by consumers and by firms implies the existence
of supply and demand correspondences for which market clearing equilibrium prices exist, if
there are large numbers of consumers and producers. Under convexity assumptions or under some
marginal-cost pricing rules, each equilibrium will be Pareto efficient: In large economies,
non-convexity also leads to quasi-equilibria that are nearly efficient.
However, the concept of market equilibrium has been criticized by Austrians, post-Keynesians
and others, who object to applications of microeconomic theory to real-world markets, when
such markets are not usefully approximated by microeconomic models. Heterodox economists assert
that micro-economic models rarely capture reality.
== end of quote ==
Steve Keen in one who uses and try to develop further Minsky concepts and he was one of the
few who predicted the financial crash on 2008. IMHO he should get more respect and coverage at
the expense of neoliberal stooges like Krugman.
Ha-Joon Chang, Philip Mirowski, Joseph Stiglitz, Richard Koo, Yanis Varoufakis, Noam Chomsky
all have interesting and IMHO more realistic ideas about how the modern economy really function
and what can be more appropriate ways to model it.
We should reject masked by mathiness typical neoclassical junk that is mainstream now.
Empirical studies reporting false reports are an unfortunate
fact of life. I'm surprised that Noah Smith did not cite John
Ioannnidis's paper on biomedical studies: "Why most published
research findings are false." journals.plos.org/plosmedicine/article?id=10.1371/journal.pmed.0020124
Usually the problem is misuse of statistical methods, for
example by data dredging or other data-dependent activities,
rather than say misinterpreting the results of a significance
test.
Edward Dodson
10
months ago
The first presenter (Professor Skidensky?) has
described very clearly my own experience as a
student and subsequently as a teacher. Decades ago
when I began my work on a master's degree I
initially chose economics but soon became very
disillusioned by the reliance on mathematics and the
absence of investigation into historical experience
and societal norms. Nor was there any serious
investigation into the validity of propositions put
forward as economic theory. At once time in class I
engaged my economics professor in a long exchange
over the impact of land hoarding and land
speculation in the U.S. economy. After about twenty
minutes he simply ended our exchanged exasperated
because he could not counter the observations made
by evidence offered by real world observations.
Fortunately, my university offered an
interdisciplinary alternative, a Master of Liberal
Arts degree and I switched programs. My course of
study permitted me to read and study the great
political economists, who were all historians and
all moral philosophers. They examined markets,
market forces, and government as a primary
externality, and they reached moral judgments based
on the principles of justice they embraced. Along
the way, I was introduced to the writings of the
great French school of political economists, the
Physiocrats, and to the American Henry George.
George's theory of the business cycle, based on the
classical three factor model of how economies and
societies function, provided to be quite useful in
my later work as a market analyst in the real estate
sector. When I retired from my professional work in
the mid-2000s I gave some thought to entering a
doctorate program in order to acquire the
credentials for college instruction. The very low
probablility of ever securing a full-time teaching
position pushed me in a different direction.
Instead, I developed two courses to teach to senior
adults in a non-credit environment. One is titled
"Understanding our Political Economy." The other is
"The History of Economic Thought." Although I do
introduce basic economic concepts, such as factor of
production and wealth distribution in these two
courses, my students are not required to know or use
mathematics in order to understand such concepts. I
found an introductory economics textbook written by
Professor Harry Gunnison Brown used to teach basic
economics without even one equation in the book.
Each course is two semesters in length is discussion
oriented. My view is that the more I am required to
lecture, the less the students are learning. I am
more than happy to share this course material with
any teacher who is attracted to the
interdisciplinary approach offered by the study of
political economy and by reliance on the classical
three factor model of wealth production and
distribution. I can be reached by email at
[email protected].
"These Professors Make More Than a Thousand Bucks an Hour
Peddling Mega-Mergers - The economists are leveraging their
academic prestige with secret reports justifying corporate
concentration. Their predictions are often wrong and
consumers pay the price."
That is just the headline. Way down in the discussion
comes the most damning statement:
"These complex mathematical formulations carry weight with
the government because they purport to be objective. But a
ProPublica examination of several marquee deals found that
economists sometimes salt away inconvenient data in footnotes
and suppress negative findings, stretching the standards of
intellectual honesty to promote their clients' interests."
Of course the government is supposed to hire its own world
class economists to review the evidence as well. The problem,
however, is that these government agencies are often
underfunded. It is hard to compete with the mega-firms who
pay $1000 an hour for a consultant when the entire budget for
the government review agency is only $100,000. Penny wise,
pound foolish.
No, no, no, no, I don't do it no more. Sometimes in the mornings waiting for the sun to rise then
I actually miss my work in SAS language programming. I was always a bigger fan of PROC FASTCLUS
than PROC REG, but definitely PROC FASTCLUS with PROC GPLOT presentation color coding the cluster
group number assignments in an overlay scatter plot. That is because I could estimate the expected
degree of change in activity from the expected change in natural business units or hardware or
software making historical data of use only for establishing a baseline, hopefully a clean baseline,
rather than for estimating the degree of change itself. I used PROC REG to generate 95% confidence
intervals around the linear regression means of predicted data points.
In my cases the heteroskedasticity was merely considered in the application of outliers from the
central cluster(s). Outliers that constituted some type of risk had to be considered discretely,
one by one, but only those that with predicted change would overshoot capacity limits. Undershooting
was just an isolated outage or collapse in demand and certainly not a capacity risk.
Outlier detection is a whole other kettle of fish. Once upon a time I spent most of my time finding
outliers in multivariate data and trying to figure out more effective methods for finding them.
(Turns out the world isn't multivariate-normal distributed. Who knew?)
For system performance data, which was my domain, an outlier could be an effect on the response
variable at the extreme range of the independent variable, or just an unordinary event. The heteroskedasticity
type outliers were things like increased CPU overhead at high utilizations, a feature of the MVS
IBM mainframe operating system, or elongated service times for Fiber channels and Ethernet or
elongated response times for a device having excessive utilization and queueing delays. Outliers
could also be bugs or system recovery events as well as work scheduled outside its normal window
of operation including systems programmers screwing around in production logical partitions. The
heteroskedasticity type outliers were actually my job to prevent and I did a good job of that.
My occasional undoing was almost always because of application changes that exceeded the developers
expected resource requirements. A couple of times my system programmer coworker that controlled
MVS performance misinterpreted a software constraint until it manifested itself in extreme ways
for long enough until I was consulted for analysis.
So what I am getting at is that all exceptions to normal expectations can be considered as
outliers, but then those that demonstrate only a difference in the reaction function of the response
variable accorded by the range of the independent variable can also be considered heteroskedasticity.
In any case, I am about at the end of my analysis of outliers on my daffodil bulb planting
now. I sure hope that I don't encounter any heteroskedasticity with the chain saw later this week.
The authors are using a study of heteroskedasticity to inform their forecasting ability. In such
a case outliers would be very different from heteroskedasticity in the response variable over
certain ranges of the independent variable. In other applications, such as large computer system
performance, heteroskedasticity exists as something to be avoided because elongation of response
variables follow a hyperbolic curve and we don't want to be kneed by the curve. Classic outliers
are to ignored for forecasting even if not solved by protective measures but heteroskedasticity
occurs as a response to demand in excess to expected and provisioned. Either resources per business
unit of work must be reduced or more resources must be provisioned. In the former case then the
historical baseline must be readjusted and in the later capacity limits must be increased.
"... Popular pre-financial crisis versions of the model excluded banking and finance, taking as given that finance and asset prices were merely a by-product of the real economy. ..."
"... The centre-piece of Paul Romer's scathing attack on these models is on the 'pretence of knowledge' ..."
"... he is critical of the incredible identifying assumptions and 'pretence of knowledge' in both Bayesian estimation and the calibration of parameters in DSGE models. ..."
"... A further symptom of the 'pretence of knowledge' is the assumed 'knowledge' that these parameters are constant over time. A milder critique by Olivier Blanchard (2016) points to a number of failings of DSGE models and recommends greater openness to more eclectic approaches. ..."
"... The equation is based on the assumption of inter-temporal optimising by consumers and that every consumer faces the same linear period-to-period budget constraint, linking income, wealth, and consumption. ..."
"... In the basic form, consumption every period equals permanent non-property income plus permanent property income defined as the real interest rate times the stock of wealth held by consumers at the beginning of each period. Permanent non-property income converts the variable flow of labour and transfer incomes a consumer expects over a lifetime into an amount equally distributed over time. ..."
"... However, consumers actually face idiosyncratic (household-specific) and uninsurable income uncertainty, and uncertainty interacts with credit or liquidity constraints. ..."
"... The 2000 Commodity Futures Modernization Act (CFMA) made derivatives enforceable throughout the US with priority ahead of claims by others (e.g. workers) in bankruptcy. ..."
"... 2004 SEC decision to ease capital requirements on investment banks increased gearing to what turned out to be dangerous levels ..."
"... Similar measures to lower required capital on investment grade PMBS increased leverage at commercial banks. These changes occurred in the political context of pressure to extend credit to poor. ..."
"... The importance of debt was highlighted in the debt-deflation theory of the Great Depression of Fisher (1933). 5 Briefly summarised, his story is that when credit availability expands, it raises spending, debt, and asset prices; irrational exuberance raises prices to vulnerable levels, given leverage; negative shocks can then cause falls in asset prices, increased bad debt, a credit crunch, and a rise in unemployment. ..."
"... In the financial accelerator feedback loops that operated in the US sub-prime crisis, falls in house prices increased bad loans and impaired the ability of banks to extend credit. As a result, household spending and residential investment fell, increasing unemployment and reducing incomes, feeding back further into lower asset prices and credit supply. ..."
"... The transmission mechanism that operated via consumption was poorly represented by the Federal Reserve's FRB-US model and similar models elsewhere. ..."
"... Reminds me of a young poseur at engineering school, who exclaimed during a group study session, "I've got it all jocked out. Now I just need the equations!" ..."
"... I have been aware of that for a few years now, but I doubt that one person in a hundred (or a thousand) knows when they listen to some economist on a news program or a business channel that the person speaking thinks that how much debt people have does not substantively affect their spending. ..."
"... If I used or invented an econ model that left out the "consumer", and modeled it with a "consumption agent object" having a single independent input variable being the Fed zero term, zero risk interest rate, I'd be too embarrassed to admit it. I would probably just very quietly make a career change into one of the softer sciences. Maybe writing fictional romance novels, or some such thing. ..."
"... The worst thing about these types of mea culpas from the mainstream is the cited criticisms from other mainstream economists only. It can only be a valid criticism if it was published in a mainstream journal ..."
"... That 'political pressure' turned out to be the bait and switch for a system that shifted power via debt creation. ..."
"... What we have not yet come to terms with are the implications of David Graeber's anthropological insights: how does debt affect social relationships, alter social norms, and affect relationships among individuals? ..."
"... Debt is a form of power, but by failing to factor this into their equations, the Central Bankers are missing the social, political, and cultural consequences of the profound shifts in 'credit market architecture'. In many respects, this is not about 'money'; it's about power. ..."
"... The Central Bankers' models can include all the parameters they can dream up, but until someone starts thinking more clearly about the role and function of money, and the way that 'different kinds of money' create 'different kinds of social relationships', we are all in a world of hurt. ..."
"... Now, maybe it is just a coincidence, but it is hard for me not to notice that the explosion in consumer credit matches up nicely with the rise in inequality. ..."
"... " .. debt does not make society as a whole poorer: one person's debt is another person's asset. So total wealth is unaffected by the amount of debt out there. This is, strictly speaking true only for the world economy as a whole .. " Paul Krugman "End this Depression Now". ..."
By John Muellbauer, Professor of Economics, Oxford University. Originally published at
VoxEU
The failure of the New Keynesian dynamic stochastic general equilibrium models to capture interactions
of finance and the real economy has been widely recognised since the Global Crisis. This column argues
that the flaws in these models stem from unrealistic micro-foundations for household behaviour and
from wrongly assuming that aggregate behaviour mimics a fully informed 'representative agent'. Rather
than 'one-size-fits-all' monetary and macroprudential policy, institutional differences between countries
imply major differences for monetary policy transmission and policy.
The New Keynesian DSGE models that dominated the macroeconomic profession and central bank thinking
for the last two decades were based on several principles.
The first was formal derivation from micro-foundations, assuming optimising behaviour of consumers
and firms with rational or 'model-consistent' expectations of future conditions. For such derivation
to result in a tractable model, it was assumed that the behaviour of firms and of consumers corresponded
to that of a 'representative' firm and a 'representative' consumer. In turn, this entailed the
absence of necessarily heterogeneous credit or liquidity constraints. Another important assumption
to obtain tractable solutions was that of a stable long-run equilibrium trend path for the economy.
If the economy was never far from such a path, the role of uncertainty would necessarily be limited.
Popular pre-financial crisis versions of the model excluded banking and finance, taking as
given that finance and asset prices were merely a by-product of the real economy.
Second, a competitive economy was assumed but with a number of distortions, including nominal
rigidities – sluggish price adjustment – and monopolistic competition. This is what distinguished
New Keynesian DSGE models from the general equilibrium real business cycle (RBC) models that preceded
them. It extended the range of stochastic shocks that could disturb the economy from the productivity
or taste shocks of the RBC model. Finally, while some models calibrated (assumed) values of the
parameters, where the parameters were estimated, Bayesian system-wide estimation was used, imposing
substantial amounts of prior constraints on parameter values deemed 'reasonable'.
The 'Pretence of Knowledge'
The centre-piece of Paul Romer's scathing attack on these models is on the 'pretence of knowledge'
(Romer 2016); echoing Caballero (2010), he is critical of the incredible identifying assumptions
and 'pretence of knowledge' in both Bayesian estimation and the calibration of parameters in DSGE
models. 1
A further symptom of the 'pretence of knowledge' is the assumed 'knowledge' that these parameters
are constant over time. A milder critique by Olivier Blanchard (2016) points to a number of failings
of DSGE models and recommends greater openness to more eclectic approaches.
Unrealistic Micro-Foundations
As explained in Muellbauer (2016), an even deeper problem, not seriously addressed by Romer or
Blanchard, lies in the unrealistic micro-foundations for the behaviour of households embodied in
the 'rational expectations permanent income' model of consumption, an integral component of these
DSGE models. Consumption is fundamental to macroeconomics both in DSGE models and in the consumption
functions of general equilibrium macro-econometric models such as the Federal Reserve's FRB-US. At
the core of representative agent DSGE models is the Euler equation for consumption, popularised in
the highly influential paper by Hall (1978). It connects the present with the future, and is essential
to the iterative forward solutions of these models. The equation is based on the assumption of
inter-temporal optimising by consumers and that every consumer faces the same linear period-to-period
budget constraint, linking income, wealth, and consumption. Maximising expected life-time utility
subject to the constraint results in the optimality condition that links expected marginal utility
in the different periods. Under approximate 'certainty equivalence', this translates into a simple
relationship between consumption at time t and planned consumption at t +1 and in periods
further into the future.
Under these simplifying assumptions, the rational expectations permanent income consumption function
can be derived. In the basic form, consumption every period equals permanent non-property income
plus permanent property income defined as the real interest rate times the stock of wealth held by
consumers at the beginning of each period. Permanent non-property income converts the variable flow
of labour and transfer incomes a consumer expects over a lifetime into an amount equally distributed
over time.
However, consumers actually face idiosyncratic (household-specific) and uninsurable income
uncertainty, and uncertainty interacts with credit or liquidity constraints. The asymmetric
information revolution in economics in the 1970s for which Akerlof, Spence and Stiglitz shared the
Nobel prize explains this economic environment. Research by Deaton (1991,1992), 2 several
papers by Carroll (1992, 2000, 2001, 2014), Ayigari (1994), and a new generation of heterogeneous
agent models (e.g. Kaplan et al. 2016) imply that household horizons then tend to be both heterogeneous
and shorter – with 'hand-to-mouth' behaviour even by quite wealthy households, contradicting the
textbook permanent income model, and hence DSGE models. A second reason for the failure of these
DSGE models is that aggregate behaviour does not follow that of a 'representative agent'. Kaplan
et al. (2016) show that, with these better micro-foundations, quite different implications follow
for monetary policy than in the New Keynesian DSGE models. A third reason is that structural breaks,
as shown by Hendry and Mizon (2014), and radical uncertainty further invalidate DSGE models, illustrated
by the failure of the Bank of England's DSGE model both during and after the 2008-9 crisis (Fawcett
et al. 2015). The failure of the representative agent Euler equation to fit aggregate data 3
is further empirical evidence against the assumptions underlying the DSGE models, while evidence
on financial illiteracy (Lusardi 2016) is a problem for the assumption that all consumers optimise.
The Evolving Credit Market Architecture
Of the structural changes, the evolution and revolution of credit market architecture was the
single most important. In the US, credit card ownership and instalment credit spread between the
1960s and the 2000s; the government-sponsored enterprises – Fannie Mae and Freddie Mac – were recast
in the 1970s to underwrite mortgages; interest rate ceilings were lifted in the early 1980s; and
falling IT costs transformed payment and credit screening systems in the 1980s and 1990s. More revolutionary
was the expansion of sub-prime mortgages in the 2000s, driven by rise of private label securitisation
backed by credit default obligations (CDOs) and swaps.
The 2000 Commodity Futures Modernization Act (CFMA) made derivatives enforceable throughout
the US with priority ahead of claims by others (e.g. workers) in bankruptcy. This permitted
derivative enhancements for private label mortgage-backed securities (PMBS) so that they could be
sold on as highly rated investment grade securities. A second regulatory change was the deregulation
of banks and investment banks. In particular, the 2004 SEC decision to ease capital requirements
on investment banks increased gearing to what turned out to be dangerous levels and further
boosted PMBS, Duca et al (2016). Similar measures to lower required capital on investment grade
PMBS increased leverage at commercial banks. These changes occurred in the political context of pressure
to extend credit to poor.
The Importance of Debt
A fourth reason for the failure of the New Keynesian DSGE models, linking closely with the previous,
is the omission of debt and household balance sheets more generally, which are crucial for understanding
consumption and macroeconomic fluctuations. Some central banks did not abandon their large non-DSGE
econometric policy models, but these were also defective in that they too relied on the representative
agent permanent income hypothesis which ignored shifts in credit constraints and mistakenly lumped
all elements of household balance sheets, debt, liquid assets, illiquid financial assets (including
pension assets) and housing wealth into a single net worth measure of wealth. 4 Because
housing is a consumption good as well as an asset, consumption responds differently to a rise in
housing wealth than to an increase in financial wealth (see Aron et al. 2012). Second, different
assets have different degrees of 'spendability'. It is indisputable that cash is more spendable than
pension or stock market wealth, the latter being subject to asset price uncertainty and access restrictions
or trading costs. This suggests estimating separate marginal propensities to spend out of liquid
and illiquid financial assets. Third, the marginal effect of debt on spending is unlikely just to
be minus that of either illiquid financial or housing wealth. The reason is that debt is not subject
to price uncertainty and it has long-term servicing and default risk implications, with typically
highly adverse consequences.
The importance of debt was highlighted in the debt-deflation theory of the Great Depression
of Fisher (1933). 5 Briefly summarised, his story is that when credit availability expands,
it raises spending, debt, and asset prices; irrational exuberance raises prices to vulnerable levels,
given leverage; negative shocks can then cause falls in asset prices, increased bad debt, a credit
crunch, and a rise in unemployment.
In the 1980s and early 1990s, boom-busts in Norway, Finland, Sweden, and the UK followed this
pattern. In the financial accelerator feedback loops that operated in the US sub-prime crisis,
falls in house prices increased bad loans and impaired the ability of banks to extend credit. As
a result, household spending and residential investment fell, increasing unemployment and reducing
incomes, feeding back further into lower asset prices and credit supply.
The transmission mechanism that operated via consumption was poorly represented by the Federal
Reserve's FRB-US model and similar models elsewhere. A more relevant consumption function for
modelling the financial accelerator is needed, modifying the permanent income model with shorter
time horizons, 6 incorporating important shifts in credit lending conditions, and disaggregating
household balance sheets into liquid and illiquid elements, debt and housing wealth.
Implications for Macroeconomic Policy Models
To take into account all the feedbacks, a macroeconomic policy model needs to explain asset prices
and the main components of household balance sheets, including debt and liquid assets. This is best
done in a system of equations including consumption, in which shifts in credit conditions – which
have system-wide consequences, sometimes interacting with other variables such as housing wealth
– are extracted as a latent variable. 7 The availability of home equity loans, which varies
over time and between countries – hardly available in the US of the 1970s or in contemporary Germany,
France or Japan – and the also the variable size of down-payments needed to obtain a mortgage, determine
whether increases in house prices increase (US and UK) or reduce (Germany and Japan) aggregate consumer
spending. This is one of the findings of research I review in Muellbauer (2016). Another important
finding is that a rise in interest rates has different effects on aggregate consumer spending depending
on the nature of household balance sheets. Japan and Germany differ radically from the US and the
UK, with far higher bank and saving deposits and lower household debt levels so that lower interest
rates reduce consumer spending. A crucial implication of these two findings is that monetary policy
transmission via the household sector differs radically between countries – it is far more effective
in the US and UK, and even counterproductive in Japan (see Muellbauer and Murata 2011).
Such models, building in disaggregated balance sheets and the shifting, interactive role of credit
conditions, have many benefits: better interpretations of data on credit growth and asset prices
helpful for developing early warning indicators of financial crises; better understandings of long-run
trends in saving rates and asset prices; and insights into transmission for monetary and macro-prudential
policy. Approximate consistency with good theory following the information economics revolution of
the 1970s is better than the exact consistency of the New Keynesian DSGE model with bad theory that
makes incredible assumptions about agents' behaviour and the economy. Repairing central bank policy
models to make them more relevant and more consistent with the qualitative conclusions of the better
micro-foundations outlined above is now an urgent task.
Endnotes
[1] Part of the problem of identification is that the DSGE models throw away long-run information.
They do this by removing long-run trends with the Hodrick-Prescott filter, or linear time trends
specific to each variable. Identification, which rests on available information, then becomes more
difficult, and necessitates 'incredible assumptions'. Often, impulse response functions tracing out
the dynamic response of the modelled economy to shocks are highly sensitive to the way the data have
been pre-filtered.
[3] See Campbell and Mankiw (1989, 1990) and for even more powerful evidence from the UK, US and
Japan; Muellbauer (2010); and micro-evidence from Shea (1995).
[4] Net worth is defined as liquid assets minus mortgage and non-mortgage debt plus illiquid financial
assets plus housing assets, and this assumes that the coefficients are all the same.
[5] In recent years, several empirical contributions have recognised the importance of the mechanisms
described by Fisher (1933). Mian and Sufi (2014) have provided extensive micro-economic evidence
for the role of credit shifts in the US sub-prime crisis and the constraining effect of high household
debt levels. Focusing on macro-data, Turner (2015) has analysed the role of debt internationally
with more general mechanisms, as well as in explaining the poor recovery from the global financial
crisis. Jorda et al. (2016) have drawn attention to the increasing role of real estate collateral
in bank lending in most advanced countries and in financial crises.
[6] The FRB-US model does build in shorter average horizons than text-book permanent income. It
also has a commendable flexible treatment of expectations, Brayton et al (1997).
[7] The use of latent variables in macroeconomic modelling has a long vintage. Potential output,
and the "natural rate" of unemployment or of interest are often treated as latent variables, for
example in the FRB-US model and in Laubach and Williams (2003), and latent variables are often modelled
using state space methods. Flexible spline functions can achieve similar estimates. Interaction effects
of latent with other variables seem not to have been considered, however. We use the term 'latent
interactive variable equation system' (LIVES) to describe the resulting format.
'the omission of debt and household balance sheets more generally'
putting these eclownometric [sic] models at about the same level of technical sophistication
as the Newcomen steam engine of 1712, which achieved about one (1) percent thermodynamic efficiency.
'a macroeconomic policy model needs to explain asset prices and household balance sheets.
This is best done in a system of equations.'
Yes indeedy. Reminds me of a young poseur at engineering school, who exclaimed during a
group study session, "I've got it all jocked out. Now I just need the equations!"
' the omission of debt and household balance sheets more generally '
You beat me to it. I have been aware of that for a few years now, but I doubt that one
person in a hundred (or a thousand) knows when they listen to some economist on a news program
or a business channel that the person speaking thinks that how much debt people have does not
substantively affect their spending.
Really, 5 year olds describing how they get toys from Santa have a better grasp of economics
than most "economists"
If I used or invented an econ model that left out the "consumer", and modeled it with a
"consumption agent object" having a single independent input variable being the Fed zero term,
zero risk interest rate, I'd be too embarrassed to admit it. I would probably just very quietly
make a career change into one of the softer sciences. Maybe writing fictional romance novels,
or some such thing.
The worst thing about these types of mea culpas from the mainstream is the cited criticisms
from other mainstream economists only. It can only be a valid criticism if it was published in
a mainstream journal
Of the structural changes, the evolution and revolution of credit market architecture was
the single most important . In the US, credit card ownership and instalment credit spread between
the 1960s and the 2000s; the government-sponsored enterprises – Fannie Mae and Freddie Mac
– were recast in the 1970s to underwrite mortgages; interest rate ceilings were lifted in the
early 1980s; and falling IT costs transformed payment and credit screening systems in the 1980s
and 1990s. More revolutionary was the expansion of sub-prime mortgages in the 2000s, driven
by rise of private label securitisation backed by credit default obligations (CDOs) and swaps.
The 2000 Commodity Futures Modernization Act (CFMA) made derivatives enforceable throughout
the US with priority ahead of claims by others (e.g. workers) in bankruptcy. This permitted
derivative enhancements for private label mortgage-backed securities (PMBS) so that they could
be sold on as highly rated investment grade securities. A second regulatory change was the
deregulation of banks and investment banks . Similar measures to lower required capital on
investment grade PMBS increased leverage at commercial banks. These changes occurred in the
political context of pressure to extend credit to poor.
That 'political pressure' turned out to be the bait and switch for a system that shifted
power via debt creation.
What we have not yet come to terms with are the implications of David Graeber's anthropological
insights: how does debt affect social relationships, alter social norms, and affect relationships
among individuals?
Debt is a form of power, but by failing to factor this into their equations, the Central
Bankers are missing the social, political, and cultural consequences of the profound shifts in
'credit market architecture'. In many respects, this is not about 'money'; it's about power.
After Brexit, Trump, and the emerging upheaval in the EU, it's no longer enough to just 'build
better economic models'.
The Central Bankers' models can include all the parameters they can dream up, but until
someone starts thinking more clearly about the role and function of money, and the way that 'different
kinds of money' create 'different kinds of social relationships', we are all in a world of hurt.
At this point, Central Bankers should also ask themselves what happens - socially, personally
- when 'debt' (i.e., financialization) shifts from productivity to predation. That shift accelerated
from the 1970s, through the 1990s, into the 2000s.
Allowing anyone to charge interest that is usurious is the modern equivalent of turning a blind
eye to slavery.
By enabling outrageous interest, any government hands their hard working taxpayers over to
what is essentially unending servitude.
This destroys the political power of any government that engages in such blind stupidity.
Frankly, I'm astonished that it has taken so long for taxpayers to show signs of outrage and
revolt.
I think you have come up with a good insight – I very much agree its about power and not money.
Now, maybe it is just a coincidence, but it is hard for me not to notice that the explosion
in consumer credit matches up nicely with the rise in inequality.
And one other thing I would point out – it doesn't take usurious interest rates. If squillionaires
have access to unlimited, essentially cost free money in which the distributors of money are guaranteed
a profit, NO MATTER HOW MUCH THEY HAVE LOST, while the debts on non-squillionaires are collected
with fees, penalties, and to the last dime, than it doesn't matter if interest rates are essentially
zero.
Who gets bailed out is not due to logic or accounting that says that the banks' losses have
to be made whole, but not home owners – that is an ideology called economics .
I wouldn't downplay how cool the money part is, however. It's no fun making questionable, dodgy
loans unless you can charge fees up front and then sell the risk off to a large crowd of suckers.
Hence the importance of securitization and other "insurance" type derivatives. Then, if you run
out of willing suckers, you need a place to stuff it all, say pension plans and maybe even privatized
social security.
But if they allow this to happen in the real world, shouldn't the models have a piece reflecting
this behavior as well? Full circle of course, where the "consumer balance sheet" contains his
bad debt investment and savings assets* offsetting his liabilities. Then everyone would be more
like a bank?
* we still need to model bubble assets – like real estate and stocks. This sounds like it's
starting to get tricky!
"Another important finding is that a rise in interest rates has different effects on aggregate
consumer spending depending on the nature of household balance sheets".
This is a point that Warren Mosler and other MMTers have been making since the 1990s: depending
on circumstances, lower interest rates may well have contractionary effects and higher interest
rates may stimulate the economy.
The tool of choice to fight recessions and control inflation should thus be fiscal instead
of monetary policy.
Again, MMT had the analysis right long before mainstream theory started to admit there might
be serious problems with its favorite approaches (without ever giving appropriate credit to MMT,
of course!).
I think the Samarians knew that 5000 years ago. The Templars certainly knew it 1300 years ago.
And most definitely, "modern" European banking knew it 300 years ago.
of note to me is just how simplistic Keynesian statistics were/are, based on almost fantasy-assumptions.
And that was followed by Stiglitz et al's theory of asymmetric information models. And this above
does give us a dose of all the different variables involved in accurately analyzing an economy
– an economy that exploded with financialization, but nobody could keep up. As was proven in 2008.
It shouldn't be this confusing. "Repairing CB policies to make them more relevant is now an urgent
task." I think it is urgent enough to nationalize the banks and start over using a sovereign money
model.
Let's take an infinitely complex system (the economy) that is widely affected by human emotion,
then we'll leave out the mechanism by which money itself is created and distributed and then let's
"model" it.
We'll have two fans of Stalin's communist "command and control" economy (Keynes and Harry Dexter
White) pretend they could create a stable system based on Ph.Ds divining future economic and trade
flows and then "managing" them by price fixing the price of money. We'll set policy based on the
national conditions of the country with the global reserve currency despite the fact that 2/3
of that currency is outside that country. And with a system where trade never settles so massive
imbalances can persist indefinitely. Then let's put self-interested private institutions in charge
of all money creation and distribution .and we'll be sure their system operates in secret and
is never audited. When the system blows up we'll have these central overlords step in as uneconomic
buyers of assets with no consideration for asset quality or price, with no economic need to ever
sell, and with "unlimited" funds with which to buy more such assets. At the end we'll continue
to call the system "capitalism" and we'll continue to call the scrip "money" and hope nobody notices.
The money supply is flat in the recession of the early 1990s.
Then it really starts to take off as the dot.com boom gets going which rapidly morphs into
the US housing boom, courtesy of Alan Greenspan's loose monetary policy.
When M3 gets closer to the vertical, the black swan is coming and you have a credit bubble
on your hands (money = debt).
The mainstream are all trained in neoclassical economics which is spectacularly dismal.
Steve Keen sits outside the mainstream and saw the credit bubble forming in 2005, you can see
it in the
US money supply (money = debt).
In 2007, Ben Bernanke could see no problems ahead (dismal).
Irving Fisher looked at the debt inflated asset bubble after the 1929 crash when ideas that
markets reached stable equilibriums were beyond a joke.
Fisher developed a theory of economic crises called debt-deflation, which attributed the crises
to the bursting of a credit bubble.
Hyman Minsky came up with "financial instability hypothesis" in 1974 and Steve Keen carries
on with this work today. The theory is there outside the mainstream.
To understand the theory you have to understand money:
" .. debt does not make society as a whole poorer: one person's debt is another person's
asset. So total wealth is unaffected by the amount of debt out there. This is, strictly speaking
true only for the world economy as a whole .. " Paul Krugman "End this Depression Now".
This is the neoclassical economic view of money and it's totally wrong and will always leave
you blind to events like 2008, e.g.
1929 – US (margin lending into US stocks)
1989 – Japan (real estate)
2008 – US (real estate bubble leveraged up with derivatives for global contagion)
2010 – Ireland (real estate)
2012 – Spain (real estate)
2015 – China (margin lending into Chinese stocks)
Norway, Sweden, Canada and Australia have been letting their real estate bubbles inflate because
their mainstream economists and Central Bankers don't know what's coming.
Money and debt are opposite sides of the same coin.
If there is no debt there is no money.
Money is created by loans and destroyed by repayments of those loans.
Advanced:
"Where does money come from" available from Amazon
You need to understand how money works to understand why austerity doesn't work in balance
sheet recessions, the cause of the dire prediction from the IMF that I started with.
You can look at the money supply/debt levels (the same thing) to see how well the economy is
doing.
The money supply is contracting – the economy will be doing badly and the risk of this turning
into debt deflation is high, there is positive feedback tending to make the situation worse. Debt
repayments are larger than the new debt being taken out, the overall level of debt is decreasing.
The money supply is stable – this is stagnation, in the ideal world the money supply should
be growing at a steady pace.
The money supply is growing steadily – the ideal.
The money supply is growing very rapidly – you've got a credit bubble on your hands and the
"black swan" is near. The FED didn't understand money and debt before 2008 so they missed it.
Mario is still doing austerity now, no wonder those Italian banks are full of NPLs.
It's too late for Norway, Sweden, Canada and Australia's mainstream economists and Central
Bankers, but we need to get this dismal neoclassical economics updated before the whole world
descends into debt deflation.
It's almost here, there isn't much time.
Chuck another trillion in to keep this sinking ship afloat Central Bankers, we need to get
our technocrat elite up to speed.
Just look at the rate of change of the money supply/debt.
When it's rising rapidly you're in trouble as a credit bubble is forming.
A negative gradient is also a bad sign as it means your money supply is contracting, your economy
is in trouble and debt deflation could be on its way.
I am shocked, shocked I tell you, that a model with 'Equilibrium' right in the name fails to
predict crises. They could probably do better just aggregating results from a big multi-player
version of The Sims.
Better models should start from scratch, assuming non-linearity. They could take the Limits-to-Growth
system of nonlinear pde's as a starting point, for example, to get a good handle on long range
dynamics. Then add detailed submodels for money and debt, for different countries, for trade,
for different economic sectors, etc. Use realistic agent based models where standard models are
inadequate.
To do all, start by sending all those economics Ph.D.s back to school in other fields where
they know how to do modern applied mathematics.
I am a Marxist economist (Professor of Economics, Mount Holyoke College) and I appreciate Branko
Milanovic's open-mindedness and his efforts in a recent post on his blog to educate economists who
often have a crude and superficial misunderstanding of Marx's labor theory of value.
For context for my comments on Milanovic, I will first say a few words about my interpretation
of Marx's labor theory of value (LTV). In my view, Marx's LTV is primarily a macro theory and
the main question addressed in Marx's macro LTV is the determination of the total profit (or surplus-value)
produced in the capitalist economy as a whole. Profit is the main goal of capitalist economies
and should be a key variable in any theory of capitalism. Marx's theory of the total profit
is that profit is the difference between the value produced by workers and the wages they are paid,
i.e. that profit is produced by the "surplus labor" of workers.
I argue that Marx's "surplus labor" theory of profit has very significant and wide-ranging explanatory
power. Marx's theory provides straight-forward and robust explanations of the following important
phenomena of capitalist economies: conflicts between capitalists and workers over wages, and
over the length of the working day, and over the intensity of labor (i.e. how hard workers work,
which determines in part how much value they produce); endogenous technological change (in order
to reduce necessary labor and increase surplus labor and surplus-value); increasing concentration
of capital and income(i.e. increasing inequality); the trend and fluctuations in the rate of profit
over time; and endogenous cycles due to fluctuations in the rate of profit rate of profit.
(A more complete discussion of the explanatory power of Marx's theory of profit is provided in my
" Marx's Economic Theory: True or False? A Marxian Response to Blaug's Appraisal, " in Moseley (ed.),
Heterodox Economic Theories: True or False?, Edward Elgar, 1995).
This wide-ranging explanatory power of Marx's surplus labor theory of profit is especially impressive
when compared to mainstream economics. In mainstream macroeconomics, there is no theory of
profit at all; profit (or the rate of profit) is not even a variable in the theory! I was shocked
when I realized in graduate school this absence of profit in mainstream macro, and am still shocked
that there is no effort to include profit. Indeed, DSGE models go in the opposite direction
and many models do not even have firms!
Mainsteam micro does have a theory of profit (or interest) – the marginal productivity theory
of distribution – but it is a weak and largely discredited theory. Marginal productivity theory
has been shown by the capital controversy and other criticisms to have insoluble logical problems
(the aggregation problem, reswitching, cannot integrate intermediate goods, etc.). And marginal
productivity theory has very meager explanatory power and explains none of the important phenomena
listed above that are explained by Marx's theory.
Milanovic agrees that Marx's LTV is primarily a macro theory, but he interprets it in this post
as only the assumption that "sum of values will be equal to sum of production prices". And
he continues: "The former is an unobservable quantity so Marx's contention is not falsifiable.
It is therefore an extra-scientific statement that we have to take on faith.
I argue, to the contrary, that Marx's macro LTV is primarily a theory of profit and my conclusion
that Marx's theory is the best theory of profit we have is not based on faith but is instead based
on the standard scientific criterion of empirical explanatory power. It is much more accurate
to say that marginal productivity theory is accepted by mainstream economists on faith, as Charles
Ferguson famously said in his conclusion to the capital controversy.
Now to my comments on Milanovic's three main points:
1. Milanovic's main point is that the LTV is often misinterpreted as a simple micro theory
that assumes that the prices of individual commodities are proportional to the labor-times required
to produce them. Milanovic argues that is not true in a capitalist economy because of the equalization
of the profit rate across industries with unequal ratios of capital to labor, so that according to
Marx's theory, long-run equilibrium prices are determined by the equation: w + d + rK, where
w is wages, d is depreciation and r is the economy-wide rate of profit (missing in this equation
is the cost of intermediate goods, but I will ignore this).
Milanovic emphasizes that Walras and Marshall had essentially the same equation for long-run equilibrium
prices. I agree that all three theories of long-run equilibrium prices have this same form,
but there is an important difference. Marx's theory provides a logically rigorous theory of
the rate of profit in this equation (based on his theory of the total profit discussed above) and
Walras and Marshall just take the rate of profit as given , disguised as an "opportunity cost", and
thus provides no theory of profit at all . Therefore, I think Marx's theory of long-run equilibrium
prices is superior to Walras' and Marshall's in this important sense.
2. Milanovic's second main point is that Marx's theory of long-run equilibrium prices are
"clearly very, very far from derisive statements that the labor theory of value means that people
are just paid for their labor input regardless of what is the 'socially necessary labor' required
to produce a good." I presume that this derisive statement means that workers produce more
value than they are paid and thus are exploited in capitalism. But Branko is mistaken about
this. Marx's theory of long-run equilibrium prices is based on his macro theory of profit according
to which the source of profit is the surplus labor of workers. This conclusion is indeed derisive
and that is the main (non-scientific) reason that Marx's theory of profit is rejected by mainstream
economists in spite of its superior explanatory power.
I know from previous correspondence that Milanovic understands well Marx's "exploitation" theory
of profit, but he seems to overlook the connection between Marx's micro theory of prices of production
and his macro theory of profit.
3. Milanovic's third point is that Marx's labor theory of value is most helpful in understanding
pre-capitalist economies and the relation between capitalism and non-capitalist economies today.
I argue, to the contrary, that Marx's labor theory of value and profit is the best theory we have
to understand the most important phenomena of capitalist economies, including 21 st century capitalism.
It would be one thing if mainstream economics had a robust theory of profit with significant explanation
power. But it has almost no theory of profit. Therefore it would seem to be appropriate
from a scientific point of view that Marx's surplus labor theory of profit should be given more serious
consideration.
Thanks again to Milanovic and I look forward to further discussion.
"... For more than three decades, macroeconomics has gone backwards," the paper began. Romer closed out his argument, some 20 pages later, by accusing a cohort of economists of drifting away from science, more interested in preserving reputations than testing their theories against reality, "more committed to friends than facts." In between, he offers a wicked parody of a modern macro argument: "Assume A, assume B, blah blah blah and so we have proven that P is true ..."
"... The idea that consumers and businesses always make rational choices pervades mainstream economics. Romer thinks that's not only wrong, but may lead to the misleading conclusion that government action can't fix big problems. ..."
"... There is no better place to be writing this than from (nearly) Minneapolis, for the University of Minnesota's economics department is the most devoted coven worshipping the most extreme form of "rational expectations." The most famous cultists have now relocated, but the U. Minnesota economics department remains fanatical in its devotion to rational expectations theory. ..."
"... All of this means that Romer's denunciations were sure to hit home far harder with mainstream and theoclassical economists than anything a heterodox economist could write. ..."
"... What this paragraph reveals is the classic tactic of theoclassical economists – they simply ignore real criticism. Lucas, Prescott, and Sargent all care desperately about Romer's criticism – but they all refuse to engage substantively with his critique. One has to love the arrogance of Sargent in "responding" – without reading – to Romer's critique. Sargent cannot, of course, respond to a critique he has never read so he instead makes a crude attempt to insult Romer, asserting that Romer has not done any scientific work in three decades. ..."
"... The rational expectations purists have been unable to come up with a response to their predictive failures and their false model of human behavior for thirty years. The Bloomberg article does not understand a subtle point about their non-defense defense, as shown in these key passages. ..."
"... What the rational expectations devotees are actually saying is their standard line, which is a radical departure from the scientific method. Their mantra is "it takes a model to beat a model." That mantra violates the scientific method. Their models are designed to embody their rational expectations theory. Those models' predictive ability is pathetic, which means that their theory and models are both falsified and should be rejected. The academic proponents of modern macro models, however, assert that their models are incapable of falsification by testing and predictive failure. This is not science, but theology. ..."
"... V.V. Chari's criticism of Romer is revealing. He complains that Romer does not want to "build on [rational expectation theory's] foundations." Why would Romer want to commit such a pointless act? Romer's point is that rational expectations is a failed theory that needs to be rejected so macroeconomics can move on to useful endeavors. ..."
"... Rational expectations theory has no such empirical foundations. ..."
"... Further, the dynamic stochastic general equilibrium (DSGE) models routinely fail the predictive test and, as Romer details, fail despite the use of dozens of ways in which the models are "gamed" with arbitrary inputs and restrictions that have no theoretical or empirical basis. Chari is right to describe the modern macro model as an "edifice." I would add that it is a baroque edifice top heavy with ornamental features designed to hide its lack of a foundation. Modern macro collapsed as soon as its devotees tried to build without an empirical foundation. ..."
"... The rational expectation devotees respond that predictive failures – no matter how extreme or frequent – cannot falsify their models or their theories. The proponents claim that only a better model, with superior predictive ability can beat their model. ..."
"... Kocherlakota's summary description is appropriately terse. He later explains the dogmatic gloss that devotees place on each of these five points. The "budget constraint," for example, means that nations with sovereign currencies such as the U.S. cannot run deficits, even to fight severe recessions or depressions. Why? Because theoclassical economists are enormous believers in austerity. As Kocherlakota archly phrased the matter, "freshwater" DSGE models were so attractive to theoclassical macro types because their model perfectly tracked their ideology. ..."
"... Specifying household preferences and firm objectives is equally erroneous, as Akerlof and Romer's 1993 article on "Looting" demonstrated. "Firms" do not have "objectives." Employees have "objectives," and the controlling officers' "objectives" are the most powerful drivers of employee behavior. ..."
"... Kocherlakota unintentionally highlighted modern macros' inability to incorporate even massive frauds driving national scandals and banking crises, despite the efforts of Akerlof (1970) (a market for "lemons") and Akerlof and Romer 1993: ("looting") in this passage. ..."
"... If macroeconomics, outside the cult of modern macro, were a car, it would not be "broken." It would be episodically broken when the rational expectations devotees got hold of monetary or fiscal policy. The rational expectations model fails the most fundamental test of a financial model – people trying to make money by anticipating the macroeconomics consequences of changes in monetary and fiscal policy overwhelmingly do not use their models because they are known to have pathetic predictive ability. The alternative models that embrace Keynesian analysis and are not dependent on the fiction of rational expectations function pretty well. The real world macro car, when driven by real world drivers, works OK. Essentially, the rational expectations devotees say that we can never drive the macro "car" because the public will defeat any effort to drive the economy in any direction. Instead, the economy will lurch about n response to random technological "shocks" that cannot be predicted because they occur without any relationship to any public policy choices. ..."
"... I am completely confused about the prediction of "rational choices". Do they include going bankrupt on purpose and letting your investors take the hit, burning your building down for the insurance money, hostile takeover behavior where businesses are run into the ground on purpose, tax strategies, people going on unemployment when they want a vacation from work, and on and on? These are decisions that have a rationale for the people who make them, and they have not been uncommon. Perhaps "economists" are best off observing not predicting "human behavior". ..."
"... I majored in economics. as you go up higher up into the dismal science, the more deranged it gets. The reason they are vague is because they don't know what they are talking about. They don't consider the real world, and as Bill Black's so brilliantly points out, they are in no hurry to out themselves as frauds. ..."
"... thanks, Simon. there must be something in those mental masturbation models for some people. justification for something the 99 % are all paying for most likely ..."
"... In some natural sciences, abandoning equilibrium models and replacing them with dynamic models have led to great progress, and looking at the actual time evolution of economies, there is a great deal of dynamics, such as growth, recessions, demography, natural catastrophes, immigration/emigration, resource discovery and depletion, technological progress. ..."
"... Since our economy has been gradually going casino for so many years, it makes sense that the folks who hold the reigns would make every effort to assure that all their key players adhere to their singular perspectives. ..."
"... The Nobel Memorial Prize in economics promotes the illusion that economics is a science. It is better conceptualized as a literary genre, and economists should be forced to compete with other writers for the prize in literature. ..."
"... Bill Black has a fascinating opinion on unnecessary complexity and I agree with him 200 percent. ..."
"... interesting about Kocherlakota formerly being a rational expectations devotee just the phrase 'rational expectations' is mind boggling as if there were no reaction to any action anywhere. Jack Bogle was on the news this morning laughing about stock picking and saying that every stock picker that makes money is balanced out by another one who loses money and so the only thing that makes money net-net is the long term progress of the market, (or society I would say – and that requires planning). ..."
"... Not one mention of Chaos or Catastrophe Theory, which are theories of systems with non linear feedback (aka: Fear and Greed), which appear to me to be fundamental aspects of Economics, especially the humans who are the Economy. ..."
"... Two slogans I read somewhere recently seem appropriate for theoclassical economics: Ideology is easy, thinking is hard. Belief is belonging. ..."
"... One doesn't have to have read any Reformation theology, but only to have observed more or less casually that human being are scarcely rational even about their own self-interest, and then only self-deceptively. Thomas Frank has commented effectively on that point in the political arena in What's the Matter with Kansas. To wit: Republicans have, he points out, diverted voters attention to social/cultural issues while picking their pockets. Perhaps one might sense an intersection of politics and economics on the latter point. ..."
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor
of economics and law at the University of Missouri-Kansas City. Jointly published at
New Economic Perspectives
Bloomberg has written an article about the origins of Paul Romer's increasingly famous
critique of modern macroeconomics.
His intention actually had been to write a paper that would celebrate advances in the understanding
of what drives economic growth. But when he sat down to write it in the months before taking over
as the World Bank's chief economist, Romer quickly found his heart wasn't in it. The world economy
wasn't growing much anyway; and the math that many colleagues were using to model it seemed unrealistic.
He watched a documentary about the Church of Scientology, and was struck by how groupthink can
operate.
So, Romer said in an interview at the Bank's Washington headquarters, "I just thought, OK,
I'm going to say what I think. I don't know if I'm the right person, but no one else is going
to say it. So I said it."
The upshot was "The Trouble With Macroeconomics," a scathing critique that landed among Romer's
peers like a grenade.
A bit of background makes the first paragraph more understandable. Romer's specialty is developmental
economics.
There are many economists who have said for years that modern macroeconomics is an abject failure.
But all economists are not equal, and Romer is both an extremely distinguished economist and the
World Bank's chief economist. When he writes that macroeconomics is absurd his position gets vastly
more attention from the field.
The Bloomberg article humorously summarizes Romer's article.
"For more than three decades, macroeconomics has gone backwards," the paper began. Romer
closed out his argument, some 20 pages later, by accusing a cohort of economists of drifting away
from science, more interested in preserving reputations than testing their theories against reality,
"more committed to friends than facts." In between, he offers a wicked parody of a modern macro
argument: "Assume A, assume B, blah blah blah and so we have proven that P is true."
The idea that consumers and businesses always make rational choices pervades mainstream
economics. Romer thinks that's not only wrong, but may lead to the misleading conclusion that
government action can't fix big problems.
There is no better place to be writing this than from (nearly) Minneapolis, for the University
of Minnesota's economics department is the most devoted coven worshipping the most extreme form of
"rational expectations." The most famous cultists have now relocated, but the U. Minnesota economics
department remains fanatical in its devotion to rational expectations theory.
A belief that consumers and businesses always make rational choices does not "pervade mainstream
economics." Mainstream economics is increasingly influenced by reality, particularly in the form
of behavioral economics. Behavioral economics, which has led to multiple Nobel awards, has many currents,
but each of them agrees that consumers and business people typically do not make rational decisions
even in simpler tasks, much less demonstrate the ability to predict the future required by rational
expectations theory. Similarly, even the proponents of modern macroeconomics admit that its predictive
ability – and predictive ability is supposed to be their holy grail of legitimacy – is beyond pathetic.
What is true is that mainstream economics' most egregious errors have come from assuming contrary
to reality in a wide range of contexts that corporate officers, consumers, and investors make optimal
decisions that maximize the firm or the household's utility.
In any real scientific field modern macro would, decades ago, have been abandoned as an abject
failure. Romer, therefore, is not storming some impregnable bulwark of economics. He is calling an
obvious, abject failure an obvious, abject failure. Private sector finance participants typically
believe the academic proponents of rational expectations theory are delusional. Romer is calling
out elites in his profession who have ignored these failures and doubled and tripled-down on their
failed dogmas for decades. This makes the Bloomberg article's title deeply misleading: "The
Rebel Economist Who Blew Up Macroeconomics."
Romer is not a rebel. He did not blow up academic, mainstream macroeconomics – the academic proponents
of modern macroeconomics blew it up decades ago. Romer is mainstream, and he is sympathetic on personal
and ideological grounds to the theoclasscial economist most famous for developing rational expectations
theory. Romer has strongly libertarian views and did his doctoral work under Robert Lucas. Romer
has long been appreciative of Lucas. All of this means that Romer's denunciations were sure to
hit home far harder with mainstream and theoclassical economists than anything a heterodox economist
could write.
The same Bloomberg article made a key factual claim that is literally true but misleading.
What's at stake far exceeds hurt feelings in the ivory tower. Central banks and other policy
makers use the models that Romer says are flawed.
Central banks and private economic forecasters rarely use modern macro models, though they have
begun to use New Keynesian models that are hybrids. They do not do use "freshwater" models because
they are known to have terrible predictive ability and because alternative models not based on rational
expectations have far superior predictive ability. The private financial sector typically does not
rely on modern macro models, even the New Keynesian hybrids. Romer is not saying that the models
are "flawed" – he is explaining that they are inherently failed models. Worse, he is saying that
the designers of the models know they are failed and respond by gimmicking the models by littering
them with myriad assumptions that have no empirical or theoretical basis and are designed to try
to make the models produce less absurd results.
I explained that Romer was far from the first to call out modern academic macroeconomics as a
failure but that he is a prominent mainstream economist. The Bloomberg article's most interesting
reveal was the response by the troika of economists must associated with rational expectations theory
to Romer's article decrying their dogmas.
Lucas and Prescott didn't respond to requests for comments on Romer's paper. Sargent did. He
said he hadn't read it, but suggested that Romer may be out of touch with the ways that rational-expectations
economists have adapted their models to reflect how people and firms actually behave. Sargent
said in an e-mail that Romer himself drew heavily on the school's insights, back when he was "still
doing scientific work in economics 25 or 30 years ago."
What this paragraph reveals is the classic tactic of theoclassical economists – they simply
ignore real criticism. Lucas, Prescott, and Sargent all care desperately about Romer's criticism
– but they all refuse to engage substantively with his critique. One has to love the arrogance of
Sargent in "responding" – without reading – to Romer's critique. Sargent cannot, of course, respond
to a critique he has never read so he instead makes a crude attempt to insult Romer, asserting that
Romer has not done any scientific work in three decades.
The rational expectations purists have been unable to come up with a response to their predictive
failures and their false model of human behavior for thirty years. The Bloomberg article does
not understand a subtle point about their non-defense defense, as shown in these key passages.
Allies of the three Nobelists have been more outspoken, and many of them point out that Romer
- unlike Keynes in the 1930s - doesn't offer a new framework to replace the one he says has failed.
"Burning down the edifice, and saying we'll figure out what we'll build on its foundations
later, just does not seem like a constructive way to proceed," said V. V. Chari, an economics
professor at the University of Minnesota.
Romer's heard that line often, and bristles at it: "I'm saying, 'the car is broken.' And everyone's
saying, 'Romer's a terrible guy, because he couldn't fix the car'."
What the rational expectations devotees are actually saying is their standard line, which
is a radical departure from the scientific method. Their mantra is "it takes a model to beat a model."
That mantra violates the scientific method. Their models are designed to embody their rational expectations
theory. Those models' predictive ability is pathetic, which means that their theory and models are
both falsified and should be rejected. The academic proponents of modern macro models, however, assert
that their models are incapable of falsification by testing and predictive failure. This is not science,
but theology.
V.V. Chari's criticism of Romer is revealing. He complains that Romer does not want to "build
on [rational expectation theory's] foundations." Why would Romer want to commit such a pointless
act? Romer's point is that rational expectations is a failed theory that needs to be rejected so
macroeconomics can move on to useful endeavors.
A "foundation" in such a building metaphor is the deep, well-grounded stone or reinforced concrete
beneath the visible building that is attached to solid bedrock. Rational expectations theory
has no such empirical foundations. It was not based on testing that found that people behaved
in accordance with the theory. Behavioral economics and finance, by contrast, is based on a growing
empirical base – virtually all of which refutes the first three assumptions of the models. Similarly,
the work of Akerlof (1970), Akerlof & Romer (1993), and the work of white-collar criminologists has
falsified each of the first three assumptions of the models.
Further, the dynamic stochastic general equilibrium (DSGE) models routinely fail the predictive
test and, as Romer details, fail despite the use of dozens of ways in which the models are "gamed"
with arbitrary inputs and restrictions that have no theoretical or empirical basis. Chari is right
to describe the modern macro model as an "edifice." I would add that it is a baroque edifice top
heavy with ornamental features designed to hide its lack of a foundation. Modern macro collapsed
as soon as its devotees tried to build without an empirical foundation.
The rational expectation devotees respond that predictive failures – no matter how extreme
or frequent – cannot falsify their models or their theories. The proponents claim that only a better
model, with superior predictive ability can beat their model. That might sound acceptable to
some, but there is a critical unstated twist. The many rival models actually used by the private
sector and central banks that produce far superior predictive ability can never be treated as "better
models" to these devotees because the models with far superior predictive powers reject rational
expectations theory, rational decision-making, and the "budget constraint." To the devotees, only
DSGE models that accept this trio of market fictions are eligible to be acceptable "models." Dr.
Kocherlakota states that acceptable models "share five key features." These five characteristics
define DSGE models.
They specify budget constraints for households, technologies for firms, and resource constraints
for the overall economy. They specify household preferences and firm objectives. They assume forward-looking
behavior for firms and households. They include the shocks that firms and households face. They are
models of the entire macroeconomy.
Kocherlakota's summary description is appropriately terse. He later explains the dogmatic
gloss that devotees place on each of these five points. The "budget constraint," for example, means
that nations with sovereign currencies such as the U.S. cannot run deficits, even to fight severe
recessions or depressions. Why? Because theoclassical economists are enormous believers in austerity.
As Kocherlakota archly phrased the matter, "freshwater" DSGE models were so attractive to theoclassical
macro types because their model perfectly tracked their ideology.
[A]lmost coincidentally-in these models, all government interventions (including all forms
of stabilization policy) are undesirable.
Yes, "almost coincidentally."
Specifying household preferences and firm objectives is equally erroneous, as Akerlof and
Romer's 1993 article on "Looting" demonstrated. "Firms" do not have "objectives." Employees have
"objectives," and the controlling officers' "objectives" are the most powerful drivers of employee
behavior.
As Akerlof and Romer (and every modern crisis) demonstrated, this frequently leads to firm practices
that harm the firm, the consumer, and the shareholders. Such behavior, however, is impossible under
the second assumption, so any model (such as control fraud or "looting") that violates the assumption
is not eligible to be a rival model because it these superior models do not produce "general equilibrium."
The "GE" in a "DSGE" model is general equilibrium, so rival models from economics and criminology
that note that the economy is not a self-correcting apparatus that produces general equilibrium are
ruled out as superior models even though they are superior in that they have an empirical and theoretical
basis and demonstrate far superior predictive results.
Kocherlakota unintentionally highlighted modern macros' inability to incorporate even massive
frauds driving national scandals and banking crises, despite the efforts of Akerlof (1970) (a market
for "lemons") and Akerlof and Romer 1993: ("looting") in this passage.
In the macro models of the 1980s, all mutually beneficial trades occur without delay. This
assumption of frictionless exchange made solving these models easy. However, it also made
the models less compelling.
He then goes on to a delighted description of macro economists now sometimes building in (arbitrary)
lags ("frictions") in the time required to accomplish "all mutually beneficial trades." But what
of the three great fraud epidemics that produced the U.S. financial crisis and the Great Recession?
Sorry, that's not allowed into the "friction" canon. The market model is still one of perfection
(albeit slightly delayed). It does not matter how many massive financial scandals occur in which
the largest UK banks and Wells Fargo deliberately abuse their customers by encouraging them to engage
in transactions that will harm them and make the bankers rich. It doesn't not matter that over ten
million Americans were induced by bankers and their agents to pay excessive interest rates in return
for yield spread premiums (YSP) to the bankers and brokers. None of these things are allowed to happen
in these models. Your better model, which includes such frauds and abuses, is not allowed precisely
because it (a) is better and (b) falsifies the theoclassical ideology underlying "rational expectations"
theory.
The assumption of "forward looking behavior" produces "expectations," which are assumed to be
accurate and rational. Theoclassical proponents claim that we all have the ability to predict vast
aspects of the financial future. While we are not perfect, we are optimal in our forecasts given
the state of knowledge. If your rival model lacks rational expectations, it isn't a real model. Romer
rejects the rational expectations myth, so he is incapable of presenting a superior model to the
devotees of rational expectations.
If macroeconomics, outside the cult of modern macro, were a car, it would not be "broken."
It would be episodically broken when the rational expectations devotees got hold of monetary or fiscal
policy. The rational expectations model fails the most fundamental test of a financial model – people
trying to make money by anticipating the macroeconomics consequences of changes in monetary and fiscal
policy overwhelmingly do not use their models because they are known to have pathetic predictive
ability. The alternative models that embrace Keynesian analysis and are not dependent on the fiction
of rational expectations function pretty well. The real world macro car, when driven by real world
drivers, works OK. Essentially, the rational expectations devotees say that we can never drive the
macro "car" because the public will defeat any effort to drive the economy in any direction. Instead,
the economy will lurch about n response to random technological "shocks" that cannot be predicted
because they occur without any relationship to any public policy choices.
Romer takes particular delight in shredding the pretension to "science" in the model's abuse of
shocks. Again, however, the Bloomberg article seriously misleads in making it appear that
his critique of shocks is novel. Then Minneapolis Fed Chair Dr.
Kocherlakota (formerly chair of the U. Minnesota economics department, where he was a "rational
expectations" devotee) forcefully owned up to the egregious predictive failures of the models. He
acknowledged that "macro models are driven by patently unrealistic shocks."
It is unfortunate that Bloomberg article about Romer's article is weak. It is useful, however,
because its journalistic inquiry allows us to know how deep in their bunker Sargent, Lucas, and Prescott
remain. They still refuse to engage substantively with Romer's critique of not only their failures
but their intellectual dishonesty and cowardice. It is astonishing that multiple economists were
awarded Nobel prizes for creating the increasingly baroque failure of modern macro. In any other
field it would be a scandal that would shake the discipline to the core and cause it to reexamine
how it conducted research and trained faculty. In economics, however, a huge proportion of Nobel
awards have gone to theoclassical economists whose predictions have been routinely falsified and
whose policy recommendations have proven disastrous. Theoclassical economists, with only a handful
of exceptions, express no concern about these failures.
I am completely confused about the prediction of "rational choices". Do they include going
bankrupt on purpose and letting your investors take the hit, burning your building down for the
insurance money, hostile takeover behavior where businesses are run into the ground on purpose,
tax strategies, people going on unemployment when they want a vacation from work, and on and on?
These are decisions that have a rationale for the people who make them, and they have not been
uncommon. Perhaps "economists" are best off observing not predicting "human behavior".
I was fortunate enough to have an econ. prof. (mid 70's) who was also my student counselor
tell me that unless I intended to work for the gov't or teach the subject, a degree in econ. was
pointless. What's taught in class has very little to do with the real world.
Anyone who contends that econ is a "science" rather than philosophy is deluded or just trying
to protect their place in the hierarchy. Seems that "physics envy" is never going away.
I'll see your DSGE model & raise with with the IBGYBG* model; in theory, you should win that
hand but I'll be walking away with the actual money.
*(by the time this blows up) I'll Be Gone & You'll Be Gone
I majored in economics. as you go up higher up into the dismal science, the more deranged
it gets. The reason they are vague is because they don't know what they are talking about. They
don't consider the real world, and as Bill Black's so brilliantly points out, they are in no hurry
to out themselves as frauds.
thanks, Simon. there must be something in those mental masturbation models for some people.
justification for something the 99 % are all paying for most likely
I am not sure which is the greatest shortcoming of the macro-economy theory described by Black:
rational expectations or global equilibrium?
In some natural sciences, abandoning equilibrium models and replacing them with dynamic
models have led to great progress, and looking at the actual time evolution of economies, there
is a great deal of dynamics, such as growth, recessions, demography, natural catastrophes, immigration/emigration,
resource discovery and depletion, technological progress.
I sometimes like to use the analogy of the famous failure of the Tacoma Narrows bridge failure.
The engineers calculated the maximum force that the wind would have on the bridge, but didn't
calculate the dynamic aerodynamic effect as the bridge deck swayed in the wind. The result was
a spectacular failure.
Since our economy has been gradually going casino for so many years, it makes sense that
the folks who hold the reigns would make every effort to assure that all their key players adhere
to their singular perspectives.
The most important of these perspectives is that there is no higher human purpose than to make
a lot of money, in essence, that greed is good.
Thus the problem facing economists worshiping at the altar of "rational expectations" is that
the only rational expectation that is accepted as 'truly rational', is first and foremost, the
love of money.
This leads to problems for businesses, as truly selfish, and money-motivated people are actually
rare, as most people have a wide range of possible motivations working in their lives.
This is why business 'leaders' give prospective employees tests to find the people they can
'trust', which is to say find those who are motivated by money, which is the only motivating factor
our masters find useful.
Of course those who are motivated exclusively by the love of money are also those who believe
that austerity is the proper medicine for the rest of us.
There's one more thing about people who are motivated only by the need to accumulate money,
they also tend to steal anything that isn't tied down.
This doesn't bother FIRE sector employers since they are only concerned to ferret-out those
whose motivations might be polluted by inclinations other than greed.
Anyway, it seems to me that the importance of 'rational expectations' is in predicting the
behavior of FIRE sector employees, not the economy as a whole.
As far as the bulk of humanity goes, the only true 'rational expectation' is that people have
many and varied motivations that make it hard to predict their behavior.
Hey Econ. Prof. – I'll see your DSGE model & raise with my IBGYBG** model. In theory, you'll
win the hand but we'll see who actually walks away the money.
**(by the time this thing blows up) I'll Be Gone, You'll Be Gone
The Nobel Memorial Prize in economics promotes the illusion that economics is a science.
It is better conceptualized as a literary genre, and economists should be forced to compete with
other writers for the prize in literature.
We need to get back to basics, to the real economy of people and necessary supplies to support
people. Model a simple city, with a simple agricultural hinterland. You can know how many bushels
of grain equivalent are necessary for subsistence economy. You can know how many people you have
in the countryside and in the city. You can know how many bushels of grain equivalent are in storage.
You can estimate how much of the economy is barter and how much is cash purchase. You can know
how much money is in circulation, and from those determine what velocity the money needs to have,
to pay for all that bushels of grain equivalent. You don't need calculus, just arithmetic. End
the sophistry and obscurity thru unnecessary complexity.
interesting about Kocherlakota formerly being a rational expectations devotee just the
phrase 'rational expectations' is mind boggling as if there were no reaction to any action anywhere.
Jack Bogle was on the news this morning laughing about stock picking and saying that every stock
picker that makes money is balanced out by another one who loses money and so the only thing that
makes money net-net is the long term progress of the market, (or society I would say – and that
requires planning).
Not one mention of Chaos or Catastrophe Theory, which are theories of systems with non
linear feedback (aka: Fear and Greed), which appear to me to be fundamental aspects of Economics,
especially the humans who are the Economy.
Perhaps an approach to a solution for economists who are rightly disgusted with the continuing
failures of macroeconomics is to confess that economics is theology/philosophy and not science.
Economics lands on the "mammon" side of serving God or mammon.
One doesn't have to have read any Reformation theology, but only to have observed more
or less casually that human being are scarcely rational even about their own self-interest, and
then only self-deceptively. Thomas Frank has commented effectively on that point in the political
arena in What's the Matter with Kansas. To wit: Republicans have, he points out, diverted voters
attention to social/cultural issues while picking their pockets. Perhaps one might sense an intersection
of politics and economics on the latter point.
There is less need to moralize about "sin" than to see it as an heuristic. That is, one might
begin by assuming that businesses and individuals are not only guided by rationality, but to the
contrary are aided by economists, say, of the U of Minnesota ilk, to rely upon the myth of rationality
to cloak fundamental selfishness, which economists have neutered by casting it as "self-interest."
Selfishness is the root of continuing, destructive "irrationality," because it is part of what
defines a root of sin, i.e., missing the mark.
An economics of gratitude for shared abundance would be closer to the mark.
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 :
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.
RogerFox :
, -1
"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.
anne ->
RogerFox...
, -1
To a man, professional
economists shill...
[ This
phrase begins a
mean-spirited lie, no matter
how the sentence is
finished. The point of the
malicious post however is
only to be destructive. ]
Avraam Jack Dectis :
, -1
.
Economics is the most
interesting science because
it is not settled and has
great effect upon the
affairs of man.
One of the
things that make it
interesting is the number of
variables that exist in most
economic situations as well
as the strong psychological
and sociological component
to the science, due to its
attempts to predict the
actions of humans, a
hierarchical herd based
status insane animal.
Undoubtedly, the desire
to promote personally
attractive policies is
something everyone must
fight.
On a side note, having
seen this blog referenced
elsewhere and finally
starting to read it
regularly, truly a nice
thing, I notice that Dr.
Thoma and I are the same age
for about three months per
year. I suspect that is
about all we have in common
since I just spent the last
18+ years getting openly and
notoriously poisoned by a
stalker gang, have hit men
following me and am so
unpopular and poorly
connected that I seem
remarkably unable to engage
any law enforcement on the
issue.
Which leads into the next
point-> Is the dynamism of
an economy a function of
freedom of speech, riule of
law, security of the citizen
and so forth. For decades
the USA, as it fought two
opposing powerful systems,
made that case yet now that
no longer seems to be the
case in the USA and in fact
this is confirmed by the
fact that nobody makes that
case convincingly anymore.
Can this deterioration of
culture and embrace of
expediency have a stifling
economic effect?
DeDude :
, -1
Economics as a science is
mainly hurt by two things.
1. 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).
2. 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.
RGC :
, -1
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.
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.
Syaloch :
, -1
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."
The 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.
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.
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. ]
"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/1812737
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".
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.
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.
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.
"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 ->
Arne...
, -1
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.
"... In fact, I would posit that the Ivy League, especially Yale, Princeton, Harvard and MIT, are the principal crime factories in America today. ..."
"... Brownback is in Kansas; UMKC is in Missouri. There is a Kansas City in Kansas, and another Kansas City in Missouri. Missouri is not as red as KS, but it's still a red state. ..."
"... UMKC is part of the state system and most likely receives no funding from the city. It was home to New Letters, a respected literary magazine edited by poet John Ciardi. I hail from Kanasa City and always thought of UMKC as a decent commuter school, mostly catering to the educational needs of adult city dwellers. But the evolution of both the Econ and jazz studies departments lead me to suspect things have changed. Whether that's by design or through organic happenstance I don't know. ..."
"... Couldn't a Marxian analysis of capitalism as a whole also shed some light on this issue? I think Hudson is pretty much right but I think, like Sanders, he's offering a reformist option as opposed to a full on critique of the entire system. ..."
"... Not that a revolution is the option you necessarily want to go with, I just think that Marx's criticism of capitalism has useful information that could help with shaping the perspective here. ..."
Michael
Hudson spends a half hour with Meet the Renegades explaining his views on money, finance, economic
training, rentier capitalism, and how debt overhangs operate. Hudson fans will recognize his regular
themes. This is a good segment for introducing people you know to Hudson and to heterodox economic
ideas.
I've always found it interesting that both Hudson and Bill Black are on the faculty of UMKC,
which is a state university in a pretty conservative state. It's possible that some of the funding
for UMKC comes from the municipality of Kansas City, MO, but that town has never been known as
a hotbed of radical intellectuality either.
Joseph Campbell didn't teach at an Ivy League either. Conformity starts with the faculty in
your own department … and the Ivy League is as status quo and status conscious as it gets.
The Ivy League are not much different than privately held corporations when you consider who
their alma materi are, how much money the alma materi have, and where Ivy League endowments come
from.
In fact, I would posit that the Ivy League, especially Yale, Princeton, Harvard and MIT, are
the principal crime factories in America today.
Please recall that the dood who financed Liberty Lobby and other white supremacist nonsense
was Koch family patriarch, Fred Koch, who was a trustee at MIT. (Ever hear Noam Chomsky complain
about that????? Of course not!)
Ah but is it really an inherently conservative state fiscally, or just socially? That is, are
the people like Brownback appealing to one sort of conservatism and using that to do a "trust
me" on the other sort?
I would say it's not unreasonable for anybody to delegate something they are not so sure of
to somebody they trust for other reasons.
Brownback is in Kansas; UMKC is in Missouri. There is a Kansas City in Kansas, and another
Kansas City in Missouri. Missouri is not as red as KS, but it's still a red state.
UMKC is part of the state system and most likely receives no funding from the city. It was
home to New Letters, a respected literary magazine edited by poet John Ciardi. I hail from Kanasa
City and always thought of UMKC as a decent commuter school, mostly catering to the educational
needs of adult city dwellers. But the evolution of both the Econ and jazz studies departments
lead me to suspect things have changed. Whether that's by design or through organic happenstance
I don't know.
If you are not on the money makers' distribution list, it would make sense to find other ways
to get some of that loot if you can't the traditional way…
You can be conservative in your social values but want change, i.e. liberalism, in the way
the monetary system distributes the money.
The UMKC is also the home of the Kansas City School of Economics, more commonly known as the
MMT School. Neither Hudson nor Black are MMTers per se, but both have grown by their affiliation
with the school.
Thanks for sharing this excellent interview. Watching it I realized the people I actually admire
more than Hudson are his students. They must care more about learning the truth than securing
wealth and job prospects on wall street.
Couldn't a Marxian analysis of capitalism as a whole also shed some light on this issue? I
think Hudson is pretty much right but I think, like Sanders, he's offering a reformist option
as opposed to a full on critique of the entire system.
Not that a revolution is the option you necessarily want to go with, I just think that Marx's
criticism of capitalism has useful information that could help with shaping the perspective here.
I asked Yves Smith at the Dallas meetup last week (paraphrasing) "Do you meet with Michael
Hudson and Bill Black… is the independent media community, or any community, organizing around
Michael Hudson and Bill Black… to not only support and promote Hudson's and Black's perspectives
but to help develop their concepts and 'fine tune' their messaging?" I said to Yves "Hudson and
Black are clearly the leaders we desperately need to rally behind and push into Washington… they
clearly know what needs to be done… a PR machine needs to be developed… to get their messages
out to our families, friends, and acquaintances… unfortunately, the current messaging is not good
enough… I can't get my family, friends, and others to engage and echo the messaging to their family,
friends, etc."
Michael Hudson has been good at repeating his central message… 'by increasing land, monopoly,
and finance rent costs… the 1% are a highly organized mafia methodically looting our economy…
effectively raping, pillaging and consequently destroying every component of our social structures'.
Very unfortunately, Bill Blacks central message seems to have been lost for years now… he doesn't
repeat his central message… 'the crimes must be stopped… there is no alternative… looting criminals
MUST be publicly exposed, investigated, indicted, prosecuted, convicted, punished and their loot
returned to society… by letting cheaters prosper, organized white-collar crime, perpetrated by
the top-most leaders of our public and private institutions, has become an epidemic… the very
fabric of civil society is being destroyed… we have no choice… the criminals must be stopped…
and the only way to do that is to publicly expose, investigate, indict, prosecute, punish, and
take back what is ours'.
In 2008, when I tuned out of the mainstream media and tuned into the independent media, I thought
the messages from Michael Hudson ("they are organized criminals… this is what they're doing…")
and Bill Black ("the criminals must be stopped… here's how we stopped the Savings & Loan criminals…)
would resonate and become common knowledge. I quickly discovered that it didn't even resonate
with close family and friends. Why???
I will send out this video… Michael Hudson at his best, speaking-wise. I don't expect to get
any reaction… why?… very frustrated…
Amen. Once you start noticing, it becomes hard to stop. In looking hard for a silver lining
to the current election storm clouds, public awareness of the MSM seems to have nudged a few toward
slightly more objectivity, although I may just be wishing for that after media fatigue ;)
"...That is, even central banks that follow some kind of Taylor rule in a flexible inflation-targeting
regime are susceptible to the knowledge problem...
The biggest information challenge comes from attempting to measure the output gap in real
time. The output gap is the difference between the economy's actual and potential level of output
and is subject to two big measurement problems.
First, real-time output data generally get revised and often on the same order of magnitude
as the estimated output gap itself.
Second, potential output estimates are based on trends that rely on ever-changing endpoints.
Orphanides finds the latter problem to be the biggest contributor to real-time misperceptions
of the output gap. This means that even if real-time data improved such that there were fewer
revisions, there would still be a sizable problem measuring the real-time output gap."
Conservative ideologues tell us government/central planners are inefficient because of the
"knowledge problem." Well so are private sector central planners. See the big banks and the housing
bubble/financial crisis. Or Samsung and its exploding Note 7. Or Volkswagon and its cheating on
benchmark tests.
This "output gap" is another rightwing diversion. It is useful to them precisely because it
is impossible to measure and therefore people can argue about it ad infinitum.
Meanwhile we have a lot of people who can't get a decent job at a living wage. That can
be easily measured and it could be easily remedied. And it is what average people actually care
about. So they want to make sure that isn't discussed. They want to discuss something with no
clear answer instead.
"Former Fed Vice Chairman Alan Blinder said he's skeptical that fiscal policy will be loosened
a great deal if Clinton wins the election, as seems likely based on recent voter surveys.
"She is promising not to make budget deficits bigger by her programs," said Blinder, who is
now a professor at Princeton University. "Whatever fiscal stimulus there is ought to be small
enough for the Fed practically to ignore it.""
Blinder is skeptical that Clinton will do enough to force the Fed to modulate their plans,
even though PGL and Sanjait tell us otherwise.
Clinton's infrastructure plans should be "substantially" larger as Krugman and Summers write.
This would help close the output gap. This would help with the job market and increasing incomes
and lowering personal debt loads.
But PGL can't admit this because he's a petulant child who thinks Germany still uses the Deutsche
Mark.
"The recent decision by the Fed to raise interest rates is the latest example of the rigged
economic system. Big bankers and their supporters in Congress have been telling us for years that
runaway inflation is just around the corner. They have been dead wrong each time. Raising interest
rates now is a disaster for small business owners who need loans to hire more workers and Americans
who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until
unemployment is lower than 4 percent. Raising rates must be done only as a last resort - not to
fight phantom inflation."
"... An important essay indeed in that ideological influence is pervasive in writing by economists, which should be no problem as such, but economists should be aware of ideological influence in the work that they do. The problem is being unaware that work is ideological, so that the work is presented as simple truth allowing for no alternative presentation and argument. ..."
"... RBC economists are very well compensated for saying that no government intervention is needed in the economy, as are those saying that minimum wages harm employment. ..."
"... Actually a lot of academics are not exactly paid that well. This crowd does this sort as a religion. The problem is that those of us who never accepted perfect markets and instant market clearing were closed out of publications for 30 years. Now if RBC explained the real world - fine. But it had zero explanation for the last 9 years. ..."
"... Mankiw is paid well. ..."
"... Krugman is paid well. ..."
"... Speaking as an academic, in the university system with the lowest paid faculty in the nation, I am well aware of that. It is not the academic salaries, but the research grants and consulting contracts that matter here. ..."
"... Upton Sinclair is always right. ..."
"... "I suspect there is a reluctance among the majority of economists to admit that some among them may not be following the scientific method but may instead be making choices on ideological grounds." ..."
"... The RBC crowd is arrogant enough to argue that Keynes was practicing junk science. They knew his writings and just ignored it. ..."
"... That US economists are completely clueless is obvious to anyone who travels around the world. That free trade economies such as the US are complete basket cases is obvious to anyone who visits mercantilist economies such as Singapore, Japan, Israel etc. US trained economists only have prestige because the masses don't know how backward and poverty-stricken the US has become under the policies they relentlessly justify and apologize for. ..."
Being honest about ideological influence in economics : Noah Smith has an
article that talks about Paul Romer's recent
critique
of macroeconomics. ... He says the fundamental problem with macroeconomics is lack of data,
which is why disputes seem to take so long to resolve. That is not in my view the whole story.
If we look at the rise of Real Business Cycle (RBC) research a few decades ago, that was only
made possible because economists chose to ignore evidence about the nature of unemployment in
recessions. There is overwhelming evidence that in a recession employment declines because workers
are fired rather than choosing not to work, and that the resulting increase in unemployment is
involuntary (those fired would have rather retained their job at their previous wage). Both facts
are incompatible with the RBC model.
In the RBC model there is no problem with recessions, and no role for policy to attempt to
prevent them or bring them to an end. The business cycle fluctuations in employment they generate
are entirely voluntary. RBC researchers wanted to build models of business cycles that had nothing
to do with sticky prices. Yet here again the evidence was quite clear...
Why would researchers try to build models of business cycles where these cycles required no
policy intervention, and ignore key evidence in doing so? The obvious explanation is ideological.
I cannot prove it was ideological, but it is difficult to understand why - in an area which as
Noah says suffers from a lack of data - you would choose to develop theories that ignore some
of the evidence you have. The fact that, as I argue
here , this bias may have expressed itself in the insistence on following a particular methodology
at the expense of others does not negate the importance of that bias. ...
I suspect there is a reluctance among the majority of economists to admit that some among them
may not be following the scientific method but may instead be making choices on ideological grounds.
This is the essence of Romer's critique, first in his own area of growth economics and then for
business cycle analysis. Denying or marginalizing the problem simply invites critics to apply
to the whole profession a criticism that only applies to a minority.
An important essay indeed in that ideological influence is pervasive in writing by economists,
which should be no problem as such, but economists should be aware of ideological influence in
the work that they do. The problem is being unaware that work is ideological, so that the work
is presented as simple truth allowing for no alternative presentation and argument.
The point of Sophocles Oedipus cycle for Sophocles and for Freud was found in the Oracle at Delphi
with which the cycle begins. The inscription at Delphi read "Know Thyself."
Know your ideological bent or leaning. The tragedy of Oedipus was in not knowing himself.
Under Fidel Castro's rule Cuba bucked the historical trend--moving not toward but far away
from political democracy.
Under Fidel Castro it looks as though Cuba lost two generations of economic growth --
generations that other neighboring economies like Mexico, Costa Rica, and Puerto Rico made
very good use of. The only good thing you can say about Castro is that Cuba continued to have
the social indicators of a middle-income country even as it became a poor one.
It was always incomprehensible that an anti-Democratic dictator who managed to turn a
middle-income country into a poor one would have fans. Yet there are still people in the class
not of stooges looking for their Stalin, but fools who have found their Fidel.
-- Brad DeLong
[ Importantly, the economics here happen to be wildly wrong but is there any concern about
how Cuba actually fared in real per capita growth relative to Mexico, Costa Rica or Puerto
Rico since 1971 when record keeping begins?
Since 1971, real per capita GDP in Cuba has grown faster than real per capita GDP in Mexico, Guatemala,
El Salvador, Nicaragua, Costa Rica and Panama, faster than in Puerto Rico, Jamaica, Trinidad and
Bermuda, faster than in Colombia, Venezuela, Brazil and Argentina, faster than in Ecuador, Bolivia,
Uruguay and Paraguay, faster than in Spain and Portugal.
Real per capita growth in the Dominican Republic and Chile alone among Spanish or Portuguese
language countries has been faster than in Cuba.
Since 1971, real per capita GDP in Cuba has also grown faster than real per capita GDP in Peru...
Correcting:
Since 1971, real per capita GDP in Cuba has grown slightly slower than real per capita GDP
in Paraguay...
Completing:
Since 1971, real per capita GDP in Cuba has grown faster than real per capita GDP in Mexico,
Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama, faster than in Puerto Rico,
Jamaica, Trinidad and Bermuda, faster than in Colombia, Venezuela, Peru, Brazil and Argentina,
faster than in Ecuador, Bolivia and Uruguay, faster than in Spain and Portugal.
Real per capita growth in the Dominican Republic, Chile and Paraguay alone among Spanish or
Portuguese language countries has been faster than in Cuba.
RBC economists are very well compensated for saying that no government intervention is needed
in the economy, as are those saying that minimum wages harm employment.
Actually a lot of academics are not exactly paid that well. This crowd does this sort as a religion.
The problem is that those of us who never accepted perfect markets and instant market clearing
were closed out of publications for 30 years. Now if RBC explained the real world - fine. But
it had zero explanation for the last 9 years.
I write "a lot" and you read "all". More evidence that my internet stalker flunked pre-K. BTW
- Mankiw is not part of the RBC crowd but PeterK is too stupid to know that. Geesh.
Lord - what a stupid comment. Krugman does make his believes against evidence. I see this is another
post you did not bother to read before posting one of your patented pointless rants.
Speaking as an academic, in the university system with the lowest paid faculty in the nation,
I am well aware of that. It is not the academic salaries, but the research grants and consulting
contracts that matter here.
Speaking as an academic, in the university system with the lowest paid faculty in the nation,
I am well aware of that. It is not the academic salaries, but the research grants and consulting
contracts that matter here.
RBC economists are very well compensated for saying that no government intervention is needed
in the economy, as are those saying that minimum wages harm employment.
Real business-cycle theory (RBC theory) are a class of New Classical macroeconomics models
in which business-cycle fluctuations to a large extent can be accounted for by real (in contrast
to nominal) shocks. Unlike other leading theories of the business cycle, RBC theory sees business
cycle fluctuations as the efficient response to exogenous changes in the real economic environment.
That is, the level of national output necessarily maximizes expected utility, and governments
should therefore concentrate on long-run structural policy changes and not intervene through discretionary
fiscal or monetary policy designed to actively smooth out economic short-term fluctuations.
According to RBC theory, business cycles are therefore "real" in that they do not represent
a failure of markets to clear but rather reflect the most efficient possible operation of the
economy, given the structure of the economy.
"I suspect there is a reluctance among the majority of economists to admit that some among them
may not be following the scientific method but may instead be making choices on ideological grounds."
How is the ridiculous RBC theory different from saying, as many prominent economists do, that
presidents do not significantly influence economic growth and job creation?
Thus, I have heard repeatedly that FDR, Reagan, Clinton and Obama should not get credit for
the economic recoveries and job creation that occurred during their presidencies. Likewise, Hoover,
Carter and the Bushes should not be blamed for the economic debacles that occurred during their
presidencies. Apparently, these were all just real business cycles that no president has responsibility
for.
Of course voters do not agree at all, re-electing all of the "lucky" presidents while throwing
out all of the "unlucky" ones. For example, Carter, who is now regarded as a good president, was
buried in a massive landslide: 489-49 by a second rate actor who was regarded as a fool by many.
(Trump will outperform Carter!)
Either RBC is correct or presidents and their policies do matter a lot. Economists have to
decide where they stand.
The RBC crowd never really got that much into politics. Of course assuming markets always clear
and are perfect in every other way is a silly way to model a real world economy.
"you would choose to develop theories that ignore some of the evidence you have". It first this
New Classical/RBC crowd put forth all sorts of fancy new econometrics thinking if you looked at
the data the right way, their model would be confirmed. Only problem is their model says aggregate
demand can have only very transitional effects but the data show persistent effects. Shocks in
other words have sustained real effects.
So when their model was shown to be faulty by the evidence, they gave up on econometrics and
turned to calibration which is just fancy math designed to hide the failure of their models.
SWL continues noting David Card's research on the effects of increases in minimum wages:
'As Card points out in the interview his research involved no advocacy, but was simply about
examining empirical evidence. So the friends that he lost objected not to the policy position
he was taking, but to him uncovering and publishing evidence. Suppressing or distorting evidence
because it does not give the answer you want is almost a definition of an illegitimate science.'
Greg Mankiw searches high and low for anything that goes along with his view that higher wage
floors lead to less employment demand. Of course this kind of bias favors people like Donald Trump
who built that DC hotel under budget by ignoring the minimum wage laws.
Much of the economic models debates hinge on "sticky wages" which are irrefutable from all empirics.
What I haven't seen yet though is a sound testable hypothesis that supports the empirical observation.
In other words, we know by empirics it's true, but we really don't yet know why its true or true
in most, but certainly not all cases -- e.g. Greece recently for example. Many suppositions have
been described but none have to my knowledge been put into the form of testable hypothesis to
suppot the suppositions with "scientific" methods..
How does the relate to RBC models and ideology embedded in models?
RBC ignores the empirics for what can be said to be ideological reasons. But models which include
those observations have no hypothesis proven to support the observations either, so then those
models are equally using unscientific methods in their construction, which just so happens to
support a different ideological position.
I don't disagree at all that models must use observations in their construction but it doesn't
put those models at any greater scientific method advantage.
"It appears, therefore, that we have a sort of asymmetry on the two sides of the critical level
above which true inflation sets in. For a contraction of effective demand below the critical level
will reduce its amount measured in cost-units; whereas an expansion of effective demand beyond
this level will not, in general, have the effect of increasing its amount in terms of cost-units.
"This result follows from the assumption that the factors of production, and in particular
the workers, are disposed to resist a reduction in their money-rewards, and that there is no corresponding
motive to resist an increase. This assumption is, however, obviously well founded in the facts,
due to the circumstance that a change, which is not an all-round change, is beneficial to the
special factors affected when it is upward and harmful when it is downward.
"If, on the contrary, money-wages were to fall without limit whenever there was a tendency
for less than full employment, the asymmetry would, indeed, disappear. But in that case there
would be no resting-place below full employment until either the rate of interest was incapable
of falling further or wages were zero.
"In fact we must have some factor, the value of which in terms of money is, if not fixed, at
least sticky, to give us any stability of values in a monetary system.
"The view that any increase in the quantity of money is inflationary (unless we mean by inflationary
merely that prices are rising) is bound up with the underlying assumption of the classical theory
that we are always in a condition where a reduction in the real rewards of the factors of production
will lead to a curtailment in their supply." The General Theory, pp. 303-304.
yes, Keynes supposition, among other was precisely what I was referring to by knowing the observation
is true but not why it is.
Everybody knows it is true by observation that the sun rises in the east and settles in the
west 1x in roughly 24 hours give or take a winter/summer trend change. But it took an awfully
long time before Copernicus figured out why that was the case... and from his theory testable
hypothesis were developed to show that the hypothesis were confirmed.
With sticky wages we don't know why. E.G.
Wages will not go below [this level] because [insert testable hypothesis]. A testable hypothesis
takes the form
Lower Bound of Wage = [insert independent measurable variables and their relationships here]
As I said, lower bounds to wages are empirically observed. Now show why in repeatable results
with the equations using the independent variables that apply under the conditions imposed by
he hypothesis.
Until that is the observation is used in models because it suits ones interest to do so...
i.e. they like the results of the models better. It isn't a scientifically founded model... the
assumption is no better than rational expectations.
"If, on the contrary, money-wages were to fall without limit whenever there was a tendency
for less than full employment, . . . there would be no resting-place below full employment until
either the rate of interest was incapable of falling further or wages were zero."
Absent sticky wages, at ZLB interest, wages would fall to zero whenever there was a tendency
for less than full employment and nobody works for zero wages.
RBC also ignores anything that would explain why we have recessions at all. Its assumption that
markets instantly clear is key to their model but we know that markets are not so perfect.
A few years ago I would have suggested otherwise. But recent research notes you are right. Obama's
CEA is noting this but he will not be President for long. Our next President needs to take this
head on. Trump won't. Will Clinton? We will see.
"There is overwhelming evidence that in a recession employment declines because workers are fired
rather than choosing not to work, and that the resulting increase in unemployment is involuntary"
see Keynes called it involuntary unemployment NOT cyclical unemployment
as all the politicians are saying now a days, words mean something
Simon-Wren Lewis is making a common mistake as I see it. The limitations and assumptions of a
model should not be conflated with evidence against the model. Not considering certain types of
data is a limitation of a model; not evidence against that model. If an RBC model does not include
certain types of data, then the best approach is to try and understand that data and attempt to
show how it fits into the existing model. Another model should be considered only when certain
limitations appear intractable. Because there are almost always lots of ways to model the same
problem, at least in the social sciences, if you create a new model every time you come across
a limitation, you'll end up running around in circles.
This makes no sense to me. So how about explaining what you meant with real world examples? I
choose the examples of involuntary unemployment and wage stickiness, and the effects of raising
the minimum wage.
"The limitations and assumptions of a model should not be conflated with evidence against the
model."
I don't think this is what SWL is saying and am fairly certain it is not what Romer is saying:
The problem is not limitation or contradiction, it is central variables assumed to confer verisimilitude
that cannot and assumptions considered true that are not.
The assumptions of the model are false and therefore should be construed as evidence against
using the model. I'm saying that's faulty reasoning.
The "my model is better than your model" argument is not a good way to approach problems at
a theoretical level. It's sometimes okay at an applied level. One thing that's hard to wrap one's
head around is that a model can still be useful even when its assumptions are false. When data
is sparse, all useful theories will have to rely on false or incomplete assumptions. Usually a
better approach is to extend rather than start over to keep people from running in too many different
directions.
"Not considering certain types of data is a limitation of a model; not evidence against that
model. If an RBC model does not include certain types of data, then the best approach is to try
and understand that data and attempt to show how it fits into the existing model"
Henry Carey - a real American economist, sadly forgotten to history : , -1
That US economists are completely clueless is obvious to anyone who travels around the world.
That free trade economies such as the US are complete basket cases is obvious to anyone who visits
mercantilist economies such as Singapore, Japan, Israel etc. US trained economists only have prestige
because the masses don't know how backward and poverty-stricken the US has become under the policies
they relentlessly justify and apologize for.
The Walloon mouse : ...Instead of decrying people's stupidity and ignorance in rejecting trade
deals, we should try to understand why such deals lost legitimacy in the first place. I'd put
a large part of the blame on mainstream elites and trade technocrats who pooh-poohed ordinary
people's concerns with earlier trade agreements.
The elites minimized distributional concerns, though they turned out to be significant for
the most directly affected communities. They oversold aggregate gains from trade deals, though
they have been smallish since at least NAFTA. They said sovereignty would not be diminished though
it clearly was in some instances. They claimed democratic principles would not be undermined,
though they are in places. They said there'd be no social dumping though there clearly is at times.
They advertised trade deals (and continue to do so) as "free trade" agreements, even though Adam
Smith and David Ricardo would turn over in their graves if they read, say, any of the TPP chapters.
And because they failed to provide those distinctions and caveats now trade gets tarred with
all kinds of ills even when it's not deserved. If the demagogues and nativists making nonsensical
claims about trade are getting a hearing, it is trade's cheerleaders that deserve some of the
blame.
One more thing. The opposition to trade deals is no longer solely about income losses. The
standard remedy of compensation won't be enough -- even if carried out. It's about fairness, loss
of control, and elites' loss of credibility. It hurts the cause of trade to pretend otherwise.
... ... ..
Trump would propose and/or enact, he listed the following six:
"A Constitutional Amendment to impose term limits on all members of Congress."
"A hiring freeze on all federal employees."
"A requirement that for every new federal regulation, 2 existing regulations must be eliminated."
"A 5-year ban on White House and Congressional officials becoming lobbyists after they leave government."
"A lifetime ban on White House officials lobbying on behalf of a foreign government."
"A complete ban on foreign lobbyists raising money for American elections."
"
~~WWW~
Lot of reform is needed but may be
The forgotten spirit of American protectionism : , -1
The free traders have human economic history precisely inverted. Countries that practice protectionism
almost uniformly become wealthy and technologically advanced. Countries that don't become or remain
terribly sad, poverty-stricken producers of worthless raw materials and desperate labor migrants.
This has been true at least going back to Byzantium and its economic conquest by Genoa and Venice.
That the US thrived pre-1970 free trade is no coincidence. There is no alternative to protectionism.
Free trade = no industry = no money = no future.
I think he is trying to talk about soft neoliberalism vs rejection of neoliberalism as discredited
economics dogma and ideology. I think like Marxism neoliberalism has religious elements in it (as in
"secular religion") so will not go away completely much like obscure religious cults does not dissapper
they on a given date second coming of Christ did not happen.
Notable quotes:
"... new research showing that policies like public housing , welfare and public education spending are more beneficial than conservatives have recognized in decades past. ..."
"... But there are not one, but two big trends in liberal economic thinking. One wants to modify the economic thinking of the past few decades, and the other wants to rip it up. I expect to see a lot of the economic debate in the coming years play out not between the left and right, but between these two strains of thought. ..."
"... The New Center-Left Consensus is attractive to academics and policy wonks. It draws on an eclectic mix of mainstream economic theory, empirical studies and historical experience. It refuses to assume, as many conservatives and libertarians do, that free markets are always the best unless there is a glaring case for government intervention. ..."
In 2015, Forbes writer Adam Ozimek
suggested that a "new liberal consensus" is forming in the economic-policy world. The data back
him up. Many economics professors now
tend to favor government intervention in the economy more than the general public. And the profession's
biggest public stars, from Paul Krugman to Thomas Piketty to Joseph Stiglitz, are now more likely
to lean
to the left than to the right. Meanwhile, I've tried to document the flood of new research
showing that policies like
public housing ,
welfare and public education
spending are more beneficial than conservatives have recognized in decades past.
But there are not one, but two big trends in liberal economic thinking. One wants to
modify the economic thinking of the past few decades, and the other wants to rip it up. I expect
to see a lot of the economic debate in the coming years play out not between the left and right,
but between these two strains of thought.
The research and people I've been writing about fit into what we might call the New Center-Left
Consensus. This strain of thought is based on data and empiricism. Support for higher minimum wages,
for example,
has grown among economists because a large amount of careful
empirical analysis has
shown that minimum wage hikes don't usually cause sizable immediate disruptions in local labor markets.
These economists aren't ignorant of the basic theory of labor supply and demand -- the kind that
every undergrad econ student is forced to learn. They just realize that
it might not be the right theory in this case.
The New Center-Left Consensus is attractive to academics and policy wonks. It draws on an
eclectic mix of mainstream economic theory, empirical studies and historical experience. It refuses
to assume, as many conservatives and libertarians do, that free markets are always the best unless
there is a glaring case for government intervention. It's more willing to entertain all kinds
of ways that government can improve the economy, from welfare to infrastructure spending to regulation,
but it also recognizes that these won't always work. It embraces a philosophy of careful experimentation.
Sometimes the new center-left is even in favor of deregulation -- for example, loosening
zoning restrictions and reducing
occupational licensing . It's not ideologically opposed to the free market.
The best evangelist of the New Center-Left Consensus might be President Barack Obama. In an amazingly
well-informed
editorial in the Economist, he recently laid out a comprehensive picture of the economy and policy.
I have little doubt that Obama's understanding was heavily informed by his chief economic adviser,
Jason Furman ,
who has become a titan of center-left policy advocacy. Obama mixes a healthy respect for capitalism
with a desire to use government to temper the market's excesses.
But there's a second strain of progressive economic thinking that is gaining attention and strength.
This alternative could be called the New Heterodox Explosion. It's basically a movement to purge
mainstream economics from progressive policy-making and thought.
The New Heterodox Explosion rose in large part out of strongly left-leaning intellectual circles,
particularly sociology, the humanities and other disciplines outside economics. It has also found
a home in some economics departments in other countries (most notably the U.K.). Recently, it has
started to permeate blogs and the media.
The new website Evonomics , for example, is
heavily devoted to strongly worded critiques of the entire edifice of modern [neoliberal] economics
and it's where the work of many of the most outspoken champions of the New Heterodox Explosion appears.
These include evolutionary biologist David Sloan Wilson, activist and venture capitalist Nick Hanauer,
speechwriter Eric Liu and Eric Beinhocker of the Institute for New Economic Thinking. In a spate
of recent blog posts and editorials, these thinkers have
advocated replacing mainstream economic theory with thinking based on evolution, and/or on complexity
theory.
Though it's difficult to boil down these critiques to a few sentences, one basic theme of Wilson,
Hanauer, et al.'s thinking is that modern economics is based on selfishness. Mainstream theories
model human beings as atomistic individuals pursuing their own wants. But, say these Evonomics writers,
people are social beings who care a lot about their fellow humans, and are also deeply embedded in
larger social structures and organizations like communities, nations and cultures.
I'm sympathetic to this point of view. I'm not at all sure that economies can be completely understood
by looking at individual decisions, any more than I'm certain the growth of a tree can be understood
simply by looking at the motions of the particles in the leaves and roots. And I do wish that economists
dedicated a lot more thought and attention to the phenomena they call "
externalities "
and "
social preferences ."
But I'm also very wary of applying the Evonomics ideas to policy-making without a lot more work.
First, the connection to evolution and complexity theory often seems less than solid. Nobody
really knows if economies evolve the way organisms do. And efforts to connect complexity theory
to economics, led by the Santa Fe Institute
, have been going on for quite some time without any dramatic breakthroughs.
So while the New Center-Left Consensus is fully formed and ready for application in the real world,
the New Heterodox Explosion is still in its infancy. Center-left ideas have tons of very careful
academic empirical work behind them, while those wishing to tear up economics and start over are
still working mostly with broad analogies. I hope that the New Heterodox Explosion -- which of course
extends far beyond the few writers and ideas I've cited in this post -- becomes a rich source of
new and innovative economic ideas. But it still has a long way to go to match the intellectual heft
of the center-left.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and
its owners.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony
Brook University, and he blogs at Noahpinion.
"... The corridor between Manhattan and Washington is a well trodden highway for the personalities we have all gotten to know in the period since the massive deregulation of Wall Street: Robert Rubin, Lawrence Summers, Henry Paulson, Timothy Geithner and many others. ..."
"... General Petraeus' expertise in these areas is unclear. His ability to peddle influence, however, is a known and valued commodity. ..."
"... Petraeus also obtained a sinecure as a non-resident senior fellow at the Belfer Center for Science and International Affairs at Harvard. The Ivy League is, of course, the preferred bleaching tub and charm school of the American oligarchy. ..."
"... The Cathedral has no central administrator, but represents a consensus acting as a coherent group that condemns other ideologies as evil. ..."
"... "you believe that morality has been essentially solved, and all that's left is to work out the details." ..."
"... Cultural assimilation is partly a matter of what psychologist Irving L. Janis called "groupthink," the chameleon-like ability of people to adopt the views of their superiors and peers. This syndrome is endemic to Washington: The town is characterized by sudden fads, be it negotiating biennial budgeting, making grand bargains or invading countries. Then, after a while, all the town's cool kids drop those ideas as if they were radioactive. As in the military, everybody has to get on board with the mission, and questioning it is not a career-enhancing move. The universe of people who will critically examine the goings-on at the institutions they work for is always going to be a small one. As Upton Sinclair said, "It is difficult to get a man to understand something when his salary depends upon his not understanding it. ..."
"... A more elusive aspect of cultural assimilation is the sheer dead weight of the ordinariness of it all once you have planted yourself in your office chair for the 10,000th time. ..."
"... No wonder so few people are whistle-blowers, quite apart from the vicious retaliation whistle-blowing often provokes: Unless one is blessed with imagination and a fine sense of irony, growing immune to the curiousness of one's surroundings is easy. To paraphrase the inimitable Donald Rumsfeld, I didn't know all that I knew, at least until I had had a couple of years away from the government to reflect upon it. ..."
"... It's probably not a coincidence that the American media elite live, work, and socialize in New York and Washington, ..."
"... It's a kind of corporatism. ..."
"... They pretend to be merrily neutral servants of the state, giving the best advice possible on national security or financial matters. But they hold a very deep ideology of the Washington consensus at home, which is deregulation, outsourcing, de-industrialization and financialization. ..."
"... And they believe in American exceptionalism abroad, which is boots on the ground everywhere, it's our right to meddle everywhere in the world. And the result of that is perpetual war. ..."
The corridor between Manhattan and Washington is a well trodden highway for the personalities
we have all gotten to know in the period since the massive deregulation of Wall Street: Robert
Rubin, Lawrence Summers, Henry Paulson, Timothy Geithner and many others.
Not all the traffic involves persons connected with the purely financial operations of the
government: In 2013, General David Petraeus
joined KKR (formerly Kohlberg Kravis Roberts) of 9 West 57th Street, New York, a private equity
firm with $62.3 billion in assets. KKR specializes in management buyouts and leveraged finance.
General Petraeus' expertise in these areas is unclear. His ability to peddle influence, however,
is a known and valued commodity. Unlike Cincinnatus, the military commanders of the Deep
State do not take up the plow once they lay down the sword. Petraeus also obtained a sinecure
as a non-resident senior fellow at the
Belfer Center for Science and International Affairs at Harvard. The Ivy League is, of course,
the preferred bleaching tub and charm school of the American oligarchy.
Lofgren goes on to say that Silicon Valley is a node of the Deep State too, and that despite the
protestations of its chieftains against NSA spying, it's a vital part of the Deep State's apparatus.
More:
The Deep State is the big story of our time. It is the red thread that runs through the war
on terrorism, the financialization and deindustrialization of the American economy, the rise of
a plutocratic social structure and political dysfunction. Washington is the headquarters of the
Deep State, and its time in the sun as a rival to Rome, Constantinople or London may be term-limited
by its overweening sense of self-importance and its habit, as Winwood Reade said of Rome, to "live
upon its principal till ruin stared it in the face."
The Cathedral - The self-organizing consensus of Progressives and Progressive ideology
represented by the universities, the media, and the civil service. A term
coined by blogger Mencius Moldbug. The Cathedral has no central administrator, but represents
a consensus acting as a coherent group that condemns other ideologies as evil. Community
writers have enumerated the
platform of Progressivism as women's suffrage, prohibition, abolition, federal income tax,
democratic election of senators, labor laws, desegregation, popularization of drugs, destruction
of traditional sexual norms, ethnic studies courses in colleges, decolonization, and gay marriage.
A defining feature of Progressivism is that "you believe that morality has been essentially
solved, and all that's left is to work out the details." Reactionaries see Republicans as
Progressives, just lagging 10-20 years behind Democrats in their adoption of Progressive norms.
You don't have to agree with the Neoreactionaries on what they condemn - women's suffrage? desegregation?
labor laws? really?? - to acknowledge that they're onto something about the sacred consensus that
all Right-Thinking People share. I would love to see a study comparing the press coverage from 9/11
leading up to the Iraq War with press coverage of the gay marriage issue from about 2006 till today.
Specifically, I'd be curious to know about how thoroughly the media covered the cases against the
policies that the Deep State and the Shallow State decided should prevail. I'm not suggesting a conspiracy
here, not at all. I'm only thinking back to how it seemed so obvious to me in 2002 that we should
go to war with Iraq, so perfectly clear that the only people who opposed it were fools or villains.
The same consensus has emerged around same-sex marriage. I know how overwhelmingly the news media
have believed this for some time, such that many American journalists simply cannot conceive that
anyone against same-sex marriage is anything other than a fool or a villain. Again, this isn't a
conspiracy; it's in the nature of the thing. Lofgren:
Cultural assimilation is partly a matter of what psychologist
Irving L. Janis called
"groupthink," the chameleon-like ability of people to adopt the views of their superiors and peers.
This syndrome is endemic to Washington: The town is characterized by sudden fads, be it negotiating
biennial budgeting, making grand bargains or invading countries. Then, after a while, all the
town's cool kids drop those ideas as if they were radioactive. As in the military, everybody has
to get on board with the mission, and questioning it is not a career-enhancing move. The universe
of people who will critically examine the goings-on at the institutions they work for is always
going to be a small one. As Upton Sinclair said, "It is difficult to get a man to understand something
when his salary depends upon his not understanding it."
A more elusive aspect of cultural assimilation is the sheer dead weight of the ordinariness
of it all once you have planted yourself in your office chair for the 10,000th time. Government
life is typically not some vignette from an Allen Drury novel about intrigue under the
Capitol dome. Sitting and staring at the clock on the off-white office wall when it's 11:00 in
the evening and you are vowing never, ever to eat another piece of takeout pizza in your life
is not an experience that summons the higher literary instincts of a would-be memoirist.
After a while, a functionary of the state begins to hear things that, in another context, would
be quite remarkable, or at least noteworthy, and yet that simply bounce off one's consciousness
like pebbles off steel plate: "You mean the
number of terrorist groups we are fighting is classified?" No wonder so few people
are whistle-blowers, quite apart from the vicious retaliation whistle-blowing often provokes:
Unless one is blessed with imagination and a fine sense of irony, growing immune to the curiousness
of one's surroundings is easy. To paraphrase the inimitable Donald Rumsfeld, I didn't know all
that I knew, at least until I had had a couple of years away from the government to reflect upon
it.
When all you know is the people who surround you in your professional class bubble and your social
circles, you can think the whole world agrees with you, or should. It's probably not a coincidence
that the American media elite live, work, and socialize in New York and Washington, the two
cities that were attacked on 9/11, and whose elites - political, military, financial - were so genuinely
traumatized by the events.
Anyway, that's just a small part of it, about how the elite media manufacture consent. Here's
a final quote, one from
the Moyers interview with Lofgren:
BILL MOYERS: If, as you write, the ideology of the Deep State is not democrat or republican,
not left or right, what is it?
MIKE LOFGREN: It's an ideology. I just don't think we've named it. It's a kind of
corporatism. Now, the actors in this drama tend to steer clear of social issues. They
pretend to be merrily neutral servants of the state, giving the best advice possible on national
security or financial matters. But they hold a very deep ideology of the Washington consensus
at home, which is deregulation, outsourcing, de-industrialization and financialization.
And they believe in American exceptionalism abroad, which is boots on the ground everywhere,
it's our right to meddle everywhere in the world. And the result of that is perpetual war.
This can't last. We'd better hope it can't last. And we'd better hope it unwinds peacefully.
I, for one, remain glad that so many of us Americans are armed. When the Deep State collapses
- and it will one day - it's not going to be a happy time.
Questions to the room: Is a Gorbachev for the Deep State conceivable? That is, could you foresee
a political leader emerging who could unwind the ideology and apparatus of the Deep State, and not
only survive, but succeed? Or is it impossible for the Deep State to allow such a figure to thrive?
Or is the Deep State, like the Soviet system Gorbachev failed to reform, too entrenched and too far
gone to reform itself? If so, what then?
"... Krugman is such a deplorable hack. I know we are supposed to accept bribe-taking politicians and the economy run by looting robber barons. But can't we even have a goddamn fourth estate? ..."
"... The way Krugman murders journalism ethics by outright campaigning for one of the most corrupt politicians in American history is outrageous. Barfing up her disgusting campaign memes verbatim as if he's coordinating his columns with her war room. ..."
"... If you're a scientist you would know that economics does not remotely resemble a science. One familiar with the history of math and science will notice that their development (based on discovered facts) forms a tree-like structure. One discovery branches out to more discoveries. The growth is therefore exponential. ..."
Sure...Krugman will occasionally pay lip service to green energy.
The problem is that 'liberal' economists tend to keep separate silos for green energy and infrastructure.
Question is, why do they refuse to connect the dots between climate change mitigation, green
energy, fiscal stimulus, and lots of jobs? And why do they prioritize more road and bridges, which
will only make climate change worse?
Krugman is an abhorrent neoliberal hack (as well as Hillary stooge).
Who actually understand very little about climate change clearly being non-specialist without
any training of physics and geophysics. He is a second rate neoclassical economist with penchant
for mathiness (and a very talented writer).
The key question here is Clinton warmongering and the threat of nuclear war with Russia. Washington
neocon chichenhawks became recently realty crazy. Obama looks completely important and does not
control anything.
I think this is more immediate threat then climate change.
Oil depletion (which already started and will be in full force in a couple of decades) might
take care about climate change as period of "cheap oil" (aka "oil age") probably will last less
then 100 years and as such is just a blip in Earth history.
End of cheap oil also might lead to natural shrinking of human population -- another factor
in the global climate change and a threat to natural ecosystems.
Hillary is the fracking Queen. Claiming she's a champion of the environment is as ridiculous portraying
Donald Trump a feminist.
Obomba is another pretender on the environment. The Paris Agreement commits to absolutely nothing
but more talk at a future time. China signed on and is still keeping its commitment to do absolutely
nothing to reduce emissions until 2030. (By the time the West has exported the lion share of its
emissions to the country in a pointless GHG emissions shell game; emission per capita have skyrocketed
since 2002! a 25% increase!)
Krugman is such a deplorable hack. I know we are supposed to accept bribe-taking politicians
and the economy run by looting robber barons. But can't we even have a goddamn fourth estate?
The way Krugman murders journalism ethics by outright campaigning for one of the most corrupt
politicians in American history is outrageous. Barfing up her disgusting campaign memes verbatim
as if he's coordinating his columns with her war room.
So to all the pretend liberals out there who offer the people nothing more than more corruption,
lies, war-profiteering and public trust liquidation: you deserve Trump. And I pray that you get
him. (After him, a New Deal; and the 'me generation,' the Void.)
If you're a scientist you would know that economics does not remotely resemble a science.
One familiar with the history of math and science will notice that their development (based on
discovered facts) forms a tree-like structure. One discovery branches out to more discoveries.
The growth is therefore exponential.
Economic history does not follow this pattern.
With science there are paradigm shifts that occur with groundbreaking discoveries like the
theories of relativity and quantum mechanics. The Friedmanian paradigm shift was founded on jettisoning
all the enormously successful work Keynes accomplished and digging up failed 19th century ideology,
repeating disastrous history.
Even psychology follows the pattern. Although it began with a lot of unsubstantiated Aristotelian
philosophizing, it was a starting point from which a significant body of definite knowledge and
medical treatments developed. A real social science. (Not perfect. It was recently discovered
that about 50% of published psychological experiments were not reproducible.)
As an anthropologist you should know about cliques and group-think. Have an inkling of how
corruption could gradually develop and spread among upper-echelon cliques to the point where the
government, the economy, the courts and the news media become captured by the upper class. Understand
how cowards would rather look the other way than take a stand and deal with it: "see no evil,
hear no evil, speak no evil."
As an anthropologist, I can assert with confidence that you are babbling about things you do not
really understand at all. I have issues with a lot of economics, but you are completely incoherent.
Completely incoherent? Then it should be easy enough for you to tear apart what I wrote. It was
certainly easy enough for me to tear into Krugman's crass political pandering. But all you got
is lame generalizations. Stock insults that could be said about anything.
What issues do you have with "a lot of economics?" I bet you can't come up with anything. Come
on. Out with it! Say something intelligent about anything, if you are at all capable, Mr. Dick.
I have yet to read anything from you that indicates you have any knowledge about anything.
It is Dr. Dick, since I have a Ph.D. If you ever read the comments on this blog, you would know
full well what those issues are, since I have raised them here many times. For a start the assumption
of "rational actors" (only partially true), the assumption of economic maximization (people maximize
many different things which affect their economic choices), and the assumption of "rational markets"
(this ignores pervasive information assymetry and active deceit).
"... I got tired of lambasting macroeconomics a while ago, and the "macro wars" mostly died down in the blogosphere around when the recovery from the Great Recession kicked in. But recently, there have been a number of respected macroeconomists posting big, comprehensive criticisms of the way academic macro gets done. Some of these criticisms are more forceful than anything we bloggers blogged about back in the day! ..."
"... First, there's Paul Romer's latest, " The Trouble With Macroeconomics ". The title is an analogy to Lee Smolin's book " The Trouble With Physics ". Romer basically says that macro (meaning business-cycle theory) has become like the critics' harshest depictions of string theory - a community of believers, dogmatically following the ideas of revered elders and ignoring the data. The elders he singles out are Bob Lucas, Ed Prescott, and Tom Sargent. ..."
"... In response to the observation that the shocks [in DSGE models] are imaginary, a standard defense invokes Milton Friedman's (1953) methodological assertion from unnamed authority that "the more significant the theory, the more unrealistic the assumptions (p.14)." More recently, "all models are false" seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favorite. ..."
"... We [macroeconomists] tend to view research as being the process of posing a question and delivering a pretty precise answer to that question...The research agenda that I believe we need is very different. It's hugely messy work. We need...to build a more evidence-based modeling of financial institutions. We need...to learn more about how people actually form expectations. We need [to use] firm-based information about residual demand functions to learn more about product market structure. At the same time, we need to be a lot more flexible in our thinking about models and theory, so that they can be firmly grounded in this improved empirical understanding. ..."
"... This is a somewhat misleading way of putting it, but it allows me to illustrate some important points about 'unrealistic' assumptions. In real world modelling in Physics 'unrealistic' assumptions are ubiquitous. What matters is not literal realism of assumptions but robustness.of conclusions. ..."
"... Simplifying assumptions are context specific, ie ad hoc, and never axiomatic.The ad hoc nature of simplifying assumptions is a feature, not a bug as the above example illustrates. ..."
"... Robustness is critical. As we move from our simplifying assumptions towards greater realism/precision, the conclusion should not change in any material way, and we use the simplifications because the gain in accuracy of the conclusions is not worth the added complexity and consequent loss of tractability in the model. ..."
"... This is indeed excellent. The three criteria for evaluating assumptions/simplifications, the precise definition of ad hoc, and the crystal-clear example of point mass for orbits vs rotation. ..."
"... So, we are witnessing a battle between a declining DSGE scam and ascending "Realistic assumptions" scam. ..."
"... Both approaches are worthless, but I guess it will give an excuse to macroeconomists why they are useless: we just used the wrong paradigm, now we are switching to the new one. Just many more years of research is needed and we will be ready. Science!, as they say. ..."
"... Science, IEHO, has three touchstones. Coherence - your model and its assumptions should not contradict each other or lead to contradictory conclusions. Consilience - a good theory has a broad reach for explaining reality. Consensus - a theory which is coherent and consilient should lead to a consensus among practicioners. It is only within a strong consensus that people can talk to each other and extend the field. ..."
"... It appears that macro misses out on a number of these. ..."
"... "Romer basically says that macro (meaning business-cycle theory)" ..."
"... In either case, I think this is another big problem with macro, its obsession with business cycles as opposed to long-term thriving and prosperity. eg, Gerald Friedman got tied in knots by this; he was trying to use "stimulus" thinking and arguments to talk about about multi-decadal possibilities. ..."
"... I'm fond of observing that in addition to "cargo cult science", macroeconomics has often been likened to a religion. What religions do when the mainstream becomes intolerable for one reason or another is schism. Then after a number of years what used to be the mainstream dies out and the former schismatics become the mainstream. ..."
"... Psychology went through this kind of crisis some years ago when the scientists split off from the clinicians, and created the Association for Psychological Science to contrast with the clinically-oriented American Psychological Association (the APA is the one that publishes the unscientific but influential Diagnostic and Statistical Manual). ..."
"... In order to be scientific, the standard method is to actually try predicting. Prediction is messy and provably fails to converge to any possible theory, but there are other authentic sciences that have this same theoretical limitation, like meteorology. This doesn't prevent meteorologists from constructing theories which make predictions that demonstrably get better and better year after year. ..."
"... For twenty years Romer has been implying (and recently saying) that economists who don't accept endogenous growth theory have abandoned the canons of science and are either blind or indifferent to the truth. Over the same twenty years he seems to have produced very little theoretical work, while his targets have remained working economists. (Why, after all, should anyone continue to do theory, since Romer has discovered the truth?) ..."
I got tired of lambasting macroeconomics a while ago, and the "macro wars" mostly died down in
the blogosphere around when the recovery from the Great Recession kicked in. But recently, there
have been a number of respected macroeconomists posting big, comprehensive criticisms of the way
academic macro gets done. Some of these criticisms are more forceful than anything we bloggers blogged
about back in the day! Anyway, I thought I'd link to a couple here.
First, there's Paul Romer's latest, "
The Trouble
With Macroeconomics ". The title is an analogy to Lee Smolin's book "
The Trouble With Physics ". Romer basically says that macro (meaning business-cycle theory) has
become like the critics' harshest depictions of string theory - a community of believers, dogmatically
following the ideas of revered elders and ignoring the data. The elders he singles out are Bob Lucas,
Ed Prescott, and Tom Sargent.
Romer says that it's obvious that monetary policy affects the real economy, because of the Volcker
recessions in the early 80s, but that macro theorists have largely ignored this fact and continued
to make models in which monetary policy is ineffectual. He says that modern DSGE models are no better
than old pre-Lucas Critique simultaneous-equation models, because they still take lots of assumptions
to identify the models, only now the assumptions are hidden instead of explicit. Romer points to
distributional assumptions, calibration, and tight Bayesian priors as ways of hiding assumptions
in modern DSGE models. He cites
an interesting
2009 paper by Canova and Sala that tries to take DSGE model estimation seriously and finds (unsurprisingly)
that identification is pretty difficult.
As a solution, Romer suggests chucking formal modeling entirely and going with more general, vague
but flexible ideas about policy and the macroeconomy, supported by simple natural experiments and
economic history.
Romer's harshest zinger (and we all love harsh zingers) is this:
In response to the observation that the shocks [in DSGE models] are imaginary, a standard
defense invokes Milton Friedman's (1953) methodological assertion from unnamed authority that
"the more significant the theory, the more unrealistic the assumptions (p.14)." More recently,
"all models are false" seems to have become the universal hand-wave for dismissing any fact that
does not conform to the model that is the current favorite.
The noncommittal relationship with the truth revealed by these methodological evasions...goes
so far beyond post-modern irony that it deserves its own label. I suggest "post-real."
Ouch. He also calls various typical DSGE model elements names like "phlogiston", "aether", and "caloric".
Fun stuff
. (Though I do think he's too harsh on string theory, which often is just a kind of math that
physicists do to keep themselves busy, and has no danger of hurting anyone, unlike macro theory.)
Meanwhile, a few weeks earlier, Narayana Kocherlakota wrote a post called "
On the Puzzling Prevalence of Puzzles ". The basic point was that since macro data is fairly
sparse, macroeconomists should have lots of competing models that all do an equally good job of matching
the data. But instead, macroeconomists pick a single model they like, and if data fails to fit the
model they call it a "puzzle". He writes:
To an outsider or newcomer, macroeconomics would seem like a field that is haunted by its lack
of data...In the absence of that data, it would seem like we would be hard put to distinguish
among a host of theories...[I]t would seem like macroeconomists should be plagued by underidentification...
But, in fact, expert macroeconomists know that the field is actually plagued by failures to fit
the data – that is, by overidentification.
Why is the novice so wrong? The answer is the role of a priori restrictions in macroeconomic theory...
The mistake that the novice made is to think that the macroeconomist would rely on data alone
to build up his/her theory or model. The expert knows how to build up theory from a priori restrictions
that are accepted by a large number of scholars...[I]t's a little disturbing how little empirical
work underlies some of those agreed-upon theory-driven restrictions – see p. 711 of Lucas (JMCB,
1980) for a highly influential example of what I mean.
In fact, Kocherlakota and Romer are complaining about much the same thing: the overuse of unrealistic
assumptions. Basically, they say that macroeconomists, as a group, have gotten into the habit of
assuming stuff that just isn't true. In fact, this is what the Canova and Sala
paper
says too, in a much more technical and polite way:
Observational equivalence, partial and weak identification problems are widespread and typically
produced by an ill-behaved mapping between the structural parameters and the coefficients of the
solution.
That just means that the model elements aren't actually real things.
(This critique resonates with me. From day 1, the thing that always annoyed me about macro was how
people made excuses for assumptions that were either unverifiable or just flatly contradictory to
micro data. The usual excuse was the "
pool player analogy " - the idea that the pieces of a model don't have to match micro data as
long as the resulting model matches macro data. I'm not sure that's how Milton Friedman wanted his
metaphor to be used, but that seems to be the way it does get used. And when the models didn't
match macro data either, the excuse was "all models are wrong," which really just seems to be a way
of saying "the modeler gets to choose which macro facts are used to validate his theory". It seemed
that to a large extent, macro modelers were just allowed to do whatever they wanted, as long as their
papers won some kind of behind-the-scenes popularity contest. But I digress.)
So what seems to unite the new heavyweight macro critics is an emphasis on realism . Basically,
these people are challenging the idea, very common in econ theory, that models shouldn't worry about
being realistic. (Paul Pfleiderer is another economist who has recently made
a similar complaint , though not in the context of macro.) They're not saying that economists
need 100% perfect realism - that's the kind of thing you only get in physics, if anywhere. As
Paul
Krugman and
Dani Rodrik have emphasized, even the people advocating for more realism acknowledge that there's
some ideal middle ground. But if Romer, Kocherlakota, etc. are to be believed, macroeconomists aren't
currently close to that optimal interior solution.
Updates
Olivier Blanchard is a bet less forceful, but he's definitely also
one of the new heavyweight
critics . Among his problems with DSGE models, at least as they're currently done, are 1. "unappealing"
assumptions that are "at odds with what we know about consumers and firms", and 2. "unconvincing"
estimation methods, including calibration and tight Bayesian priors. Sounds pretty similar to Romer.
Meanwhile,
Kocherlakota
responds to Romer . He agrees with Romer's criticism of unrealistic macro assumptions, but he
dismisses the idea that Lucas, Prescott, and Sargent are personally responsible for the problems.
Instead, he says it's about the incentives in the research community. He writes:
We [macroeconomists] tend to view research as being the process of posing a question and delivering
a pretty precise answer to that question...The research agenda that I believe we need is very
different. It's hugely messy work. We need...to build a more evidence-based modeling of financial
institutions. We need...to learn more about how people actually form expectations. We need [to
use] firm-based information about residual demand functions to learn more about product market
structure. At the same time, we need to be a lot more flexible in our thinking about models and
theory, so that they can be firmly grounded in this improved empirical understanding.
Kocherlakota says that this isn't a "sociological" issue, but I think most people would call it that.
Since journals and top researchers get to decide what constitutes "good" research, it seems to me
that to get the changes in focus Kocherlakota wants, a sociological change is exactly what would
be required.
Kocherlakota now has another post describing
how
he thinks macro ought to be done . Basically, he thinks researchers - as a whole, not just on
their own! - should start with toy models to facilitate thinking, then gather data based on what
the toy models say is important, then build formal "serious" models from the ground up to match that
data. He contrasts this with the current approach of tweaking existing models.
My question
is: Who is going to enforce this change? If a few established researchers start doing things
the way Kocherlakota wants, they'll certainly still get published (because they're famous old people),
but will the young folks follow? How likely is it that established researchers en masse are going
to switch to doing things this way, and demanding that young researchers do the same, and using their
leverage as reviewers, editors, and PhD advisers to make that happen? This doesn't seem like the
kind of change that can be brought about by a few young smart rebels forcing everyone else to recognize
the value of their approach - the existing approach, which Kocherlakota dislikes, already succeeds
in getting publication and prestige, so the rebels would simply coexist alongside the old approach,
rather than overthrowing it. How could this cultural change be put into effect?
Also: Romer
now has a follow-up
to his original post, defending his original post against the critics. This part stood out to
me as particularly persuasive:
The whine I hear regularly from the post-real crowd is that "it is really, really hard to do research
on macro so you shouldn't criticize any of our models unless you can produce one that is better."
This is just post-real Calvinball used as a shield from criticism. Imagine someone saying to a
mathematician who finds an error in a theorem that is false, "you can't criticize the proof until
you come up with valid proof." Or try this one on and see how it feels: "You can't criticize the
claim that vaccines cause autism unless you can come up with a better explanation for autism."
Sounds right to me. The old like that "it takes a theory to kill a theory" just seems wrong to me.
Sometimes all it takes is evidence.
I've already commented at lenght on Romer at
Mark Thoma's. So I'll just use something you wrote on physics to make a tangential comment
on unrealistic assumptions.
"They're not saying that economists need 100% perfect realism - that's the kind of thing
you only get in physics, if anywhere"
This is a somewhat misleading way of putting it, but it allows me to illustrate some important
points about 'unrealistic' assumptions. In real world modelling in Physics 'unrealistic' assumptions are ubiquitous. What matters is
not literal realism of assumptions but robustness.of conclusions.
Consider a point-mass. There is no such thing. Yet it is a perfectly legitimate simplifying
assumption about a planet if you are interested in studying its orbit around its sun. It is not
a legitimate assumption if you are interested in studying a planet's rotation about its axis
The most important points underlying such simplifying assumptions are:
1. Simplifying assumptions are context specific, ie ad hoc, and never axiomatic.The ad hoc
nature of simplifying assumptions is a feature, not a bug as the above example illustrates.
2. Robustness is critical. As we move from our simplifying assumptions towards greater realism/precision,
the conclusion should not change in any material way, and we use the simplifications because the
gain in accuracy of the conclusions is not worth the added complexity and consequent loss of tractability
in the model.
3. Out of sample performance of the model.
* Richard Feynman:
"...in order to understand physical laws you must understand that they are all some kind of
approximation.
The trick is the idealizations. To an excellent approximation of perhaps one part in 10^10,
the number of atoms in the chair does not change in a minute, and if we are not too precise we
may idealize the chair as a definite thing; in the same way we shall learn about the characteristics
of force, in an ideal fashion, if we are not too precise. One may be dissatisfied with the approximate
view of nature that physics tries to obtain (the attempt is always to increase the accuracy of
the approximation), and may prefer a mathematical definition; but mathematical definitions can
never work in the real world. A mathematical definition will be good for mathematics, in which
all the logic can be followed out completely, but the physical world is complex, as we have indicated
in a number of examples, such as those of the ocean waves and a glass of wine. When we try to
isolate pieces of it, to talk about one mass, the wine and the glass, how can we know which is
which, when one dissolves in the other? The forces on a single thing already involve approximation,
and if we have a system of discourse about the real world, then that system, at least for the
present day, must involve approximations of some kind.
This system is quite unlike the case of mathematics, in which everything can be defined, and
then we do not know what we are talking about. In fact, the glory of mathematics is that we do
not have to say what we are talking about. The glory is that the laws, the arguments, and the
logic are independent of what "it" is.
Indeed. That was part of the reason for redundantly using the phrase :) . The other reason
was that the usage is strictly accurate. ad hoc = for this particular purpose (Shorter OED)
It is difficult to see how simplifying assumptions underlying real world models can be anything
but ad hoc (context-specific)
For a mathematician to object to ad hoc statements would be understandable, but for someone
concerned with real world modelling to do so is mind-boggling.
It is worth pointing out that the economists who do so object have never in their life built
a model that works, for any definition of 'works' acceptable anywhere outside economics.
This is indeed excellent. The three criteria for evaluating assumptions/simplifications, the
precise definition of ad hoc, and the crystal-clear example of point mass for orbits vs rotation.
I'd like to bring in my pet bailiwick, accounting. Our (national) accounting systems are rife
with assumptions and simplifications - they are economic models. (Or in Feynman's excellent
term, "idealizations.") And those assumptions are effectively invisible to almost everyone. If
I had a nickel for every time I've heard "it's an accounting identity" as if that was somehow
synonymous with "truth"...
Just one example, relating to a rather important economic measure - income:
The national-accounting sages know that the appropriateness of this basic conceptual construct
is a very open question. But that fact is invisible to almost everyone. National accounts could
be depicted quite differently (yes, with everything still balancing).
Economists' thinking is completely owned by the conceptual constructs, the idealizations, embodied
in our national-accounting structures. And they frequently display zero understanding of the constructs
that they are (we are) using to think with.
I've been critical of you in the past, but that is a really good comment, 100% on the ball.
But I will add that the simplifying assumption you used to illustrate your point, may not be true,
but it is nearly true (without the scales being considered). And many simplifying assumptions
used in economics are not nearly true.
Informally we might - and sometimes do - say that the assumption (point-mass) is 'nearly true',
but it is not quite correct. It is an idealization that satisfies criterion (2): robustness, and
the resulting model satisfies criterion (3); out-of-sample performance.
Of course this is very different from the sort of assumptions common in economics which are
often patently false - and this is the critical point - making them more realistic materially
changes the conclusions ie the assumptions in the models fail to satisfy the robustness criterion.
And, at least in DSGE/RBC macro to talk of in-sample fit or out-of-sample performance of the resulting
model would imply a libelous misuse of the terms.
Actually, as Romer notes, the situation in economics is often even worse.with assumptions being
not merely false ( with non-robust conclusions) but entirely meaningless in terms of real world
observables. Assumptions of the sort that are deservedly derisively dismissed as not even wrong
in every scientific or engineering discipline.
It's not just an argument about having models with realistic assumptions. It is also an argument
about the extent to which mathematics and models can usefully provide the answers we need to know.
Basically we are going back to Keynes's (1937) arguments about the limitations of "pretty and
polite techniques". Edgeworth was also very much aware of the limitations of mathematics in economics.
And so have many others, for a long time.
I have been critical of Romer in the past. His growth theory for me does not answer the critical
questions that I think are the most important into understanding why certain countries get on
to a growth curve and others do not. But I now really have to admire his honesty.
It is not true that we do not have a lot of macro data. The National Accounts contain scores
of (largely stock-flow consistent) data. The point is: one of the big failures of DSGE economists
is their failureto establish a measurement system which produces data consistent with the DSGE
models. Keynes, who even established his own government statistical office, the present day ONS,
and, in a more indirect sense, Smith, Marshall as well and Veblen did establish systems of measurement
to measure data consistent with their models and ideas. Read Mitra Kahn http://openaccess.city.ac.uk/1276/
or my efforts
DSGE economists never bothered to do this. Weird (well, not that weird - taking account of
real life data would have meant taking unemployment and the government serious... Or the fact
that the National Accounts identities only hold for nominal variables, not for deflated real variables).
Anyway - as there is no system of DSGE consistent measurement of the macro-economy it can't be
called a valid science.There are however systems consistent with the ideas of Keynes and Veblen...
So, we are witnessing a battle between a declining DSGE scam and ascending "Realistic assumptions"
scam.
Both approaches are worthless, but I guess it will give an excuse to macroeconomists why
they are useless: we just used the wrong paradigm, now we are switching to the new one. Just many
more years of research is needed and we will be ready. Science!, as they say.
I'm curious how many economists are simply too blind to understand that this will lead nowhere
and how many are simply cynical beyond belief.
I just don't understand the mentality. Wouldn't you like to do something productive? Like produce
actual knowledge? Can you guys be satisfied with infinite curve fitting?
Science, IEHO, has three touchstones. Coherence - your model and its assumptions should not contradict each other or lead to contradictory
conclusions. Consilience - a good theory has a broad reach for explaining reality. Consensus - a theory which is coherent and consilient should lead to a consensus among practicioners.
It is only within a strong consensus that people can talk to each other and extend the field.
It appears that macro misses out on a number of these.
"Romer basically says that macro (meaning business-cycle theory)"
Are you equating macro with business-cycle theory, or are you saying that Romer does?
In either case, I think this is another big problem with macro, its obsession with business
cycles as opposed to long-term thriving and prosperity. eg, Gerald Friedman got tied in knots
by this; he was trying to use "stimulus" thinking and arguments to talk about about multi-decadal
possibilities.
" (Though I do think he's too harsh on string theory, which often is just a kind of math that
physicists do to keep themselves busy, and has no danger of hurting anyone, unlike macro theory.)"
I find it hard to believe Noah understands string theory well enough to justify such a strong
opinion of it only existing to keep theorists employed. As much as I like "The Trouble With Physics"
those reading should keep in mind that Lee Smolin acknowledges that maybe there is something to
string theory.
And again, the focus of string theory in theoretical physics is harmful to the expansion of
knowledge and economic growth if too many brains not only barked up the wrong tree - nothing wrong
with that - but *continued* to bark up the wrong tree for years, ignoring other paths of understanding
physics, which is Smolin's main point.
I'm fond of observing that in addition to "cargo cult science", macroeconomics has often
been likened to a religion. What religions do when the mainstream becomes intolerable for one
reason or another is schism. Then after a number of years what used to be the mainstream dies
out and the former schismatics become the mainstream.
Psychology went through this kind of crisis some years ago when the scientists split off
from the clinicians, and created the Association for Psychological Science to contrast with the
clinically-oriented American Psychological Association (the APA is the one that publishes the
unscientific but influential Diagnostic and Statistical Manual).
All that heterodox economists need to do is gain some self-confidence and stop calling themselves
derogatory names. That won't make them scientific, but it'll be a step in the right direction.
In order to be scientific, the standard method is to actually try predicting. Prediction is
messy and provably fails to converge to any possible theory, but there are other authentic sciences
that have this same theoretical limitation, like meteorology. This doesn't prevent meteorologists
from constructing theories which make predictions that demonstrably get better and better year
after year.
Why don't all these macro critics stop publishing in "unscientific" mainstream journals and
setup their own J.Econ.Sci. that has rigorous scientific standards? Many of them have tenure or
non-academic jobs (e.g. Roemer) and don't need to kowtow to committees who care only about established
impact factors. It's been done elsewhere. It wasn't so long ago that one of the most prestigious
biology journals Cell, was just an upstart new face on the block. All it takes is a strong editor
and a pool of like-minded peer reviewers.
I think Paul Romer's self-serving ad hominem attacks should be identified as just that. One
would hardly blame the older generation of Nobel laureates of conspiring to deny economic pre-eminence
to Romer - look at how he behaves! - but I think they probably have better things to do.
I admit I haven't completely digested Romer's latest thunderbolt - I'm basing my comments more
on Romer's "mathiness" series of a year ago. In that case, I went back and read the "mathy" papers
that Romer was attacking. Mathy they were, but the Lucas and Moll paper at least was very clear
about why it didn't see increasing returns-to-scale in growth models convincing: the intellectual
property-driven economic sector just isn't, in their view, big enough. (BTW, that's almost exactly
the same argument made by William Nordhaus against the AI "singularity" folks: it could happen,
but none of today's macroeconomic data suggest that it is happening.)
To come back to the current discussion, I have no particular sympathy with the Lucas-Prescott-Sargent
rational expectations / microfoundations / real business cycle approach - but the needed discussion
of the defects of RBC has been underway for some time. And note that Romer's opening distillation
of RBC makes its problems all about a supposed "exogenous" component, for which the subtext is
that RBC's authors don't accept Romer's "endogenous" growth theory.
For twenty years Romer has been implying (and recently saying) that economists who don't accept
endogenous growth theory have abandoned the canons of science and are either blind or indifferent
to the truth. Over the same twenty years he seems to have produced very little theoretical work,
while his targets have remained working economists. (Why, after all, should anyone continue to
do theory, since Romer has discovered the truth?)
I wish Romer well at the World Bank. There is no doubt that his ideas around urbanization,
for example, will bring an important and updated perspective to a development bank. But the very
move suggest to me that the World Bank has not failed to note Romer's ability to propagandize
an economic agenda - and that it values his political skills as much as his reputation as an economic
theorist.
It's easy to poke holes in existing methodology, but it's much more difficult to come up with
viable alternatives and solutions. Do those who knock DSGE models really think we should go back
to 1970's macro and reuse old-school Keynesian models? The empirical evidence against Keynesian
multipliers is overwhelming (See Ramey for an overview). Methodologically, Keynesian models make
just as many implausible, ad hoc assumptions as DSGE models, if not more. Their forecast accuracy
is no better; private forecasters are mostly selling stories and scenarios, not forecasts that
in any way will prove ex post to be accurate.
I think you are repeating - and it is a good reminder - the classic Mark Blaug argument that
economists should not abandon the "best available" theory (even if its deficiencies are manifest)
if there is no better replacement. I have no problem with that.
However, I think the discussion right now is about those manifest defects. And there are stirrings
about what comes next. Noah has blogged several times on the new "empirical turn". And the Keynesians,
who have never gone away, may yet stand up a rehabilitated theory. For a usable business cycle
theory, there are really three tests to satisfy:
1) Normal forecasting capability (as you mention);
2) Convincing comparative statics on the effects of monetary or fiscal intervention. (RBC omitted
this almost by definition.)
3) Some ability to detect pressures that are building toward a major shock. (I call this 'the
Cassandra feature', since the predictions are unlikely to be believed or heeded.) Whether any
model could really offer this is open to question, but it's a real question. The Fed always talks
about "risks to the economy", but is the perception of those risks coming from the model? How
did Warren Buffet know that the pile of financial derivatives would collapse, but bankers and
regulators and economists not know it? One answer, at least for economists, is that rational expectations
theory forces prediction of any kind of discontinuity completely out of the model. That part of
Paul Romer's complaint seems to me to be valid.
"... There is indeed a wing of heterodox economics that is anti-mathematical. Known as "Critical Realism" and centred on the work of Tony Lawson at Cambridge UK, it attributes the failings of economics to the use of mathematics itself... ..."
"... Steve also offers some useful criticism of Milton Friedman's ideas about how to evaluate a model's empirical success ( I agree ). ..."
"... The problem with 'heterodox economics' is that it is self-definition in terms of the other. It says 'we are not them' - but says nothing about what we are. This is because it includes everything outside of the mainstream, from reasonably well-defined and coherent schools of thought such as Post Keynesians, Marxists and Austrians, to much more nebulous and ill-defined discontents of all hues. To put it bluntly, a broad definition of 'people who disagree with mainstream economics' is going to include a lot of cranks. People will place the boundary between serious non-mainstream economists and cranks differently, depending on their perspective. ..."
"... Aside from rejecting standard neoclassical economics, the Marxists and the Austrians don't have a great deal in common. ..."
"... Noah seems to define heterodox economics as 'non-mathematical' economics. This is inaccurate. There is much formal modelling outside of the mainstream. ..."
"... Noah's post unfortunately seems to have elicited some rather defensive responses from the heterodox community, along the lines of " But we DO like mathematics! " or even, " Actually our mathematics is better than yours ". But this is to buy into Noah's core proposition. The heterodox economics community should - and, to be fair, in most cases does - reject it outright. Economics is not, and cannot be , exclusively mathematical...There is no need for the heterodox economic community to be defensive about vagueness. ..."
The other day I wrote
a Bloomberg View post arguing that heterodox macroeconomics is not in any better shape than mainstream
macroeconomics. As you might expect, this drew some lively responses.
One or two of the responses seemed to be arguing against the title of my post, rather than
the contents. That's understandable, since titles are important. In this case, though, it probably
detracted from the debate a great deal. The Bloomberg title people are good, and they usually get
things right, but once in a while the title they choose doesn't quite capture the point I'm trying
to make. This was one of those cases. The title they gave my post was "Economics Without Math Is
Trendy, But It Doesn't Add Up." But actually, this wasn't what I was arguing. My point about non-mathy
models wasn't that these are bad, useless, or inferior. It was that they're different from
mathy models, and so comparing non-mathy models with mathy ones is an apples-to-oranges comparison.
Both types of models have their uses, but you can't really compare one to the other. I make that
pretty clear in the text of
my post , but most of the people who responded tended to focus more on the title. Oh well. These
things happen.
Anyway, on to some of the responses. The numbering here is arbitrary, corresponding to the order
in which the tabs were open on my browser. (Note: The ordering has changed; see #4.)
Response 1: Steve Keen
First, we have
a
response by Steve Keen . Steve, unlike others, did get the point I was making about mathy vs.
non-mathy models (Thanks, Steve!), and had some good commentary on the subject:
There is indeed a wing of heterodox economics that is anti-mathematical. Known as "Critical
Realism" and centred on the work of Tony Lawson at Cambridge UK, it attributes the failings of
economics to the use of mathematics itself...
What Noah might not know is that many heterodox economists are critical of this approach as well.
In response to
a paper by Lawson that effectively defined "Neoclassical" economics as any economics that
made use of mathematics (which would define me as a Neoclassical!), Jamie Morgan edited a book
of replies to Lawson entitled
What is Neoclassical Economics? (including a chapter by me). While the authors agreed with
Lawson's primary point that economics has suffered from favouring apparent mathematical elegance
above realism, several of us asserted that mathematical analysis is needed in economics, if only
for the reason that Noah gave in his article[.]
Steve also offers some useful criticism of Milton Friedman's ideas about how to evaluate a model's
empirical success (
I agree ).
Steve also makes the useful point that linearization critically hampers many mainstream models
(
I agree ).
Steve points out that non-mathy models can make qualitative forecasts. That's true. However, my
point was that these are often a lot less actionable than quantitative forecasts. A non-mathy model
might tell you that private-sector debt is dangerous, but it might not tell you how much of
it is dangerous, or how dangerous. For that, you'd need some kind of mathy model. Steve definitely
seems to get this point too, though, so I'm not disagreeing.
Steve then discusses overfitting of data, and points out that many mainstream models do this too.
That's certainly true, although I think DSGE models tend to be a lot more parsimonious than SFC models
or stuff like FRB/US. Actually, overfitting is one of the big criticisms of the most popular DSGE
models in use at central banks.
Steve then addresses the idea that heterodox models are similar to mainstream ones. I never said
they were, although I said there are some similarities between the FRB/US model and Wynne Godley-type
SFC models. In fact, there are some similarities, though there are also differences. But in general,
most heterodox models are very different from most mainstream models.
Steve also discusses my (admittedly too brief) mention of agent-based models, and has some good
comments:
Largely speaking, this is true - if you want to use these models for macroeconomic forecasting.
But they are useful for illustrating an issue that the mainstream avoids: "emergent properties".
A population, even of very similar entities, can generate results that can't be extrapolated from
the properties of any one entity taken in isolation...Neoclassical economists unintentionally
proved this about isolated consumers as well, in what is known as the Sonnenschein-Mantel-Debreu
theorem. But they have sidestepped its results ever since...Multi-agent modelling may not lead
to a new policy-oriented theory of macroeconomics. But it acquaints those who do it with the phenomenon
of emergent properties - that an aggregate does not function as a scaled-up version of the entities
that comprise it. That's a lesson that Neoclassical economists still haven't absorbed.
I think this is right. Agent-based models have so far served as a demonstration of the fragility
of representative agent models. In the future, they might be much more than that.
So anyway, I'd say I pretty much agree with Steve's response. Good stuff. (Though
this person on Reddit had some problems with it.)
Response 2: Ari Andricopolous
Ari
has a response as well . His response comes in the form of a list of things that he thinks macro
models should not include. The list is:
Microfoundations
Neoliberal_rationality/
Loanable funds
Interest rate effects
The financial sector
It's pretty clear that the last item on this list is misplaced, since Ari thinks one should
include the financial sector in models.
Whether macro models should be microfounded is a big open question, but I'd like to note that
by saying they shouldn't be, Ari is saying that agent-based models are bad. Agent-based models are
as microfounded as they come.
As for rationality, I kind of disagree...humans observe and learn and adapt (OK, some more than
others, I'll grant). Even though perfect rationality is probably pretty unrealistic, to insist that
models totally ignore human observation, learning, and adaptation seems very dangerous for the realism
of any model.
As for the loanable funds thing...yeah, OK, sure.
Response 3: Jo Michell
Jo Michell's response might have been the first to go up, but it's later on this list because...the
numbering is arbitrary!
Jo, which I believe is short for "Jörmungandr", has a helpful diagram of the "schools" of macroeconomic
thought. He also pushes back on the notion that "heterodox" is a useful classification at all:
The problem with 'heterodox economics' is that it is self-definition in terms of the other.
It says 'we are not them' - but says nothing about what we are. This is because it includes everything
outside of the mainstream, from reasonably well-defined and coherent schools of thought such as
Post Keynesians, Marxists and Austrians, to much more nebulous and ill-defined discontents of
all hues. To put it bluntly, a broad definition of 'people who disagree with mainstream economics'
is going to include a lot of cranks. People will place the boundary between serious non-mainstream
economists and cranks differently, depending on their perspective.
Another problem is that these schools of thought have fundamental differences. Aside from
rejecting standard neoclassical economics, the Marxists and the Austrians don't have a great deal
in common.
This is a good and useful point. My Bloomberg post really did bite off more than it could chew. My
point was that there wasn't something better and more successful out there that by rights ought to
already have displaced the (unsuccessful) mainstream approach. But in making that point, I touched
on a number of different types of alternatives that aren't really closely connected. And I left out
others (for example, Steve Keen's own work, and the Austrians).
Jo, unfortunately, appears to have gotten tripped up by the title:
Noah seems to define heterodox economics as 'non-mathematical' economics. This is inaccurate.
There is much formal modelling outside of the mainstream.
Well, no, I don't define it that way, otherwise I wouldn't have discussed SFC models and agent-based
models in my post.
Jo goes on to make some good points about mainstream models, and some of the problems they encounter.
Response 4: Frances Coppola
Frances Coppola, whom I cited in my Bloomberg post,
also has
a response . I responded to this post earlier, but Frances changed it, so I moved my response
down to #4.
Frances still seems to misunderstand my post somewhat, and to have been tripped up by the title:
Noah's core proposition is that economics has no validity unless it is expressed in mathematical
terms. He says that economics without mathematics doesn't add up.
Actually, I didn't make such a claim. Nor do I believe it.
What I wrote was:
Broad idea-sketching is certainly a valuable activity. If theorists get lost in the specifics
of their models, they can blind themselves to truly new hypotheses and mechanisms that would let
them make big, radical changes. I do think this has happened to some degree in mainstream macro...But
that doesn't mean that broad idea-sketching is a replacement for formal models. It's not an apples-to-apples
comparison.
My point is that although non-mathematical econ is often valuable, it's not comparable to mathematical
econ. Both have their place. But to say that a non-quantitative theory was successful at predicting
the Great Recession, while a quantitative theory failed, is to hold the two theories to very different
standards, since "predict" means different things for quantitative theories than it does for non-quantitative
theories.
Frances goes on to discuss some of the limitations of purely quantitative models. She's broadly
right. She then criticizes some heterodox theorists who, in her opinion, focus too much on math:
Noah's post unfortunately seems to have elicited some rather defensive responses from the
heterodox community, along the lines of "
But we DO like mathematics! " or even, "
Actually our mathematics is better than yours ". But this is to buy into Noah's core proposition.
The heterodox economics community should - and, to be fair, in most cases does - reject it outright.
Economics is not,
and cannot be , exclusively mathematical...There is no need for the heterodox economic community
to be defensive about vagueness.
Again, Frances demonstrates a deep misunderstanding of my thesis. I never said that econ theory should
be exclusively mathematical, nor do I believe it. This confusion is partly the result of the title,
and partly the result of me just not explaining my thesis well enough.
Anyway, those are the responses I've seen. Thanks to everyone who took the time to respond!
"... Trump isn't attempting to appeal to neocons or neoliberals. (New Classical or New Keynesian.) That's Hillary's job. So losing this guy (neocon Bush economist) means nothing. ..."
"... Accusations of corruption against Hillary are ridiculous! Have you ever listened to Hillary's voice? Her speeches are like music to the ears! The only reason why corporations across various industrial complexes - financial, healthcare, private prison, military, Big Oil, etc. - pay Hillary $250k a speech is because they can afford to. The rest of society - the moochers - can only dream of being wealthy enough to enjoy a Hillary speech! ..."
"... I'm so tired of people hating on the rich and disparaging the Clintons' 'democratic innovation' techniques. They are clearly nothing more than envious ingrates and ignoramuses! ..."
"... All of the neoclassical tax cutting over the past 35 years has only provided a net benefit to the upper class. Only 30% of the US economy is related to international trade. So very little of the debt created with tax cuts has trickled down into trade deficits. ..."
"... But trade-liberalization/outsourcing policies, on the other hand, explain how a trade deficit has an accompanying budget deficit (according to the Twin Deficits hypothesis.) If a country is spending more on imports than it is earning in exports it will have to borrow the money to pay for them. ..."
"... Trump's absurd tax cuts would only benefit the top 20%. They would not increase demand for imports or increase the trade deficit. All of this money would be in the form of whopping budget deficits and growing government debt. It would be a spectacular failure. A better one than what Hillary would bring: because the Republicans would be on the hook for it. (If Hillary wins, the Democrats are on the hook for a 12 year Great Recession by 2020. That kicks the New Deal can down the road to 2024.) ..."
"... Sanders supporters dislike Republicans more than Hillary supporters do according to polls. They're not going to go for trickle-down economics. Sanders's message was that the problem with the economy and political system are people like Trump. That's why he proposed a significant financial transaction tax. Sanders supporters agree with Sanders, Dean Baker and Jared Bernstein that corporate trade deals could be made more fair. ..."
"... "Corporate" trade deals aren't the issue. It is capital markets. Republicans wants a total abolition of regulations on capital markets. Not only will Trumps deficits need more foreign finance, he will gut the economy to bring that foreign finance in or gut the economy if it doesn't come in if he trade saber rattles. The only other option is much such large government spending cuts, that creates a recession as well creating capital flight. ..."
"... Mankiw reveals like Krugman he's never been to East Asia, nor is he the least bit curious about why the US developed in the first place. If he had studied economic development or East Asia he would know that blistering high interest rates (+50%) were common in the East Asian countries during their periods of stunning growth. Rising interest rates from the reduced flow of capital would also be associated with - for the first time in 40 years -- positive incentives to invest in US tradable goods production. ..."
"... Watch Charles Ferguson's Inside Job for information on how morally and financially compromised US economists are. ..."
"... And Mankiw does this specifically in the context of offering support to idiotic Republican policies, to pander to the Republican mandarins who hire him every 4 years as economic adviser to their Presidential candidate (and to sell more textbooks at Red-state schools). ..."
"... Why does Mankiw think he deserves to sell his own ass like a two-bit prison whore, while Navarro and Ross can't? ..."
Trump isn't attempting to appeal to neocons or neoliberals. (New Classical or New Keynesian.)
That's Hillary's job. So losing this guy (neocon Bush economist) means nothing.
This argument against Trump's economic plan would appear to be nonsensical. Interest rates
are not marked to international markets. They are set by the central bank to manage demand and
inflation. (According to 'orthodox' economics, protectionism would negatively affect GDP and put
a downward pressure on demand, inflation and interest rates. So this argument is doubly senseless.)
I can't imagine that many economists understand international trade or they wouldn't be in
favor of the highly mercantlist global economy that free-trade globalization has produced.
The 35 years of trade deficits the US has run with undeveloped mercantilist countries is a
triple whammy: 1) jobs, production and investment flow out of the country reducing GDP, real incomes
and demand; 2) the trade deficit has an accompanying budget deficit (according to the Twin Deficits
hypothesis); this creates rising government debt; spending cuts further depress demand; 3) for
every dollar that flows out of the country from imported goods, a dollar must flow back into the
country in the form of foreign investment (i.e. debt owed to foreign countries.)
This process is certainly no Carnot engine. Simply a linear process of wealth being transferred
from one source to another (much of it in debt.) A process that is quickly running out of steam.
My impression is that only a return to the progressive Keynesian New Deal era (that began with
FDR and ended with Reagan) can prevent the global economy from collapsing into fascist revolutions
and world war. (Repeating the history of the 1930s; Trump would make a better Herbert Hoover than
Hillary, that's for sure.)
Accusations of corruption against Hillary are ridiculous! Have you ever listened to Hillary's
voice? Her speeches are like music to the ears! The only reason why corporations across various
industrial complexes - financial, healthcare, private prison, military, Big Oil, etc. - pay Hillary
$250k a speech is because they can afford to. The rest of society - the moochers - can only dream
of being wealthy enough to enjoy a Hillary speech!
I'm so tired of people hating on the rich and disparaging the Clintons' 'democratic innovation'
techniques. They are clearly nothing more than envious ingrates and ignoramuses!
All of the neoclassical tax cutting over the past 35 years has only provided a net benefit
to the upper class. Only 30% of the US economy is related to international trade. So very little
of the debt created with tax cuts has trickled down into trade deficits.
But trade-liberalization/outsourcing policies, on the other hand, explain how a trade deficit
has an accompanying budget deficit (according to the Twin Deficits hypothesis.) If a country is
spending more on imports than it is earning in exports it will have to borrow the money to pay
for them.
Clearly any form of non-regulated stimulus (tax cuts or income redistribution) that primes
anemic demand by putting more money in the hands of the bottom 80% will produce a bigger trade
deficit. The only way to eliminate a trade deficit with a mercantilist country is with tariffs.
If Trump's plan is to raise GDP by eliminating the trade deficit with some form of regulatory
measures, then clearly this could not raise the trade deficit.
Trump's absurd tax cuts would only benefit the top 20%. They would not increase demand
for imports or increase the trade deficit. All of this money would be in the form of whopping
budget deficits and growing government debt. It would be a spectacular failure. A better one than
what Hillary would bring: because the Republicans would be on the hook for it. (If Hillary wins,
the Democrats are on the hook for a 12 year Great Recession by 2020. That kicks the New Deal can
down the road to 2024.)
Sanders supporters dislike Republicans more than Hillary supporters do according to polls.
They're not going to go for trickle-down economics. Sanders's message was that the problem with
the economy and political system are people like Trump. That's why he proposed a significant financial
transaction tax. Sanders supporters agree with Sanders, Dean Baker and Jared Bernstein that corporate
trade deals could be made more fair.
Ben Groves -> Peter K.... , -1
"Corporate" trade deals aren't the issue. It is capital markets. Republicans wants a total
abolition of regulations on capital markets. Not only will Trumps deficits need more foreign finance,
he will gut the economy to bring that foreign finance in or gut the economy if it doesn't come
in if he trade saber rattles. The only other option is much such large government spending cuts,
that creates a recession as well creating capital flight.
Sanders doesn't support deregulated capital markets, he can swagger about 'trade'.
Saigo Takamori : , -1
Mankiw reveals like Krugman he's never been to East Asia, nor is he the least bit curious
about why the US developed in the first place. If he had studied economic development or East
Asia he would know that blistering high interest rates (+50%) were common in the East Asian countries
during their periods of stunning growth. Rising interest rates from the reduced flow of capital
would also be associated with - for the first time in 40 years -- positive incentives to invest
in US tradable goods production.
US economists are paid to confuse people and be confused. Watch Charles Ferguson's Inside
Job for information on how morally and financially compromised US economists are.
No wonder the US is an economic basket case on the cusp of becoming a third world country.
Thanks economists! You guys have the best advice! Free trade and comparative advantage are real
winners! Just ask Haiti, the second most open economy in the Americas after the US.
I've watched Mankiw, on video, on several occasions, make patently false claims about economic
policy based on first-year macro that's completely and utterly disproven at even a third-year
level.
And Mankiw does this specifically in the context of offering support to idiotic Republican
policies, to pander to the Republican mandarins who hire him every 4 years as economic adviser
to their Presidential candidate (and to sell more textbooks at Red-state schools).
Why does Mankiw think he deserves to sell his own ass like a two-bit prison whore, while
Navarro and Ross can't?
The crisis exposed some serious flaws in our economic thinking. It has highlighted the need to
look at economic policy with more critical, fresh approaches. It has also revealed the limitations
of existing tools for structural analysis in factoring in key linkages, feedbacks and trade-offs
– for example between growth, inequality and the environment.
We should seize the opportunity to develop a new understanding of the economy as a highly complex
system that, like any complex system, is constantly reconfiguring itself in response to multiple
inputs and influences, often with unforeseen or undesirable consequences. This has many implications.
It suggests policymakers should be constantly vigilant and more humble about their policy prescriptions,
act more like navigators than mechanics, and be open to systemic risks, spillovers, strengths, weaknesses,
and human sensitivities. This demands a change in our mind-sets, and in our textbooks. As John Kenneth
Galbraith once said, "the conventional view serves to protect us from the painful job of thinking."
This is why at the OECD we launched an initiative called New Approaches to Economic Challenges
(NAEC). With this initiative we want to understand better how the economy works, in all its complexity,
and design policies that reflect this understanding. Our aim is to consider and address the unintended
consequences of policies, while developing new approaches that foster more sustainable and inclusive
growth.
Complexity is a common feature of a growing number of policy issues in an increasingly globalised
world employing sophisticated technologies and running against resource constraints.
The report of the OECD Global Science Forum (2009) on Applications of Complexity Science for Public
Policy reminds us of the distinction between complicated and complex systems. Traditional science
(and technology) excels at the complicated, but is still at an early stage in its understanding of
complex phenomena like the climate.
For example, the complicated car can be well understood using normal engineering analyses. An
ensemble of cars travelling down a highway, by contrast, is a complex system. Drivers interact and
mutually adjust their behaviours based on diverse factors such as perceptions, expectations, habits,
even emotions. To understand traffic, and to build better highways, set speed limits, install automatic
radar systems, etc., it is helpful to have tools that can accommodate non-linear and collective patterns
of behaviour, and varieties of driver types or rules that might be imposed. The tools of complexity
science are needed in this case. And we need better rules of the road in a number of areas.
This is not an academic debate. The importance of complexity is not limited to the realm of academia.
It has some powerful advocates in the world of policy. Andy Haldane at the Bank of England has thought
of the global financial system as a complex system and focused on applying the lessons from other
network disciplines – such as ecology, epidemiology, and engineering – to the financial sphere. More
generally, it is clear that the language of complexity theory – tipping points, feedback, discontinuities,
fat tails – has entered the financial and regulatory lexicon. Haldane has shown the value of adopting
a complexity lens, providing insights on structural vulnerabilities that built up in the financial
system. This has led to policy suggestions for improving the robustness of the financial system.
Closer to home, Bill White, Chairman of our Economic and Development Review Committee (EDRC) has
been an ardent advocate of thinking about the economy as a complex system. He has spoken in numerous
OECD meetings – in part as an explanation and in part as a warning – that systems build up as a result
of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non-linearity.
As a result Bill has urged policymakers to accept more uncertainty and be more prudent. He also urged
economists to learn some exceedingly simple but important lessons from those that have studied or
work with complex systems such as biologists, botanists, anthropologists, traffic controllers, and
military strategists.
Perhaps the most important insight of complexity is that policymakers should stop pretending that
an economy can be controlled. Systems are prone to surprising, large-scale, seemingly uncontrollable,
behaviours. Rather, a greater emphasis should be placed on building resilience, strengthening policy
buffers and promoting adaptability by fostering a culture of policy experimentation.
At the OECD, we are starting to embrace complexity. For several years we have been mapping the
trade "genome" with our Trade in Value Added (TiVA) database to explain the commercial interconnections
between countries.
We have examined the possibilities for coupling economic and other systems models, for example
environmental (climate) and societal (inequalities). Our work on the Costs of Inaction and Resource
Constraints: Implications for Long-term Growth (CIRCLE) is a key example of linking bio-physical
models and economic models to gauge the impact of environmental degradation and climate change on
the economy.
We are also looking at governing complex systems in areas as diverse as education and international
trade policy. And we are looking at the potential for tapping big data – an indispensable element
of complexity modelling approaches. But there remains much to do to fully enrich our work with the
perspectives of complexity.
The OECD is delighted to work with strong partners – the Institute for New Economic Thinking (INET)
Oxford, and the European Commission to help policy-makers advance the use of complex systems thinking
to address some of the most difficult challenges.
An important question remains. How can the insights and methods of complexity science be applied
to assist policymakers as they tackle difficult problems in areas such as environmental protection,
financial regulation, sustainability or urban development?
At the Workshop on Complexity and Policy on 29-30 September at the OECD, we will help find the
answer – stimulate new thinking, new policy approaches and ultimately better policies for better
lives.
[Sometimes when it seems like you are just howling at the moon there really is a new day coming.]
I think it is both correct,
and entirely wrong-headed.
Firstly, we have not believed that the economy can be controlled (we were just trying
to steer it) - the guiding principle was that it didn't need to be controlled which is something
completely different. It also falls into the trap of talking about "the economy" as though
the economy was an organism that had its own purposes, rather than as a set of institutions
that ultimately exist to serve human beings (a job which it achieves with quite varying
degrees of success). I won't say this approach is necessarily bound to fail, I just doubt
that it will be alone sufficient.
The OECD is one of those institutions.
Yep, they have plenty of their own assumptions. Complexity has been mentioned here before.
Exactly what they mean is indeterminable from the general principles mentioned, but examples
are worthwhile. You might read them to mean be cautious about leaps of faith such as financial
deregulation because bad stuff CAN happen.
"...Perhaps the most important
insight of complexity is that policymakers should stop pretending that an economy can be
controlled. Systems are prone to surprising, large-scale, seemingly uncontrollable, behaviours.
Rather, a greater emphasis should be placed on building resilience, strengthening policy
buffers and promoting adaptability by fostering a culture of policy experimentation..."
[In context I took this more to mean that economic models are probabilistic at best rather
than deterministic rather than that it said policy makers in the OECD were performing central
planning of the economy, which everyone knows is not true.]
Firstly, we have not believed
that the economy can be controlled (we were just trying to steer it) - the guiding principle
was that it didn't need to be controlled which is something completely different. It also
falls into the trap of talking about "the economy" as though the economy was an organism
that had its own purposes, rather than as a set of institutions that ultimately exist to
serve human beings (a job which it achieves with quite varying degrees of success)....
Re: Stop pretending that an economy can be controlled -
OECD Insights
"The crisis exposed some serious flaws in
our economic thinking. It has highlighted the need to look
at economic policy with more critical, fresh approaches.
It has also revealed the limitations of existing tools for
structural analysis in factoring in key linkages,
feedbacks and trade-offs – for example between growth,
inequality and the environment.
We should seize the opportunity to develop a new
understanding of the economy as a highly complex system
that, like any complex system, is constantly reconfiguring
itself in response to multiple inputs and influences,
often with unforeseen or undesirable consequences. This
has many implications. It suggests policymakers should be
constantly vigilant and more humble about their policy
prescriptions, act more like navigators than mechanics,
and be open to systemic risks, spillovers, strengths,
weaknesses, and human sensitivities. This demands a change
in our mind-sets, and in our textbooks. As John Kenneth
Galbraith once said, "the conventional view serves to
protect us from the painful job of thinking."
..................................
Complex systems such as chemical processes are managed by
feedback control systems that specify a desired output and
then measure deviation from that control point (the error
signal) to adjust the inputs and thus return to the
desired setpoint.
I have promoted the use of control theory concepts in
economics before. From a previous post:
Auto-control:
Did you ever think about how you keep the temperature
in your house at a comfortable level even though the
weather is unpredictable and can change a lot?
Well, maybe the level of the economy could be controlled
on similar principles. Maybe economists could borrow from
the control theory that is employed in air conditioning
thermostats.
For example, if we wanted to maintain full employment we
could adjust inputs in a similar manner to the way heat
and cooling is adjusted in your house. Just as heat is
added when the temperature gets too low, government jobs
could be added when private employment falls short. When
the temperature starts to get too high ( full employment
is achieved), heat could be sucked out ( no more jobs
would be added and/or higher taxes could be imposed) to
cool things off.
This is an appealing analogy because, like the weather,
the economy is inherently unpredictable and, like the air
conditioning in your house, you could keep things
comfortable without the need of forecasting the
unknowable.
So maybe economists should forsake their DSGE models and
instead study control theory.
...................
In my view such approaches are not promoted because they
require central control by the state and our elite
establishment quashes such threats to their dominance.
That is why Keynes' conclusions were subverted:
"The context is as follows: in an interview with the
leftist British journalist Kingsley Martin (1897–1969) in
the New Statesman of January 1939, Keynes – commenting on
the need for a new interventionist economic system and at
the same time the need to avoid the authoritarianism of
the Fascist and communist states – said this:
"The question is whether we are prepared to move out of
the nineteenth-century laissez faire state into an era of
liberal socialism, by which I mean a system where we can
act as an organized community for common purposes and to
promote social and economic justice, whilst respecting and
protecting the individual-his freedom of choice, his
faith, his mind and its expression, his enterprise and his
property." (Moggridge 1982: 500 = Keynes and Martin 1939:
123).
............
Many people now accept that we have traveled the wrong
path since the 1950's. I would submit that economists
would do well to go back to the ideas of Keynes, Kalecki,
Lerner and perfect those concepts within a framework of
automatic stabilization. This would be greatly facilitated
if some prominent economists would have the guts to say
again what Keynes was saying in the 30's.
What would a recommended reading of or about Abba Lerner
be? Though Lerner is frequently mentioned, I still have no
idea where to begin reading. Would this do?
The Lerner symmetry theorem is a result used in
international trade theory, which states that, based on an
assumption of a zero balance of trade (that is, the value
of exported goods equals the value of imported goods for a
given country), an ad valorem import tariff (a percentage
of value or an amount per unit) will have the same effects
as an export tax. The theorem is based on the observation
that the effect on relative prices is the same regardless
of which policy (ad valorem tariffs or export taxes) is
applied.
The theorem was developed by economist Abba P. Lerner
in 1936.
Functional Finance and Full Employment: Lessons from
Lerner for Today?
By Mathew Forstater
The Asian Crisis, with the fallout in Latin America and
the transition economies; the Russian default; continuing
troubles in Japan; weaknesses in the structure of the new
European EMU; volatility on Wall Street; deflationary
pressures in the global economy: recent economic
developments invite a reconsideration of some of our most
deeply held beliefs concerning economic theory and public
policy. Even within the hallowed halls of mainstream
economics, voices of dissent can be heard. Paul Krugman,
Joseph Stiglitz, and Jeffrey Sachs are among those whose
recent proclamations indicate that we have entered a
period in which orthodox views are being openly
questioned, creating an atmosphere characterized by a
crisis of confidence.
Such periods of impending crisis and open expressions
of self-doubt, questioning our most deeply held beliefs
about the way the world works, creates a climate in which
the ideas of the great unorthodox thinkers of the past may
be revisited. The work of those who in the past dedicated
their lives to formulating solutions to the challenges of
modern capitalist economies may contain lessons applicable
to the contemporary situation. It is in this spirit that
this paper revisits the early works of Abba Lerner,
outlining fifteen such lessons regarding macroeconomic
theory and policy, as fresh in the context of the current
scene as they were some five decades ago when they were
first formulated.
Lesson #1: Full employment, price stability, and a
decent standard of living for all are fundamental
macroeconomic goals, and it is the responsibility of the
state to promote their attainment.
Lesson #2: Policies should be judged on their ability
to achieve the goals for which they are designed and not
on any notion of whether they are "sound" or otherwise
comply with the dogmas of traditional economics.
Lesson #3: "Money Is a Creature of the State"
Lesson #4: Taxing is not a funding operation.
Lesson #5: Government Borrowing is not a funding
operation.
Lesson #6: The primary purpose of taxation is to
influence the behavior of the public.
Lesson #7: The primary purpose of government bond sales
is to regulate the overnight interest rate.
Lesson #8: Bond sales logically follow from, rather
than precede, government spending....
Functional Finance: Monetary and Fiscal Policy for
Sovereign Currencies
By L. Randall Wray
Today we will lay out Abba Lerner's approach to policy.
In the 1940s he came up with what he called the functional
finance approach to policy.
Lerner's Functional Finance Approach. Lerner posed two
principles:
First Principle: if domestic income is too low,
government needs to spend more. Unemployment is sufficient
evidence of this condition, so if there is unemployment it
means government spending is too low.
Second Principle: if the domestic interest rate is too
high, it means government needs to provide more "money",
mostly in the form of bank reserves.
The idea is pretty simple. A government that issues its
own currency has the fiscal and monetary policy space to
spend enough to get the economy to full employment and to
set its interest rate target where it wants. (We will
address exchange rate regimes later; a fixed exchange rate
system requires a modification to this claim.) For a
sovereign nation, "affordability" is not an issue-it
spends by crediting bank accounts with its own IOUs,
something it can never run out of.If there is unemployed
labor, government can always afford to hire it-and by
definition, unemployed labor is willing to work for money.
Lerner realized that this does not mean government
should spend as if the "sky is the limit"-runaway spending
would be inflationary (and, as discussed many times, it
does not presume that government spending won't affect the
exchange rate). When Lerner first formulated the
functional finance approach (in the early 1940s),
inflation was not a major concern-the US had recently
lived through deflation in the Great Depression. However,
over time, inflation became a serious concern, and Lerner
proposed a form of wage and price controls to constrain
inflation that he believed would result as the economy
nears full employment. Whether or not that would be an
effective and desired way of attenuating inflation
pressures is not our concern here. The point is that
Lerner was only arguing that government should use its
spending power with a view to moving the economy toward
fullemployment-while recognizing that it might have to
adopt measures to fight inflation.
Lerner rejected the notion of "sound finance"-that is
the belief that government ought to run its finances as if
it were like a household or a firm. He could see no reason
for the government to try to balance its budget annually,
over the course of a business cycle, or ever. For Lerner,
"sound" finance (budget balancing) was not "functional"-it
did not help to achieve the public purpose (including, for
example, full employment). If the budget were occasionally
balanced, so be it; but if it never balanced, that would
be fine too. He also rejected any attempt to keep a budget
deficit below any specific ratio to GDP, as well as any
arbitrary debt to GDP ratio. The "correct" deficit would
be the one that achieves full employment.
Similarly the "correct" debt ratio would be the one
consistent with achieving the desired interest rate
target. This follows from his second principle: if
government issues too much debt, it has by the same token
issued too few bank reserves and cash. The solution is for
the treasury and central bank to stop selling bonds,and,
indeed, for the central bank to engage in open market
purchases (buying treasuries by crediting the selling
banks with reserves). That will allow the overnight rate
to fall as banks obtain more reserves and the public gets
more cash.
Essentially, the second principle just says that
government ought to let the banks,households, and firms
achieve the portfolio balance between "money" (reserves
and cash) and bonds desired. It follows that government
bond sales are not really a "borrowing" operation required
to let the government deficit spend. Rather, bond sales
are really part of monetary policy, designed to help the
central bank to hit its interest rate target. All of that
is consistent with the modern money view advanced
previously....
It seems to me this line from Wren-Lewis is the biggie as far
as the Great Recession/Longer Depression is concerned:
"A
recession initiated by a financial crisis is also likely to
see consumers reducing their own borrowing, and so
(erroneous) analogies between governments and households
resonate."
In 2008/9 the public was (rightly) convinced that the
collapse was due to deflation of a financial bubble blown up
by many years of excessive private borrowing and debt-fueled
over-consumption: too much credit card debt; too much
borrowing against (inflated) home values; two much
speculative gambling with, and ponzi profiting from, cutesy
and overvalued financial instruments. That correct,
instinctive evaluation of the situation was backed up by
numbers showing that the total private debt to GDP ratio had
reached a level unseen since 1928, and by the sudden
discovery of the many analyses of many experienced, sober,
but neglected financial observers who had been predicting
some kind of collapse for years.
Since the public was thus primed to believe that, going
forward, the private economy had to reduce its overall debt
load, it was very easy to convince them that governments,
being just another part of the overall economy, had to do the
same thing.
But what Wren-Lewis doesn't seem to mention is that the
public had already been primed by decades of Norquistian,
Petersonian and Rubinite deficit-hectors, debt-despairers and
entitlement-exterminators to believe that our deficits were a
very bad thing, that government was too big, and that we were
headed for a "fiscal train wreck" because of our
undisciplined budgets and government spending. They were thus
easily convinced that the financial crisis also had something
to to with the problems alleged by this bipartisan team of
budget Casandras all finally coming a-cropper.
We had endless cadres of Republican politicians promoting
hysteria over the public debt and also decrying the very size
of government, whether deficit-financed or not.
We had Bill Clinton running around bragging about his
"reinvention" (shrinking) of government and his dot-com
boom-assisted surprise surplus.
We had Joe Biden telling everyone that the financial
collapse was caused by "putting two wars on a credit card".
We had the Concord Coalition and the Peterson Institute
gearing up their zombies for the Fix the Debt onslaught that
eventually saddled us with an economic discourse driven by a
stupid budget-reduction commission in the middle a deep
recession!
Hatred of governments and their spending habits had
already given us years of gradually building stagnation due
to declining public investment and a consequent secular shift
from capital formation to consumption. But the voters saw
only that all of the Serious People in both parties were
strongly in favor of this "disciplined" decimation of
government. So why in the world wouldn't they end up
supporting its continuation?
"... Most workers suffer serious consequences when they mess up on their jobs. Custodians get fired
if the toilet is not clean. Dishwashers lose their job when they break too many dishes, but not all
workers are held accountable for the quality of their work. ..."
"... At the top of the list of people who need not be competent to keep their job are economists.
Unlike workers in most occupations, when large groups of economists mess up they can count on the media
covering up their mistakes and insisting it was just impossible to understand what was going on. ..."
Economists Keep Getting It Wrong Because the Media Coverup Their Mistakes
Most workers suffer serious consequences when they mess up on their jobs. Custodians get
fired if the toilet is not clean. Dishwashers lose their job when they break too many dishes,
but not all workers are held accountable for the quality of their work.
At the top of the list of people who need not be competent to keep their job are economists.
Unlike workers in most occupations, when large groups of economists mess up they can count on
the media covering up their mistakes and insisting it was just impossible to understand what was
going on.
This is first and foremost the story of the housing bubble. While it was easy * to recognize
that the United States and many other countries were seeing massive bubbles that were driving
their economies, which meant that their collapse would lead to major recessions, the vast majority
of economists insisted there was nothing to worry about.
The bubbles did burst, leading to a financial crisis, double-digit unemployment in many countries,
and costing the world tens of trillions of dollars of lost output. The media excused this extraordinary
failure by insisting that no one saw the bubble and that it was impossible to prevent this sort
of economic and human disaster. Almost no economists suffered any consequences to their career
as a result of this failure. The "experts" who determined policy in the years after the crash
were the same people who completely missed seeing the crash coming.
We are now seeing the same story with trade. The New York Times has a major magazine article
** on the impact of trade on the living standards of workers in the United States and other wealthy
countries. The subhead tells readers:
"Trade is under attack in much of the world, because economists failed to anticipate the accompanying
joblessness, and governments failed to help."
Of course many economists did not anticipate the negative impact of trade, but of course many
of us did. The negative impact was entirely predictable and predicted. (Here are a few from Center
for Economic and Policy Research, *** **** ***** there are many more books and papers from my
friends at the Economic Policy Institute.) The argument is straightforward: trade policy has been
designed to put manufacturing workers in direct competition with low paid workers in the developing
world. This costs jobs and puts downward pressure on the wages of these workers. It also puts
downward pressure on the wages of less-educated workers more generally, as displaced manufacturing
workers seek jobs in retail and other sectors. Stagnating wages and increasing inequality are
the predicted result of this pattern of trade, not a surprising outcome.
If economists were like custodians and dishwashers, the failure to recognize this obvious outcome
of trade policy would have put them out on the street. Instead, we get major news outlets like
the New York Times, telling us this is all a remarkable surprise. No one could have seen that
trade would have bad outcomes for large segments of the workforce. Rather than lose their jobs,
economists can still draw comfortable six figure salaries as they tell reporters how it was impossible
for them to understand the economy.
Economic theory tells us that if economists don't face consequences for completely messing
up on the job then they have no incentive to get things right. If the custodian never pays any
price for not cleaning the toilet, then they won't clean the toilet. In the same way, if the media
and the country always grant a "who could have known" amnesty to large chunks of the economics
profession when it gets things completely wrong, then there is no reason to expect that economists
will ever get things right. All they have to do is say the same things as other elite economists
say, and if it turns out to be wrong, the NYT will just run major news articles explaining that
no one could have known better.
There is one other important point that needs emphasis here. There was nothing inherent to
trade that required growing inequality, it was the structure of trade policy that gave us this
result. There are millions of very bright ambitious people in the developing world who would be
very happy to study to meet U.S. standards and work as doctors, dentists, lawyers and other professionals
in the United States. We could have designed trade agreements to facilitate this process.
The result would be massive economic gains in the form of lower cost health care, dental care,
legal services and other professionals services. In the case of physicians alone, if the increased
supply brought the pay of our doctors down to the levels of Western Europe and Canada, we would
save close to $100 billion a year. This comes to roughly $700 a year in savings for every family
in the United States. And, this would lead to a reduction in inequality.
Our elite economists have chosen not to discuss this sort of trade opening. (They also rarely
discuss reducing rather than increasing protectionist barriers like patents and copyrights.) These
issues are discussed in more depth in my forthcoming book, "Rigged: How Globalization and the
Rules of the Modern Economy Were Structured to Make the Rich Richer" (coming to a website near
year in October). But the key point here is that economists should know better, and if they were
doing their job, they did.
"The argument is straightforward: trade policy has been designed to put manufacturing workers
in direct competition with low paid workers in the developing world. This costs jobs and puts
downward pressure on the wages of these workers. It also puts downward pressure on the wages of
less-educated workers more generally, as displaced manufacturing workers seek jobs in retail and
other sectors. Stagnating wages and increasing inequality are the predicted result of this pattern
of trade, not a surprising outcome."
This is surprising to PGL and Krugman who argue the Fed will just adjust to keep full employment
or at least that's what the models tell them.
Dean is talking about protectionism for drug companies, doctors etc. and free trade for the rest
of us. On this score he is exactly right and I have said so many times. This is a very different
issue from the macroeconomic ones. I would accuse you of once again misrepresenting what I have
said. But to be fair - you are too stupid to get these distinctions so maybe you are not lying.
I do wish I had a smarter internet stalker.
Tom aka Rusty -> anne... , -1
Baker get the diagnosis correct.
Baker's standard solutions do very little for blue collar workers. Having a cheaper doctor
and lawyer don't help much for the unemployed and underemployed.
Simon Wren-Lewis has an excellent new paper * trying to
explain the widespread resort to austerity in the face of a
liquidity trap, which is exactly the moment when such
policies do the most harm. His bottom line is that
"austerity was the result of right-wing opportunism,
exploiting instinctive popular concern about rising
government debt in order to reduce the size of the state."
I think this is right; but I would emphasize more than he
does the extent to which both the general public and Very
Serious People always assume that reducing deficits is the
responsible thing to do. We have some polling from the 1930s,
showing a strong balanced-budget bias even then:
[Chart]
I think Simon would say that this is consistent with his
view that large deficits grease the rails for deficit phobia,
since Franklin Roosevelt's administration did run up deficits
and debt that were unprecedented for peacetime. But has there
ever been a time when the public favored bigger deficits?
Meanwhile, as someone who was in the trenches during the
US austerity fights, I was struck by how readily mainstream
figures who weren't especially right-wing in general got
sucked into the notion that debt reduction was THE central
issue. Ezra Klein documented this phenomenon ** with respect
to Bowles-Simpson: ***
"For reasons I've never quite understood, the rules of
reportorial neutrality don't apply when it comes to the
deficit. On this one issue, reporters are permitted to openly
cheer a particular set of highly controversial policy
solutions. At Tuesday's Playbook breakfast, for instance,
Mike Allen, as a straightforward and fair a reporter as
you'll find, asked Simpson and Bowles whether they believed
Obama would do 'the right thing' on entitlements - with 'the
right thing' clearly meaning 'cut entitlements.' "
Meanwhile, as Brad Setser points out, the International
Monetary Fund - whose research department has done heroic
work puncturing austerity theories and supporting a broadly
Keynesian view of macroeconomics - is, in practice, pushing
for fiscal contraction **** almost everywhere.
Again, this doesn't exactly contradict Simon's argument,
but maybe suggests that there is a bit more to it.
Austerity is defined as a fiscal contraction that causes a
significant increase in aggregate unemployment. For the
global economy, or an economy with a flexible exchange rate,
or a monetary union as a whole, an increase in unemployment
following a fiscal consolidation can and should be avoided
because monetary policy can normally offset the demand impact
of the consolidation. The tragedy of global austerity after
2010 was that fiscal consolidation was not delayed until
monetary policy was able to do this.
An individual member of a currency union that requires a
greater fiscal contraction than the union as a whole cannot
use its own monetary policy to offset the impact of fiscal
consolidation. Even in this case, however, a sharp and deep
fiscal contraction is unlikely to be optimal. Providing this
economy is in a union where the central bank acts as a
sovereign lender of last resort, a more gradual fiscal
adjustment is likely to minimise the unemployment cost.
As the theory behind these propositions is simple and
widely accepted, the interesting question is why global
austerity happened. Was austerity an unfortunate accident, or
is there a more general political economy explanation for why
it occurred? Answering this question is vital to avoid the
next global recession being followed by yet more austerity.
The answer is that politicians and pundits have a flawed
understanding of inflation and its relationship to
hyperinflation.
Some economists promoted a seriously flawed interpretation of
the 1970s stagflation that solidified myths about inflation.
As Max Planck said, "Science advances one funeral at a time."
We need the current generation of economists and their failed
models to be replaced by a new generation that does not
suffer from the same mythology.
Peter K. -> anne...
, -1
If one just read Krugman or Kevin Drum you wouldn't
understand how Bill Clinton declared "the era of Big
Government is over" or how after he was first elected he
listened to his top two economic advisers Robert Rubin and
Alan Greenspan and dropped his middle class spending campaign
promise in favor of deficit reduction.
Greenspan promised Clinton lower rates in exchange for
reducing government. Clinton ended "welfare as we knew it."
But Greenspan didn't regulate this increase in private
investment. It led to the tech-stock bubble and a shadow
banking system which was susceptible to a banking panic.
According to Hillary, Bush's tax cuts caused the housing
bubble and Great Recession. It's a little more complicated.
But this cuts against Krugman and Drum's narrative that the
Clinton years were nothing but awesome.
Summers told Brooksley Born that derivatives shouldn't be
regulated b/c the market is magic.
Obama reinforced the narrative that government should
tighten its belt during hard times like households do. This
is exactly wrong.
Maybe it's understandable for politicians to pander for
short-term political expediency but it's hurts the long-term
ideological conflict.
There's the right and there's the left and Obama and
Clinton tried to straddle the two ideologies which just
waters down the left's appeal and pull.
That's why the millennials and more progressive workers
aren't as excited for Hillary's candidacy. That's why Sanders
energized them.
Now I agree with Sanders that a Trump Presidency would be
a disaster, but this doesn't preclude me from correcting
Krugman's outlook as some center-leftists would insist in
their binary thinking.
It seems to me this line from Wren-Lewis is the biggie as far
as the Great Recession/Longer Depression is concerned:
"A
recession initiated by a financial crisis is also likely to
see consumers reducing their own borrowing, and so
(erroneous) analogies between governments and households
resonate."
In 2008/9 the public was (rightly) convinced that the
collapse was due to deflation of a financial bubble blown up
by many years of excessive private borrowing and debt-fueled
over-consumption: too much credit card debt; too much
borrowing against (inflated) home values; two much
speculative gambling with, and ponzi profiting from, cutesy
and overvalued financial instruments. That correct,
instinctive evaluation of the situation was backed up by
numbers showing that the total private debt to GDP ratio had
reached a level unseen since 1928, and by the sudden
discovery of the many analyses of many experienced, sober,
but neglected financial observers who had been predicting
some kind of collapse for years.
Since the public was thus primed to believe that, going
forward, the private economy had to reduce its overall debt
load, it was very easy to convince them that governments,
being just another part of the overall economy, had to do the
same thing.
But what Wren-Lewis doesn't seem to mention is that the
public had already been primed by decades of Norquistian,
Petersonian and Rubinite deficit-hectors, debt-despairers and
entitlement-exterminators to believe that our deficits were a
very bad thing, that government was too big, and that we were
headed for a "fiscal train wreck" because of our
undisciplined budgets and government spending. They were thus
easily convinced that the financial crisis also had something
to to with the problems alleged by this bipartisan team of
budget Casandras all finally coming a-cropper.
We had endless cadres of Republican politicians promoting
hysteria over the public debt and also decrying the very size
of government, whether deficit-financed or not.
We had Bill Clinton running around bragging about his
"reinvention" (shrinking) of government and his dot-com
boom-assisted surprise surplus.
We had Joe Biden telling everyone that the financial
collapse was caused by "putting two wars on a credit card".
We had the Concord Coalition and the Peterson Institute
gearing up their zombies for the Fix the Debt onslaught that
eventually saddled us with an economic discourse driven by a
stupid budget-reduction commission in the middle a deep
recession!
Hatred of governments and their spending habits had
already given us years of gradually building stagnation due
to declining public investment and a consequent secular shift
from capital formation to consumption. But the voters saw
only that all of the Serious People in both parties were
strongly in favor of this "disciplined" decimation of
government. So why in the world wouldn't they end up
supporting its continuation?
Exactly. This all having started with the 70s arrival of
monetarism, essentially a gold standard with no gold. While
no one really paid attention to gold standard (depressionary)
budgeting until Clinton I, the rhetoric was being put into
place such that, even today, the Democrats still hail
Clinton's "balanced budget" disaster as if it were God's
gift, when in reality it was the kickoff to consumers
cannibalizing the home equity just to keep pace, and the
ultimate reason the 2008 crash was so severe on household
spending. Hillary Clinton; be forewarned.
If governmental fat cats and billionaire lobbyists would
spend more time at fixing the obvious, they would have less
time for looting the public treasure. Do you see how they
could have prevented the HD, Hoboken disaster?
They could have removed the overpowered transformers that
oversupplied coulombs to the Catenary wire that supplied
current to the Pantograph of the Hoboken train that just now
crashed into the station full of passengers. All the
transformers at the end of the line should be scaled down to
prevent this sort of disaster, plus all the transformers near
a curves in the roadbed should be scaled back to prevent
excess power from speeding train up enough to jump the track.
No!
You can't always depend on the engineer's judgment to
prevent these disasters. Can't always depend on
high-tech-safety devices to prevent! Hell! High-tech can be
hacked by the North Koreans. You need to change the deep
infrastructure of power available.
Most people have a flawed understanding of inflation.
Sustainable inflation means BOTH wages and prices go up.
Most people think of inflation only in terms of price
increases so we get: Prices go up, wages stay the same: BAD.
A minimum level of inflation is necessary to allow relative
prices and wages to reset smoothly.
Prices and wages are sticky downward.
It is unsustainable for a business to deflate prices below
fixed costs.
A price can be reset downward by inflation (if inflation is
high enough) erosion and thus is less likely to be below
fixed costs.
Businesses don't cut wages of employees, they layoff
employees.
Businesses don't only cut prices, they cut production.
Workers with leverage and fixed payments cannot afford to
work for less.
Inflation allows relative wages to deflate without causing
issues with fixed payments.
Everyone agrees that deflation is bad because it is
associated with lower output and higher unemployment.
Inflation and deflation are a continuum. Inflation that is
too low is only marginally better than deflation.
Inflation must be high enough to absorb relative price resets
demanded by the majority of economic shocks or the process of
resetting wages and prices will be extended and be a
continued drag on an economy.
The evidence clearly suggests that US inflation in the 21st
Century has been much too low. A higher inflation target is
clearly necessary.
People misunderstand hyperinflation.
Hyperinflation is associated with an increased money supply.
The increased money supply is an effect of hyperinflation not
its cause.
Under hyperinflation, an economy needs increasingly larger
amounts of currency for transactions, so governments print
more money to meet demand.
Hyperinflation is caused by loss of confidence in a
currency.
Under hyperinflation, the risk of complete loss of buying
power of a currency factors into the price that vendors are
willing to accept for goods and services.
Example: In the 1865 US, Confederate currency hyper inflated,
not because too much was printed, but because the Confederate
government was facing elimination and the currency no longer
being honored. 90 percent of the currency could have been
eliminated and prices still would have hyperinflated.
Major Myths:
Printing money does not cause hyperinflation, loss of
confidence does.
A higher rate of inflation does not make hyperinflation more
likely.
A lower rate of inflation is NOT always better for an economy
than a higher rate.
Politicians and pundits need to unlearn these inflation
myths.
DrDick -> pgl...
, -1
Krugman makes some good points, adding to Wren Lewis's
excellent observations. I would point out, however, that
neither of them acknowledges that most of our media are
economic and policy illiterates and incapable of
understanding the issues, while the general public has been
sold on the idiocy that national budgets are just like
household budgets (mostly by that same illiterate media).
Perusing
Palgrave's Dictionary of Political Economy from 1894 alerted me to the odd interaction
of a pair of distinctions. The first distinction was between the study of "what is" and "what ought
to be." The second distinction was between "economic science" (or "economics") and "political economy."
Economic science presumably distinguished itself from political economy by its strict focus on describing
"what is" rather than on prescribing "what ought to be."
Palgrave's explains the latter distinction to have been at least partly motivated by the confusion
that arose over just what kind of laws -- legal or natural -- so-called "laws of political economy"
were. Even after the attempt at rebranding, however:
"...even well-educated persons still occasionally speak of "laws of political economy" as being
"violated" by the practice of statesmen, trades-unions and other individuals and bodies.
You can't "break" scientific laws. They are simply generalized descriptions of fact. A flying airplane
doesn't break the law of gravity. It conforms to a more comprehensive complex of physical laws. The
law of gravity isn't the only law.
Palgrave's Dictionary further noted that the "great complexity and variety of circumstance
which surround every economic problem are such as to render the enunciation of general laws, on a
large scale, barely possible and if possible barely useful."
So the whole "positive" economics rigamarole wasn't just about methodological rigor. It was a
purification ritual to rid the political economist of the stigma of dogma. Economists
who invoke the violation of so-called laws aren't only forfeiting any legitimate claim to
economic science. They are contaminating their profession with atavistic hokum.
Speaking of atavistic hokum, I have been trying to track down ANY accessible published
record of a trade unionist or advocate of the reduction of the hours of labor EVER overtly
expressing the belief that there is a fixed amount of work to be done or a certain quantity of labor
to be performed or whatever synonymous equivalent. There is none.
There is a reasonable explanation for this absence of evidence. The alleged false belief is expressed
in abstract language that was not vernacular to the people accused of harbouring it. It's the wrong
answer to a question workers never asked themselves.
False belief requires two conditions to be fulfilled: 1. the idea is false and 2. it is believed
by someone to be true. The matrix below shows the possible states of belief and falsehood. An idea
does not have to be true to be "not false" and it doesn't have to be believed to be false to be "not
believed to be true." The fallacy claim asserts a simplistic (and false!) polarization in which the
beliefs of the "unenlightened" are "the opposite" of economic orthodoxy.
In an 1861 letter to the Times of London "A Master Builder" alleged that George Potter,
secretary of the carpenters' union, and his associates had "absurdly argued that there was only a
certain amount of work to be done" during a 1859 strike and lock-out of the London building trades.
There is a detailed report on the 1859 strike in an 1860 report on
Trades' Societies and Strikes published by the National Association for the Promotion of
Social Science. The 23-page account presents several items of correspondence from Potter outlining
the union's position with not a hint of a lump in the load. The "certain amount of work to be done"
was what Mr. Master Builder thought he heard when he mentally translated Potter's argument
into his own capitalistic patois .
There was something else interesting in the 685-page document -- an overarching controversy about
whether or not labor was a commodity just like any other and therefore whether or not unions violated the laws of political economy by trying to regulate wages and hours
of work. The employers who maintained this were pretty dogmatic about it. "Rates of wages cannot
be settled by mediation, but must be left to the free operation of supply and demand." It's the law!
This was not simply political economy It was vulgar political economy of the most self-serving
and disingenuous kind. One has no difficulty whatsoever finding multiple evocations by employers
of the so-called laws of political economy but the elusive lump remains "one of the most tenaciously
held and generally least articulated of trade union beliefs."
Least articulated? Least articulated is an understatement. Try NEVER articulated. There
is no there there. The alleged false belief is a pure projection by the laws-of-political-economy
crowd onto the unbeliever. The
eighth annual report of the New York Bureau of Labor Statistics for the year 1890 contains the
responses of over 600 labor union locals to the question of whether and why they support an eight-hour
day. Not one claims there is only a certain quantity of work to be done.
Below is an example of what an overt statement of the theory of the lump of labor looks like.
It is not from a trade union manifesto or a pamphlet of the eight-hour day movement. It is from a
propaganda tract put out by Nassau Senior's crew of Whig-Benthamites in defense of their New Poor
Laws, which abolished outdoor relief and established the workhouse test:
The fact is, there is a certain quantity of work to be done, and the question is who ought to
do it -- those who live by their labour, and their labour only, or those who have thrown themselves
on public charity.
Can anyone find such an unequivocal articulation of the false belief by a trade unionist? Of course
not. It's not the way that workers talk about their work. Work is not an abstract, disembodied
quantity to those who do it. It is part of a lived experience. "A certain quantity of work to
be done" is political economy speak, plain and simple. It's ceteris paribus and "all else
being equal."
Paradoxically, for old school vulgarians there both is and is not a certain quantity
of work to be done. There is a certain quantity of work to be done when it comes to disparaging
the idea that workers might increase wages their through collective action:
There is a certain quantity of work to be done, and a certain number of hands to do it; if there
be much work and comparatively few hands, wages will rise; if little work and an excess of hands,
wages will fall. It is self-evident that combinations and strikes cannot alter this law. They
can neither increase capital, nor diminish population; and, therefore, it is utterly impossible,
in the very nature of things, that they ever can procure a permanent rise of wages.
But there isn't a certain amount of work when it comes to explaining why such foolish action
isn't even necessary:
There is, say they, a certain quantity of labour to be performed. This used to be performed by
hands, without machines, or with very little help from them... The principle itself is false.
There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not
hemmed in by great walls, beyond which it cannot go. By bringing our goods cheaper and better
to market, we open new markets, we get new customers, we encrease the quantity of labour necessary
to supply these, and thus we are encouraged to push on, in hope of still new advantages. A cheap
market will always be full of customers.
Five years ago I compiled a database of over 500 instances of the claim in books and journal articles
between 1890 and 2010 (
Excel file ). That's 500 claims without a single overt statement of the false belief from an
alleged believer. Six claimants (about one percent) named culprits whose argument "arguably depends
upon..." "makes an error equivalent to..." "indicates a belief..." "seems hopelessly involved in..."
"is an example of the strange conclusions to which one may be carried by clinging clinging firmly
to..." and "are driven by implicit assumptions." Each of those turns out to be a false alarm -- an
uncharitable, speculative inference. Five hundred boys crying "wolf" and not a single wolf to be
seen?
This is an astonishing performance. This compulsion to repeat is not "careless" or "dogmatic."
It's neurotic.
The patient cannot remember the whole of what is repressed in him, and what he cannot remember
may be precisely the essential part of it.. He is obliged to repeat the repressed material as
a contemporary experience instead of remembering it as something in the past.
The atavistic return of the repressed "laws of political economy" conforms faithfully to a description
toward the end of chapter 3 of Beyond the Pleasure Principle where Freud talks about the experiences
of "people with whom every human relationship ends in the same way" and gives as a "singularly affecting"
final example the events in a romantic epic, in which the hero, Tancred, repeatedly slays his beloved,
Clorinda, each time she reappears in a different guise. In this example, as Gavriel Reisner notes,
Freud reverses the compulsion to repeat, showing how we will sometimes injure others in order
to avoid injuring ourselves. Freud concludes that we often project the internal, masochistic drive
as the external, sadistic drive, victimizing others to redirect an intent toward self-victimization.
The utilitarian political economists styled themselves advocates for "the greatest good for the greatest
number" and viewed opponents as apologists for narrow special interests. The supposed laws they discovered,
which operated through isolated exchanges between individuals in the market, vindicated a system
of natural liberty and consequently freedom entailed obedience to those laws. Collective action and
collective bargaining violated the laws of individual exchange, resulting in sub-optimal outcomes.
Such perversity could only be motivated by false beliefs. The false beliefs of the adversary were
presumably the opposite of the true beliefs of the faithful: trade unions operated through tyranny
and their bizzaro-world political economy assumed that less output meant more income.
Reality discredited that polemic of political economy and calmer heads sought to rebrand the enterprise
as economics. The ersatz laws were scaled back to tendencies, which operated within the admittedly
abstract ceteris paribus pound of the economist's static model. Real life and the evolution
of economic relations operated outside the ceteris paribus pound but maybe the static model
could shed light on dynamic economic activity.
It was no longer fashionable to denounce "The Evils of Collective Bargaining in Trades' Unions"
(Thomas Cree, 1898) because it was increasingly understood that the so-called laws of supply and
demand operated quite differently with regard to the peculiar commodity of labor power (Richard Ely,
1886):
While those who sell other commodities are able to influence the price by a suitable regulation
of production, so as to bring about a satisfactory relation between supply and demand, the purchaser
of labor has it in his own power to determine the price of this commodity and the other conditions
of sale.
But even as old-guard political economy was being gradually displaced by rebranded economics in the
universities, employers' associations and business journalism emerged to propound and propagate the
old-time religion. The break with quasi-scientific, quasi-legalistic, quasi-religious pseudo-laws
was ambivalent, the reconciliation surreptitious. Employers' associations told the college teachers
what to teach. Textbooks served up a smorgasbord of the obsolescent and the innovative.
In this twilight of science and superstition, the fallacy claim offered uncertain economists a
distinctive advantage. It enabled them to continue to denounce violations of the laws of political
economy without actually having to specify which laws were being violated. That left them
exempt from any obligation to justify the validity of defunct laws. The burden of proof deftly shifted
and the providence of economic science affirmed, albeit by default.
Economic science thus gets to have its "what is" humility... and eat its "what ought to be" hubris
too! Evidence be damned.
That there was one particular offense singled out for condemnation by the self-appointed economic
police is suggested by the example given in Palgrave's Dictionary for the common confusion
between the legislative and scientific senses of law: "Thus it is often said that to regulate the
hours of labour, or to introduce differential import duties, is to break economic law." The anachronism
of such a view should require no explanation. The hours of labor are regulated.
Any proposal to repeal the Fair Labor Standards Act of 1938 on the grounds that it "breaks economic
law" would no doubt be laughed at by Paul Krugman, David Autor, Jonathan Portes or Alan Manning.
But, inadvertently, that is precisely the historical grammar of their lump-of-labor fallacy taunt.
Although there is no logical imperative that links the law-breaking claim to the fallacy claim, they
have been inseparably paired in usage from their inception. To invoke the latter is either to imply
the former or it is a non sequitur.
At long last, economists, have you no scientific self-respect ? On this labor day, 2016,
would you still insist that regulating of the hours of work breaks the laws of economics? Posted
by
Sandwichman at
12:00 AM
"Everybody except Joan Robinson agrees about capital theory." -- Robert Solow (as paraphrased
by Robinson)
An essential text in my researches on mercantilism, usury and bills of exchange is Raymond de Roover's
Gresham on Foreign Exchange, which just happens to be stored in part of SFU's library that
is under construction and thus inaccessible. The immediate unavailability of that book, however,
led to a fortuitous discovery.
I browsed in the call number section of the library's general collection where de Roover's book
would have been and Robert Leeson's Ideology and the International Economy caught my eye.
I flipped through the book and noticed on page 19 the delicious quote from Joan Robinson that, "the
free-trade doctrine is just a more subtle form of mercantilism."
The quote is from a 1966 lecture, "The New Mercantilism" that is included in a collection of essays,
Contributions to Modern Economics, which also contains "Capital Theory Up-to-Date," a 1970
review of C. E. Ferguson's The Neoclassical Theory of Production and Distribution, in which
Robinson reprises her parody of neo-Walrasian, neo-neoclassical capital "
leets. " Leets is steel spelled backward and
makes its debut in "Equilibrium Growth Models," Robinson's 1961 review of James Meade's Neo-Classical
Theory of Economic Growth. This allegedly ectoplasmic representation of capital is, in a nutshell, the crux of the "Cambridge
capital controversy," which Robinson launched with her 1952 challenge, "I leave it to those who draw
production functions to say what marginal productivity and the elasticity of substitution mean when
labour and capital are the factors of production." Looking back, in 1978, on her 1952 essays and
the "long struggle to escape... habitual modes of thought and expression," Robinson stressed that
"it was precisely from the concept of equilibrium that Keynes was struggling to escape..." Contrarily,
though:
"...textbook teaching in the department of so-called macro theory was an attempt to push Keynes
into short-term equilibrium. ... The grand neoclassical synthesis (now known as bastard Keynesianism)
was a more ambitious attempt to reduce the General Theory to a system of equilibrium."
In responding to Robinson's leets critique, Robert Solow began by acknowledging "much truth" to the
objection that "the usual production functions, allowing for more or less substitutability between
capital and labor, attribute to 'capital' a degree of malleability which contradicts common observation."
He then distinguished between the "econometrically-minded person" who would view the overly malleable
capital as a "specification error" and others -- presumably including Robinson -- who judge it to
be "a doctrinal error; and its consequence is a kind of Fall from Grace." Seven years later, Robinson
had this to say about "doctrinal disputes":
Many economists, nowadays, who are interested in practical questions are impatient of doctrinal
disputes. What does it matter, they are inclined to say, let him have his leets, what harm does
it do? But the harm that the neo-neoclassicals have done is, precisely, to block off economic
theory from any discussion of practical questions.
If one is concerned about actual unemployment in an actual economy, Robinson later
explained, one "has to discuss it in terms of processes taking place in actual history. The concept
of equilibrium is incompatible with history. It is a metaphor based on movements in space applied
to processes taking place in time." In other words, it is not just some kind of ethereal affectation
to object to the concept of equilibrium -- it is an argument with irrevocable real-world consequences.
The failure of what Robinson dismissed as "bastard Keynesianism" also had real-world doctrinal
consequences. "In the era of stagflation, this notion [that equilibrium growth can be achieved through
fiscal and monetary 'fine tuning'] has been discredited and the quantity theory of money is blossoming
afresh amongst its ruins." This 'blossoming,' incidentally, was not something Robinson welcomed.
Well, my interlibrary loan of de Roover's Gresham on Foreign Exchange has arrived, so I'm
off up the hill to pick it up.
To be continued...
"... [Dave Elder-Vass accepted my invitation to write a response to my discussion of his recent
book, ..."
"... Profit and Gift in the Digital Economy ..."
"... ). Elder-Vass is Reader in sociology at Loughborough University and author as well of ..."
"... The Causal Power of Social Structures: Emergence, Structure and Agency ..."
"... The Reality of Social Construction ..."
"... , discussed ..."
"... . Dave has emerged as a leading voice in the philosophy of social science, especially in the
context of continuing developments in the theory of critical realism. Thanks, Dave!] ..."
"... Profit and Gift in the Digital Economy ..."
"... Financial Times ..."
"... the argument for Pareto optimality of real market systems is patently false, but it continues
to be trotted out constantly. ..."
We need to move on from existing theories of the economy
Let me begin by thanking Dan Little for his very perceptive review of my book
Profit and Gift in the Digital Economy . As he rightly says, it's more ambitious than
the title might suggest, proposing that we should see our economy not simply as a capitalist market
system but as a collection of "many distinct but interconnected practices". Neither the traditional
economist's focus on firms in markets nor the Marxist political economist's focus on exploitation
of wage labour by capital is a viable way of understanding the real economy, and the book takes
some steps towards an alternative view.
Both of those perspectives have come to narrow our view of the economy in multiple dimensions.
Our very concept of the economy has been derived from the tradition that began as political economy
with Ricardo and Smith then divided into the Marxist and neoclassical traditions (of course there
are also others, but they are less influential). Although these conflict radically in some respects
they also share some problematic assumptions, and in particular the assumption that the contemporary
economy is essentially a capitalist market economy, characterised by the production of commodities
for sale by businesses employing labour and capital. As Gibson-Graham argued brilliantly in their
book
The End Of Capitalism (As We Knew It): A Feminist Critique of Political Economy , ideas seep
into the ways in which we frame the world, and when the dominant ideas and the main challengers
agree on a particular framing of the world it is particularly difficult for us to think outside
of the resulting box. In this case, the consequence is that even critics find it difficult to
avoid thinking of the economy in market-saturated terms.
The most striking problem that results from this (and one that Gibson-Graham also identified)
is that we come to think that only this form of economy is really viable in our present circumstances.
Alternatives are pie in the sky, utopian fantasies, which could never work, and so we must be
content with some version of capitalism – until we become so disillusioned that we call for its
complete overthrow, and assume that some vague label for a better system can be made real and
worthwhile by whoever leads the charge on the Bastille. But we need not go down either of these
paths once we recognise that the dominant discourses are wrong about the economy we already have.
To see that, we need to start defining the economy in functional terms: economic practices
are those that produce and transfer things that people need, whether or not they are bought and
sold. As soon as we do that, it becomes apparent that we are surrounded by non-market economic
practices already. The book highlights digital gifts – all those web pages that we load without
payment, Wikipedia's free encyclopaedia pages, and open source software, for example. But in some
respects these pale into insignificance next to the household and family economy, in which we
constantly produce things for each other and transfer them without payment. Charities, volunteering
and in many jurisdictions the donation of blood and organs are other examples.
If we are already surrounded by such practices, and if they are proliferating in the most dynamic
new areas of our economy, the idea that they are unworkably utopian becomes rather ridiculous.
We can then start to ask questions about what forms of organising are more desirable ethically.
Here the dominant traditions are equally warped. Each has a standard argument that is trotted
out at every opportunity to answer ethical questions, but in reality both standard arguments operate
as means of suppressing ethical discussions about economic questions. And both are derived from
an extraordinarily narrow theory of how the economy works.
For the mainstream tradition, there is one central mechanism in the economy: price equilibration
in the markets, a process in which prices rise and fall to bring demand and supply into balance.
If we add on an enormous list of tenuous assumptions (which economists generally admit are unjustified,
and then continue to use anyway), this leads to the theory of Pareto optimality of market outcomes:
the argument that if we used some other system for allocating economic benefits some people would
necessarily be worse off. This in turn becomes the central justification for leaving allocation
to the market (and eliminating 'interference' with the market).
There are many reasons why this argument is flawed. Let me mention just one. If even one market
is not perfectly competitive, but instead is dominated by a monopolist or partial monopolist,
then even by the standards of economists a market system does not deliver Pareto optimality, and
an alternative system might be more efficient. And in practice capitalists constantly strive to
create monopolies, and frequently succeed! Even the Financial Times recognises this:
in today's issue (Sep 15 2016) Philip Stevens argues, "Once in a while capitalism has to be rescued
from the depredations of, well, capitalists. Unconstrained, enterprise curdles into monopoly,
innovation into rent-seeking. Today's swashbuckling "disrupters" set up tomorrow's cosy cartels.
Capitalism works when someone enforces competition; and successful capitalists do not much like
competition".
So the argument for Pareto optimality of real market systems is patently false, but it
continues to be trotted out constantly. It is presented as if it provides an ethical justification
for the market economy, but its real function is to suppress discussion of economic ethics: if
the market is inherently good for everyone then, it seems, we don't need to worry about the ethics
of who gets what any more.
The Marxist tradition likewise sees one central mechanism in the economy: the extraction of
surplus from wage labour by capitalists. Their analysis of this mechanism depends on the labour
theory of value, which is no more tenable that mainstream theories of Pareto optimality (for reasons
I discuss in the book). Marxists consistently argue as if any such extraction is ethically reprehensible.
Marx himself never provides an ethical justification for such a view. On the contrary, he claims
that this is a scientific argument and disowns any ethical intent. Yet it functions in just the
same way as the argument for Pareto optimality: instead of encouraging ethical debate about who
should get what in the economy, Marxists reduce economic ethics to the single question of the
need to prevent exploitation (narrowly conceived) of productive workers.
We need to sweep away both of these apologetics, and recognise that questions of who gets what
are ethical issues that are fundamental to justice, legitimacy, and political progress in contemporary
societies. And that they are questions that don't have easy 'one argument fits all' answers. To
make progress on them we will have to make arguments about what people need and deserve that recognise
the complexity of their social situations. But it doesn't take a great deal of ethical sophistication
to recognise that the 1% have too much when many in the lower deciles are seriously impoverished,
and that the forms of impoverishment extend well beyond underpaying for productive labour.
I'm afraid that I have written much more than I intended to, and still said very little about
the steps I've taken in the book towards a more open and plausible way of theorising how the economy
works. I hope that I've at least added some more depth to the reasons Dan picked out for attempting
that task.
"This in turn becomes the central justification for leaving allocation to the market (and eliminating
'interference' with the market)."
Krugman is a neoliberal, although a softer, kinder neoliberal much better than Mankiw, Cowen
or the Republicans.
"pgl -> Peter K....
Please find me a Krugman discussion where he says nothing can be done about income inequality.
This is so straw man that the winds have blown this stupid lie away.
Wisdom, Courage and the Economy
by Paul Krugman
AUG. 15, 2016
It's fantasy football time in political punditry, as commentators try to dismiss Hillary Clinton's
dominance in the polls - yes, Clinton Derangement Syndrome is alive and well - by insisting that
she would be losing badly if only the G.O.P. had nominated someone else. We will, of course, never
know. But one thing we do know is that none of Donald Trump's actual rivals for the nomination
bore any resemblance to their imaginary candidate, a sensible, moderate conservative with good
ideas.
Let's not forget, for example, what Marco Rubio was doing in the memorized sentence he famously
couldn't stop repeating: namely, insinuating that President Obama is deliberately undermining
America. It wasn't all that different from Donald Trump's claim that Mr. Obama founded ISIS. And
let's also not forget that Jeb Bush, the ultimate establishment candidate, began his campaign
with the ludicrous assertion that his policies would double the American economy's growth rate.
Which brings me to my main subject: Mrs. Clinton's economic vision, which she summarized last
week. It's very much a center-left vision: incremental but fairly large increases in high-income
tax rates, further tightening of financial regulation, further strengthening of the social safety
net.
It's also a vision notable for its lack of outlandish assumptions. Unlike just about everyone
on the Republican side, she isn't justifying her proposals with claims that they would cause a
radical quickening of the U.S. economy. As the nonpartisan Tax Policy Center put it, she's "a
politician who would pay for what she promises."
So here's my question: Is the modesty of the Clinton economic agenda too much of a good thing?
Should accelerating U.S. economic growth be a bigger priority?
For while the U.S. has done reasonably well at recovering from the 2007-2009 financial crisis,
longer-term economic growth is looking very disappointing. Some of this is just demography, as
baby boomers retire and growth in the working-age population slows down. But there has also been
a somewhat mysterious decline in labor force participation among prime-age adults and a sharp
drop in productivity growth.
The result, according to the Congressional Budget Office, is that the growth rate of potential
G.D.P. - what the economy could produce at full employment - has declined from around 3.5 percent
per year in the late 1990s to around 1.5 percent now. And some people I respect believe that trying
to get that rate back up should be a big goal of policy.
But as I was trying to think this through, I realized that I had Reinhold Niebuhr's famous
Serenity Prayer running through my head: "Grant me the serenity to accept the things I cannot
change, courage to change the things I can, and wisdom to know the difference." I know, it's somewhat
sacrilegious applied to economic policy, but still.
After all, what do we actually know how to do when it comes to economic policy? We do, in fact,
know how to provide essential health care to everyone; most advanced countries do it. We know
how to provide basic security in retirement. We know quite a lot about how to raise the incomes
of low-paid workers.
I'd also argue that we know how to fight financial crises and recessions, although political
gridlock and deficit obsession has gotten in the way of using that knowledge.
On the other hand, what do we know about accelerating long-run growth? According to the budget
office, potential growth was pretty stable from 1970 to 2000, with nothing either Ronald Reagan
or Bill Clinton did making much obvious difference. The subsequent slide began under George W.
Bush and continued under Mr. Obama. This history suggests no easy way to change the trend.
Now, I'm not saying that we shouldn't try. I'd argue, in particular, for substantially more
infrastructure spending than Mrs. Clinton is currently proposing, and more borrowing to pay for
it. This might significantly boost growth. But it would be unwise to count on it.
Meanwhile, I don't think enough people appreciate the courage involved in focusing on things
we actually know how to do, as opposed to happy talk about wondrous growth.
When conservatives promise fantastic growth if we give them another chance at Bushonomics,
one main reason is that they don't want to admit how much they would have to cut popular programs
to pay for their tax cuts. When centrists urge us to look away from questions of distribution
and fairness and focus on growth instead, all too often they're basically running away from the
real issues that divide us politically.
So it's actually quite brave to say: "Here are the things I want to do, and here is how I'll
pay for them. Sorry, some of you will have to pay higher taxes." Wouldn't it be great if that
kind of policy honesty became the norm?
"For while the U.S. has done reasonably well at recovering from the 2007-2009 financial crisis,"
Reasonably well?
"Now, I'm not saying that we shouldn't try. I'd argue, in particular, for substantially more
infrastructure spending than Mrs. Clinton is currently proposing, and more borrowing to pay for
it. "
Then why was he for Hillary over Bernie Sanders who did campaign on substantially more infrastructure
spending?
Instead Krugman argues that we need to lower our hopes and expectations.
"According to the budget office, potential growth was pretty stable from 1970 to 2000, with
nothing either Ronald Reagan or Bill Clinton did making much obvious difference. "
So the market price mechanism rules and we government can't do much?
"So here's my question: Is the modesty of the Clinton economic agenda too much of a good thing?
Should accelerating U.S. economic growth be a bigger priority?"
Her agenda is unambitious. It is "center-left" as Krugman puts it which is partly why her poll
numbers are in the dumps.
" It's very much a center-left vision: incremental but fairly large increases in high-income
tax rates, further tightening of financial regulation, further strengthening of the social safety
net."
Point me to a blog post where Krugman spells out exactly where he explains how Clinton proposes
to do things.
President Trump has proposed a $25000 standard deduction for each of us, but $50,000 for married
couples who prove that they have consummated. Hey! IRS Agents like to watch.
Can you see how this minimum federal standard-deduction is de-fang-ed by lower state-standard-deduction?
Tell me something!
When state minimum wage is $5 / hour but federal minimum wage is $9 / hour, does employer hiring
in same state have to pay $5 or $9? Do you see how that works?
State's rights are dissolved by the federal statute.
This dissolution of state's rights means that Congress could as easily pass a law to establish
minimum standard-deduction for all state's income tax collection. Tell me something else!
Would such a minimum standard deduction on all state income tax collection cause any unemployment?
Would it bankrupt any small businesses?
Of course not! By contrast, the federal minimum wage regulation does cause unemployment, does
close down some employers of entry level workers, a danger to employment and poverty.
Economics is all about opportunity costs. The opportunity cost of federal minimum wage is the
possibility of federal minimum standard deduction, a more harmless subsidy.
State's rights are dissolved by the federal statute.
This dissolution of state's rights means that Congress could as easily pass a law to establish
minimum standard-deduction for all state's income tax collection. Tell me something else!
Would such a minimum standard deduction on all state income tax collection cause any unemployment?
Would it bankrupt any small businesses?
Of course not! By contrast, the federal minimum wage regulation does cause unemployment, does
close down some employers of entry level workers, a danger to employment and poverty.
[ Ah, understood. A clever and important argument that I am thinking through. Like the rational
for the federal Earned Income Tax Credit. ]
The United States federal earned income tax credit or earned income credit (EITC) is a refundable
tax credit for low- to moderate-income working individuals and couples, particularly those with
children. The amount of EITC benefit depends on a recipient's income and number of children. For
a person or couple to claim one or more persons as their qualifying child, requirements such as
relationship, age, and shared residency must be met. In the 2013 tax year, working families, if
they have children, with annual incomes below $37,870 to $51,567 (depending on the number of dependent
children) may be eligible for the federal EITC. Childless workers who have incomes below about
$14,340 ($19,680 for a married couple) can receive a very small EITC benefit.
Growth is a fixed investment. The investments have been made. Especially older societies, consumption
and leisure become more important the nature of purchases change.
I see Space Exploration as the only thing that will change that narrative. That would probably
create another computer revolution, industrial revolution kind of change. People just aren't into
it thought. People are happy with the dopamine economy and just want to get high.
"Second, less relevant to Sims but very relevant to other helicopter people, a deficit ultimately
financed by inflation is just as much of a burden on households as one ultimately financed by
ordinary taxes, because inflation is a kind of tax on money holders. From a Ricardian point of
view, there's no difference.
So I'm trying to figure out exactly what Sims is saying. What, ahem, is his model?"
Inflation hits people with savings who don't have debt.
Inflation helps people with debt by eating away at the principle. Inflation signals tight job
markets with growing incomes as well. That's why you have price pressures. That's why low inflation
and loose job markets can be just as bad as deflation.
Who taxes hit depends on how the government has set up its tax system. Some people and corporations
like Apple, Mitt Romney and presumably Trump pay little in taxes.
Capitalism was invented by Sephardic Jews who immigrated to Iberia in the 15th and 16th century.
They eventually invented market based economy.
By 1600's they had a swirling business sector located in Amsterdam and William the Orange spread
it into England during the latter 17th century, creating the Bank of England in 1694 and became
the worlds central bank via commodity money.
There is nothing to see here people. It is ponzi scheme and nothing more. Capitalism has only
made it because of liberalism. You have to be open to market expansion and have the resources
to make it work. It is why "konservatism" is a farce. One, the konservatives were the ones that
pushed the decaying "feudal" aristocracy to merge with the merchant caste in the first place and
create the bourgeois, despite the aristocracy being the birth place of most of the technology
we have now. This morphed into what we call capitalism. Basically the Jews are the Parasites(Finance),
"Whites"(the capitalists, which has a abnormal % of homosexuals) the Host and the non-whites the
cattle(mass famines and genocide during the 19th and 20th century are what really powered the
manpower behind anti-capitalism. Aka the British Empire led to 150 million deaths globally. All
global fraternities and organizations like the Skull in Bones to the Council of Foreign relations
are a conservative institutions. Yet, those cons won't admit it. As Butler said about his Pacific
"campaigns" is is all about spreading capitalism. It is indeed a racket.
These same forces are what created "Protestantism" and "Mormanism", which were a global financed
movement. First led by Catholic turncoat Martin Luther, who was financed by the Jews, then run
by Jewish John Cohen(Calvin) who spread the judeo-christian revolution globally. This also led
to the farce of "sovereignty" nonsense Mormons have tried to use in the last 40 years to push
a plutocracy. Then the other bible thumpers caught on. Destroy the nation, bring on the market
totalitarianism. Dumb sheep.
This is what we have long been used to from Mr. Groves. Ramblings in this style pretty much comment
on their own merit and don't need to be graced with rebuttals, as that implies an acknowledgement
that at some level a sort of identifiable argument was made.
"America's economic performance peaked in the late 1990s, and erosion in crucial economic indicators
such as the rate of economic growth, productivity growth, job growth, and investment began well
before the Great Recession.
Workforce participation, the proportion of Americans in the productive workforce, peaked in
1997. With fewer working-age men and women in the workforce, per-capita income for the U.S. is
reduced.
Median real household income has declined since 1999, with incomes stagnating across virtually
all income levels. Despite a welcome jump in 2015, median household income remains below the peak
attained in 1999, 17 years ago. Moreover, stagnating income and limited job prospects have disproportionately
affected lower-income and lower-skilled Americans, leading inequality to rise."
and something I have been going hoarse saying:
"The U.S. lacks an economic strategy, especially at the federal level. The implicit strategy
has been to trust the Federal Reserve to solve our problems through monetary policy."
the charts alone are worth the effort to check out this excellent study.
" Neither the traditional economist's focus on firms in markets nor the Marxist political economist's
focus on exploitation of wage labour by capital is a viable way of understanding the real economy,
and the book takes some steps towards an alternative view. "
Why did East Asia become Star Trek instead of the US? Why didn't the hopeful visions of mid-1960's
America become reality for the Americans? Read Ha Joon Chang if you want to know why East Asia
is on track to be as rich as the US/USSR portrayed in 2001 Space Odyssey. Western provincialism,
or perhaps the corruption of economists by looting banks (as documented by Charles Ferguson) has
led Western economists to offer really, really terrible advice to their own governments: free
trade forever, don't worry about massive deindustrialization, there will be new jobs, there's
no chance the US ends up like Mali.
One of the big problems of economics is how little of our society it explains. Exactly how many
people of either sex actually sit down and decide to have children based on a return on investment
calculation? How many people spend time with their friends and families based on some kind of
maximization function? When you visit a dying friend or family member at the hospital is this
the result of some gift exchange calculus? What about the time one spends listening to music,
watching a baseball game or browsing Facebook?
It might help to start with anthropology and think about human societies and their organization.
Start with something like the Lynds' Middletown books to get away from the implicit exoticism
that the term anthropology invokes. Societies have certain basic functions: raising children,
caring for those who cannot care for themselves, earning a living, spending free time, recognizing
one's place in the universe, participating in civil society and so on. Economics only looks at
a tiny piece of this, just part of the earning a living section. It's as if chemists never studied
anything except hydrogen molecules.
Economics really does need some new thinking. Starting with Pareto optimality is simply the
argument that we live in the best of all possible worlds. It is so transparently bogus that it
is hard to believe that anyone ever took it seriously. Oil lamps were hard on torch makers and
the automobile destroyed the buggy whip business. We need an economic system to regulate the production
and allocation of goods and services, but we also need child custody laws and burial customs.
I'm a capitalist at heart, but I view capitalism as I view fire. There is nothing quite like
fire for cooking food, lighting the dark, scaring wild animals, firing pottery and so on, but
fire also needs to be carefully controlled, constantly monitored and subject to societal sanction.
Economics fashions itself (or is being fashioned) as a science, and as such has to restrict itself
to measurable, identifiable, and (in principle) predictable phenomena.
What you are describing is more in the realm of philosophy, psychology, and moral judgement.
The problem starts when the economics profession and related occupations (business media, etc.)
pretend to have identified "market mechanisms" as the unifying theory of society and world, including
"explaining" social dynamics in terms of "objective/rational" market transactions and motivations.
But the desire for grand unified theories and "whole truths" is ever strong, lending credence
and support to such efforts.
Now is the time to push for my leisure theory of value. All goods and services traded in the economy
are intermediate goods, and value is actually created during leisure time!
"... The deficit obsession that governments have shown since 2010 has helped produce a recovery that has been far too slow, even in the US. ..."
"... The Zero Lower Bound (ZLB) raises an acute problem for what I call the consensus assignment (leaving macroeconomic stabilisation to an independent, inflation targeting central bank), but add in austerity and you get major macroeconomic costs. ICBs appear to rule out the one policy (money financed fiscal expansion) that could combat both the ZLB and deficit obsession. ..."
Simon Wren-Lewis has a follow-up to his recent post on central bank independence:
The 'strong case' critically examined : Perhaps it was too unconventional
setting out an argument (against independent central banks, ICBs) that
I did not agree with, even though I made it abundantly clear that was what
I was doing. It was too much for one blogger, who reacted by deciding that
I did agree with the argument, and sent a series of tweets that are best
forgotten. But my reason for doing it was also clear enough from the final
paragraph. The problem it addresses is real enough, and the problem appears
to be linked to the creation of ICBs.
The deficit obsession that governments have shown since 2010 has
helped produce a recovery that has been far too slow, even in the US.
It would be nice if we could treat that obsession as some kind of aberration,
never to be repeated, but unfortunately that looks way too optimistic.
The Zero Lower Bound (ZLB) raises an acute problem for what I call
the consensus assignment (leaving macroeconomic stabilisation to an independent,
inflation targeting central bank), but add in austerity and you get major
macroeconomic costs. ICBs appear to rule out the one policy (money financed
fiscal expansion) that could combat both the ZLB and deficit obsession.
I wanted to put that point as strongly as I could. Miles Kimball does
something similar
here , although without the fiscal policy perspective ...
Skipping ahead (and omitting quite a bit of the argument):
... The basic flaw with my strong argument against ICBs is that the ultimate
problem (in terms of not ending recessions quickly) lies with governments.
There would be no problem if governments could only wait until the recession
was over (and interest rates were safely above the ZLB) before tackling
their deficit, but the recession was not over in 2010. Given this failure
by governments, it seems odd to then suggest that the solution to this problem
is to give governments back some of the power they have lost. Or to put
the same point another way, imagine the Republican Congress in charge of
US monetary policy.
But if abolishing ICBs is not the answer to the very real problem I set
out, does that mean we have to be satisfied with the workarounds? One possibility
that a few economists
like Miles Kimball have argued for is to effectively abolish paper money
as we know it, so central banks can set negative interest rates. Another
possibility is that the government (in its saner moments) gives ICBs
the power to undertake helicopter money.
Both are complete solutions to
the ZLB problem rather than workarounds. Both can be accused of endangering
the value of money. But note also that both proposals gain strength from
the existence of ICBs: governments are highly unlikely to ever have the
courage to set negative rates, and ICBs stop the flight times of helicopters
being linked to elections.
These are big (important and complex) issues. There should be no taboos
that mean certain issues cannot be raised in polite company. I still think
blog posts are the best medium we have to discuss these issues, hopefully
free from distractions like partisan politics.
"... We don't get to do many controlled experiments in economics, so history is mainly what we have to go on. ..."
"... What did orthodox salt-water macroeconomists believe about disinflation on the eve of the Paul Volcker contraction? As it happens, we have an excellent source document: James Tobin's "Stabilization Policy Ten Years After," * presented at Brookings in early 1980. ..."
"... Unemployment shot up faster than in Tobin's simulation, then came down faster, because the Fed didn't follow the simple rule he assumed. But the basic shape - a clockwise spiral, with inflation coming down thanks to a period of very high unemployment - was very much in line with what standard Keynesian macro said would happen. ..."
"... trade between any two regional economies is roughly proportional to the product of their GDPs and inversely related to distance. Neat. ..."
We don't get to do many controlled experiments in economics, so history
is mainly what we have to go on. Unfortunately, many people who imagine
that they know how the economy works go with what they think they heard
about history, not with what actually happened. And I'm not just talking
about the great unwashed; quite a few well-known economists seem not to
have heard about FRED, or at least haven't picked up the habit of doing
a quick scan of the actual data before making assertions about facts.
And there's one decade in particular where people are weirdly unaware
of the realities: the 1980s. A lot of this has to do with Reaganolatry:
the usual suspects have repeated so often that it was a time of extraordinary,
incredible success that I often encounter liberals who believe that something
special must have happened, that somehow the events were at odds with what
the prevailing macroeconomic models of the time said would happen.
But nothing special happened, aside from the unexpected willingness of
the Federal Reserve to impose incredibly high unemployment in order to bring
inflation down.
What did orthodox salt-water macroeconomists believe about disinflation
on the eve of the Paul Volcker contraction? As it happens, we have an excellent
source document: James Tobin's "Stabilization Policy Ten Years After," *
presented at Brookings in early 1980. Among other things, Tobin laid out
a hypothetical disinflation scenario based on the kind of Keynesian model
people like him were using at the time (which was also the model laid out
in the Dornbusch-Fischer and Robert Gordon textbooks).
These models included
an expectations-augmented Phillips curve, ** with no long-run tradeoff between
inflation and unemployment - but expectations were assumed to adjust gradually
based on experience, rather than changing rapidly via forward-looking assessments
of Fed policy.
This was, of course, the kind of model the Chicago School dismissed scathingly
as worthy of nothing but ridicule, and which was more or less driven out
of the academic literature, even as it continued to be the basis of a lot
of policy analysis.
So here was Tobin's picture:
[Picture]
Here's what actually happened:
[Graph]
Unemployment shot up faster than in Tobin's simulation, then came down
faster, because the Fed didn't follow the simple rule he assumed. But the
basic shape - a clockwise spiral, with inflation coming down thanks to a
period of very high unemployment - was very much in line with what standard
Keynesian macro said would happen. On the other hand, there was no sign
whatsoever of the kind of painless disinflation rational-expectations models
suggested would happen if the Fed credibly announced its disinflation plans.
Now that's fun: Adam Davidson tells us * about trade in the ancient Near
East, as documented by archives found in Kanesh - and reports that the volume
of trade between Kanesh and various trading partners seems to fit a gravity
equation: trade between any two regional economies is roughly proportional
to the product of their GDPs and inversely related to distance. Neat.
But what does the seemingly universal applicability of the gravity equation
tell us? Davidson suggests that it's an indication that policy can't do
much to shape trade. That's not where I would have gone, and it's not where
those who have studied the issue closely ** have gone.
Here's my take: Think about two cities with the same per capita GDP -
we can relax that assumption in a minute. They will trade if residents of
city A find things being sold by residents of city B that they want, and
vice versa.
So what's the probability that an A resident will find a B resident with
something he or she wants? Applying what one of my old teachers used to
call the principle of insignificant reason, a good first guess would be
that this probability is proportional to the number of potential sellers
- B's population.
And how many such desirous buyers will there be? Again applying insignificant
reason, a good guess is that it's proportional to the number of potential
buyers - A's population.
So other things equal we would expect exports from B to A to be proportional
to the product of their populations.
What if GDP per capita isn't the same? You can think of this as increasing
the "effective" population, both in terms of producers and in terms of consumers.
So the attraction is now the product of the GDPs.
Is there anything surprising about the fact that this relationship works
pretty well? A bit. Standard pre-1980 trade theory envisaged countries specializing
in accord with their comparative advantage - England does cloth, Portugal
wine. And these models suggest that how much countries trade should have
a lot to do with whether they are similar or not. Cloth exporters shouldn't
be selling much to each other, but should instead do their trading with
wine exporters. In reality, however, there's basically no sign of any such
effect: even seemingly similar countries trade about as much as a gravity
equation says they should.
Calibrated models of trade have long dealt with this reality, somewhat
awkwardly, with the so-called Armington assumption, *** which simply assumes
that even the apparently same good from different countries is treated by
consumers as a differentiated product - a banana isn't just a banana, it's
an Ecuador banana or a Saint Lucia banana, which are imperfect substitutes.
The new trade theory some of us introduced circa 1980 - or as some now call
it, the "old new trade theory" - does a bit more, and possibly better, by
introducing monopolistic competition and increasing returns to explain why
even similar countries produce differentiated products.
And there's also a puzzle about both the effect of distance and the effect
of borders, both of which seem larger than concrete costs can explain. Work
continues.
Does any of this suggest the irrelevance of trade policy? Not really.
Changes in trade policy do have obvious effects on how much countries trade.
Look at what happened when Mexico opened up starting in the late 1980s,
as compared with Canada, which was fairly open all along - and which, like
Mexico, mainly trades with the US:
[Graph]
So what does gravity tell us? Simple Ricardian comparative advantage
is clearly incomplete; the process of international trade is subtler, with
invisible as well as visible costs. Not trivial, but not too unsettling.
And gravity models are very useful as a benchmark for assessing other effects.
One morning, just before dawn, an old man named Assur-idi loaded up two
black donkeys. Their burden was 147 pounds of tin, along with 30 textiles,
known as kutanum, that were of such rare value that a single garment cost
as much as a slave. Assur-idi had spent his life's savings on the items,
because he knew that if he could convey them over the Taurus Mountains to
Kanesh, 600 miles away, he could sell them for twice what he paid.
At the city gate, Assur-idi ran into a younger acquaintance, Sharrum-Adad,
who said he was heading on the same journey. He offered to take the older
man's donkeys with him and ship the profits back. The two struck a hurried
agreement and wrote it up, though they forgot to record some details. Later,
Sharrum-Adad claimed he never knew how many textiles he had been given.
Assur-idi spent the subsequent weeks sending increasingly panicked letters
to his sons in Kanesh, demanding they track down Sharrum-Adad and claim
his profits.
These letters survive as part of a stunning, nearly miraculous window
into ancient economics. In general, we know few details about economic life
before roughly 1000 A.D. But during one 30-year period - between 1890 and
1860 B.C. - for one community in the town of Kanesh, we know a great deal.
Through a series of incredibly unlikely events, archaeologists have uncovered
the comprehensive written archive of a few hundred traders who left their
hometown Assur, in what is now Iraq, to set up importing businesses in Kanesh,
which sat roughly at the center of present-day Turkey and functioned as
the hub of a massive global trading system that stretched from Central Asia
to Europe. Kanesh's traders sent letters back and forth with their business
partners, carefully written on clay tablets and stored at home in special
vaults. Tens of thousands of these records remain. One economist recently
told me that he would love to have as much candid information about businesses
today as we have about the dealings - and in particular, about the trading
practices - of this 4,000-year-old community.
Trade is central to every key economic issue we face. Whether the subject
is inequality, financial instability or the future of work, it all comes
down to a discussion of trade: trade of manufactured goods with China, trade
of bonds with Europe, trade over the Internet or enabled by mobile apps.
For decades, economists have sought to understand how trade works. Can we
shape trade to achieve different outcomes, like a resurgence of manufacturing
or a lessening of inequality? Or does trade operate according to fairly
fixed rules, making it resistant to conscious planning?
Economists, creating models of trade, have faced a challenge, because
their data have derived exclusively from the modern world. Are their models
universal or merely reflections of our time? It's a crucial question, because
many in our country would like to change our trading system to protect American
jobs and to improve working conditions here and abroad. The archives of
Kanesh have proved to be the greatest single source of information about
trade from an entirely premodern milieu.
In a beautifully detailed new book - ''Ancient Kanesh,'' written by a
scholar of the archive, Mogens Trolle Larsen, to be published by Cambridge
University Press later this year - we meet dozens of the traders of Kanesh
and their relatives back home in Assur. Larsen has been able to construct
family trees, detailing how siblings and cousins, parents and spouses, traded
with one another and often worked against one another. We meet struggling
businessmen, like Assur-idi, and brilliant entrepreneurs, like Shalim-Assur,
who built a wealthy dynasty that lasted generations. In 2003, while covering
the war in Iraq, I traveled to many ancient archaeological sites; the huge
burial mounds, the carvings celebrating kings as relatives to the gods,
all gave the impression of a despotic land in which a tiny handful of aristocrats
and priests enjoyed dictatorial control. But the Kanesh documents show that
at least some citizens had enormous power over their own livelihoods, achieving
wealth and power through their own entrepreneurial endeavors.
The details of daily life are amazing, but another scholar, Gojko Barjamovic,
of Harvard, realized that the archive also offered insight into something
potentially more compelling. Many of the texts enumerate specific business
details: the price of goods purchased and sold, the interest ate on debt,
the costs of transporting goods and the various taxes in the many city-states
that the donkey caravans passed on the long journey from Assur to Kanesh.
Like most people who have studied Kanesh, Barjamovic is an Assyriologist,
an expert in ancient languages and culture. Earlier this year, he joined
some economists, as well as some other Assyriologists and archaeologists,
on a team that analyzed Kanesh's financial statistics. The picture that
emerged of economic life is staggeringly advanced. The traders of Kanesh
used financial tools that were remarkably similar to checks, bonds and joint-stock
companies. They had something like venture-capital firms that created diversified
portfolios of risky trades. And they even had structured financial products:
People would buy outstanding debt, sell it to others and use it as collateral
to finance new businesses. The 30 years for which we have records appear
to have been a time of remarkable financial innovation....
Multipliers: What We Should Have Known
By Paul Krugman
There's a very nice interview * with Olivier Blanchard, who is leaving
the International Monetary Fund, in which among other things Olivier says
the right thing about changing one's mind:
"With respect to outside, the issue I have been struck by is how to indicate
a change of views without triggering headlines of 'mistakes,' 'Fund incompetence,'
and so on. Here, I am thinking of fiscal multipliers. The underestimation
of the drag on output from fiscal consolidation was not a 'mistake' in the
way people think of mistakes, e.g. mixing up two cells in an excel sheet.
It was based on a substantial amount of prior evidence, but evidence which
turned out to be misleading in an environment where interest rates are close
to zero and monetary policy cannot offset the negative effects of budget
cuts. We got a lot of flak for admitting the underestimation, and I suspect
we shall continue to get more flak in the future. But, at the same time,
I believe that we, the Fund, substantially increased our credibility, and
used better assumptions later on. It was painful, but it was useful."
Indeed. There are a lot of people out there whose idea of a substantive
argument is "you used to say X, now you say Y" - never mind the reasons
why you changed your view, and whether it was right to do so.It's important
not to fall into the trap of being afraid to let new evidence or analysis
speak.
One thing I would say, however, is that on this particular issue the
Fund should have known better. Olivier says that the evidence "turned out
to be misleading in an environment where interest rates are close to zero
and monetary policy cannot offset the negative effects of budget cuts",
but didn't we know that? I certainly did. **
And let me also beat one of my favorite drums: the prediction that multipliers
would be much larger in a liquidity trap came out of IS-LMish macro (or,
to be fair, New Keynesian models) and has been overwhelmingly confirmed
by experience. So this was yet another victory for Keynesian analysis, the
success story nobody will believe.
Barry Eichengreen and Kevin O'Rourke have lately been scoring a series
of research coups, based on the combination of historical perspective and
a global view. Most famously, they showed that on a global basis the first
year of the current crisis was every bit as severe * as the first year of
the Great Depression.
Now they and collaborators have a new piece on policy effects, ** especially
fiscal multipliers.
The background here is that there are two problems with estimating multipliers
relevant to our current situation. First, you need to look at what happens
under liquidity-trap conditions - and except in Japan,these haven't prevailed
anywhere since the 1930s. The second is that in the United States, fiscal
policy was never forceful enough to provide a useful natural experiment.
We didn't have a really big fiscal expansion until World War II; and WWII
isn't a good experiment because the surge in defense spending was accompanied
by government policies that suppressed private demand, such as rationing
and restrictions on investment. (I really, really don't understand why this
point has been so hard to get across.)
What E&R do here is use a broad international cross-section to overcome
this problem. This works because a number of countries had major military
buildups during the 1930s - fiscal expansions that can be regarded as exogenous
to the economic situation, since they were
"driven above all by Hitler's rearmament programmes and other nations'
efforts to match the Nazis in this sphere, and by one-off events like Italy's
war in Abyssinia."
What do E&R find? Initial fiscal multipliers of 2 or more, although they
shrink over time. Yes, fiscal expansion is expansionary.
So how does the decade of the 1980s end up being perceived as a defeat
for Keynesians? To see it that way you have to systematically misrepresent
both what happened to the economy and what people like Tobin were saying
at the time. In reality, Tobinesque economics looks very good in the light
of events.
In economics, the Phillips curve is a historical inverse relationship
between rates of unemployment and corresponding rates of inflation that
result in an economy. Stated simply, decreased unemployment, (i.e. increased
levels of employment) in an economy will correlate with higher rates of
inflation.
"... By Daniela Gabor is associate professor in economics at the University of the West of England, Bristol. Originally published at the Institute for New Economic Thinking website ..."
"... For a detailed account see Gabor, D. (2016) The (impossible) repo trinity : the political economy of repo markets, Review of International Political Economy, doi 10.1080/09692290.2016.1207699 ..."
Since the 1980s, central banks have been increasingly freed from
fiscal dominance , the obligation to monetize government debt. The new regime of monetary dominance
celebrated the (price) stability benefits of insulating scientific monetary policy from poorly theorized,
highly politicized fiscal policy. Yet the growing dominance of the 'monetary science, fiscal
alchemy' view in both academia and
policy circles played a critical role in the rapid rise of shadow banking. The untold story of shadow
banking is the story of (failed) attempts to separate monetary from fiscal policy, and of the bordeland
that connects them, mapped onto the
repo market .
While the state withdrew from economic life, privatizing state-owned enterprises or state banks,
and putting macroeconomic governance in the hands of independent central banks, its role in financial
life grew bigger. Sovereign debt evolved into the cornerstone of modern financial systems, used as
benchmark for pricing private assets, for hedging and
as base asset for credit creation via shadow banking . The state's role as debt issuer, passive
and systemic at once, has been reliant, beyond the arithmetic of budget deficits, on the intricate
workings of the repo trinity.
The repo trinity captures a consensus in central bank circles emerging after the 1998 Russian
crisis, the first systemic crisis of collateral-intensive finance, that financial stability requires
liquid government bond markets and liberalized repo markets (fig. 1).
Figure 1 The repo trinity
The repo-government bond market nexus took shape in the 1980s. In the US, securities dealers
preferred repos to secured lending against collateral because market convention treated repos
as outright sales and repurchases of collateral that allowed dealers to re-use collateral for a wide
range of activities (short-selling, hedging, selling to a third party). When bankruptcy courts decided
that repos would be subjected to automatic stay rules, Paul Volcker, then the Federal Reserve chairperson,
successfully lobbied Congress to exempt repos with US Treasuries (UST) and agency securities collateral.
Then, Salomon Brothers short-squeezed the UST market in 1991 by becoming the only repo supplier of
a two-year note. This allowed Salomon to fund securities through repo transactions at exceptionally
low rates. The ensuing public enquiry into the Salomon scandal showed little appetite for regulating
repos. Rather, the Fed and the Treasury
introduced new practices to fix gaps in repo plumbing, celebrating repos as innovative, liquidity
enhancing instruments that would support the state in the post fiscal-dominance era.
The UST blueprint diffused rapidly to Europe. Pressured to adjust to a world of independent central
banks, market-based financing and global competition for liquidity, European states embarked on a
project of creating modern government bond markets, with
modernity understood to mean the structural features of the US government bond market: regular
auctions, market-making based on primary dealers and a liberalised repo market.
Central banks were at first divided on the benefits of opening up repo markets. While Banque de
France followed the US Fed in assuming a catalyst role for the repo-sovereign bond market nexus,
Bundesbank and Bank of England worried that deregulated repo markets would unleash structural changes
in finance that could undermine the conduct of monetary policy and financial stability. In the architecture
of the US government bond market, the Bundesbank saw the conditions nurturing
short-term , fragile finance.
Seeking to keep banks captive on the uncollateralized segment of interbank markets, Bundesbank imposed
reserve requirements on repo liabilities. In parallel, as government's fiscal agent, Bundesbank followed
a conservative strategy, with irregular auctions, issuance concentrated at long maturities and repo
rules that increased the costs of funding bunds via repos. German banks responded by moving (bund)
repo activities to London and warned that France's open repo strategy would make it into the benchmark
sovereign issuer for the Euroarea. For similar reasons, the Bank of England exercised strict control
over the repo gilt market for 10 years after the 1986 Big Bang liberalisation of financial markets.
Under intense pressure from the financial industry and Ministries of Finance, the two central banks
liberalized repo markets by 1997.
As the fragilities of the new, collateral-intensive world became apparent in the 1998 Russian
crisis, central banks working together in the Committee on the Global Financial System subscribed
to the policy goals of the repo trinity. The
CGFS argued that financial
stability in market-based finance required global safe assets, issued in government bond markets,
in turn 'lubricated' by free repo markets with carefully designed (but not regulated) risk management
regimes.
In pursuing the objectives of the repo trinity, central banks helped consolidate the critical
role that sovereign bonds play in modern financial markets. Throughout the 2000s, the shortage of
US government bonds saw the trinity extended to include securitization markets, while the Euro project
galvanized consensus for a European repo trinity, whereby central banks encouraged the European banks
dominating the repo market to treat all Euro sovereign debt as high-quality
collateral
.
After Lehman, central banks and the Financial Stability Board recognized the impossible nature
of the repo trinity, attributing cyclical leverage, fire sales and elusive liquidity in collateral
markets, including government bond markets, to free repo markets. Central banks, with the
Bank of England leading the way, now accept that financial stability means supporting liquidity
in collateral markets in times of stress rather than supporting banking institutions as in the traditional
lender of last resort (LOLR) model. Paradoxically, LOLR support, implemented through repo loans,
can
destabilize (shadow) banks where central banks' collateral framework follows collateral market
valuations (figure 2).
Figure 2 The impossible repo trinity
The quiet revolution in crisis central banking that involves direct support for core markets may
appear like, but does not entail a return to, fiscal dominance. Rather, it creates
financial dominance , defined
as asymmetric support for falling asset prices. While financial dominance should be addressed by
direct regulatory interventions, the quest for biting repo rules has so far proved illusive. The
precise impact of Basel III liquidity and leverage rules is yet to be determined, whereas the failed
attempts to include repos in the European
Financial
Transactions Tax and the FSB's watered-down repo proposals suggest that (countercyclical) collateral
rules are only possible once states design alternative models of organizing their sovereign debt
markets. Paradoxically, new initiatives in Europe suggest that a return to the repo trinity is rather
more likely: the Capital Market Union plans to create Simple, Transparent and Standardized (
STS ) securitisation again illustrate the catalyst role that central banks choose to play in
market-driven solutions to safe asset shortages.
For a detailed account see Gabor, D. (2016)
The (impossible)
repo trinity : the political economy of repo markets, Review of International Political Economy,
doi 10.1080/09692290.2016.1207699
Uhhh. The article is one of the rare "too short, wish it was longer" breed.
I'll hazard a remark: how can securitization be "transparent" if, as one of the articles yesterday
discussed, central banks intervene to support banks so as to allow them to avoid having the market
deliver a price verdict on asset value?
Any time you let central banks like the Federal Bank of NY create money from debt; bankruptcy
is on the horizon. This has only been proven true for around five thousand years.
For a recent example have a look at the difference in government debt in Canada now verses
when it had a public banking system.
"Throughout the 2000s, the shortage of US government bonds saw the trinity extended to include
securitization markets,"
This started treating asset based securities similar to US Treasuries
Also this:
"fire sales and elusive liquidity in collateral markets, including government bond markets,"
I don't think the European government bond market can be treated as sovereign government bonds
as they don't have that guarantee of backing from a central bank.
----
Quite simply, US Treasuries can be put to much better use than supporting asset prices and
other financial products.
Repos hide risk and makes it possible to increase leverage. Why would anyone but financial
institutions want that?
But since financial institutions rule all then I suppose that repos will continue and as a gesture
of goodwill (dressed up as something else) they'll just become more and more complex – those (high)
fees for the professionals enabling the practice has to be justified somehow…
"... The values and ideology represented in the Economics textbook Bill Black analyzed didn't arise in a vacuum. The points Black lists reflect the ideology, values, ethics and interests of a narrow segment of our society who have accumulated enormous personal wealth through a variety of extra-legal and illegal mechanisms, and who use a small portion of that wealth to fund "Economics Chairs" in our public and private universities; economics "think tanks"; and speeches, books, consulting engagements, and board memberships for "prominent economists". ..."
"... Mankiw is a shill/useful idiot for his oligarchs patrons. #11 explains the idiocy of the previous 10. ..."
"... Did the banks which loaned billions to the gas frackers of North Dakota know that production would exceed demand and cause a crash? Perhaps the loan officer might have such concern, but would more likely be most concerned with his/her own bottom line – a meme Yves explores in Econned. ..."
"... Newly-printed money CAN cause inflation, but WHERE the price rises happen depends greatly on the pockets in which the money lands. ..."
"... stocks, real estate, luxury goods, premium educations, etc. ..."
"... This kind of ignorant cluelessness is pretty prevalent among the oligarchy and its supporters like Mankiw. Just like that guy in Davos who simply couldn't understand why there's so much social unrest in the world today. They live in a completely different world. ..."
"... My first exposure to Mankiw's principles was actually an early version of the talk by Yoram Bauman in this video. It hits several of the points Mr. Black makes and is also pretty funny. It definitely demonstrates how Mankiw attempts to cloak his biases in supposedly neutral terms. ..."
"... I doubt Mankiw will accept 100% estate tax on the justification that the cost of bequests is zero to the recipient. (and thus a 100% estate tax doesn't incur large costs on the recipient) ..."
"... My paper lists four principles claimed to be at the core of modern economics by Mankiw and then shows how all four principles are false: Amir-ud-Din, Rafi and Zaman, Asad, Failures of the 'Invisible Hand' (July 15, 2013). Forum for Social Economics, Vol. 45, Iss. 1, 2016. Available at SSRN: http://ssrn.com/abstract=2293940 or http://dx.doi.org/10.2139/ssrn.2293940 ..."
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate
professor of economics and law at the University of Missouri-Kansas City. Jointly published with
New Economic Perspectives
This is the second column in a series on the N. Gregory Mankiw's myths and dogmas that he spreads
in his economic textbooks. The first column exposed the two (contradictory) meta-myths that begin
his preface. This column de-mythologizes Mankiw's unprincipled "
principles " of economics – the ten commandments of theoclassical economics' priestly caste.
Some of these principles, correctly hedged, could be unobjectionable, but in each case Mankiw dogmatically
insists on pushing them to such extremes that they become Mankiw myths.
To understand Mankiw's mythical 10 commandments, one must understand "Mankiw morality" – a morality
that remains hidden in each of his textbooks. Few people understand how radically theoclassical economics
has moved in the last thirty years. Milton Friedman famously argued that CEOs should operate exclusively
in the interest of shareholders. Mankiw, however, is a strong supporter of the view that CEOs will
not only defraud customers, but also shareholders and creditors by looting the firm. "[I]t would
be irrational for savings and loans [CEOs] not to loot." "Mankiw morality" decrees that if you have
an incentive as CEO to loot, and fail to do so, you are not moral – you are insane. Mankiw morality
was born in Mankiw's response as discussant to George Akerlof and Paul Romer's famous 1993 article
"Looting: The Economic Underworld of Bankruptcy for Profit."
Mankiw's textbooks preach the wonders of the indefensible a system he has helped design to allow
elite CEOs to loot the shareholders with impunity – the antithesis of Friedman's stated goal. Mankiw
morality helps create the "criminogenic environments" that produce the epidemics of "control fraud"
that drive our recurrent, intensifying financial crises. It is essential to interpret Mankiw's ten
myths in light of his unacknowledged immoral views about how CEOs will and should respond to incentives
to rig the system against the firm's consumers, employees, creditors, and shareholders. His textbooks
religiously avoid any disclosure of Mankiw morality or its implications for perverting his ten commandments
into an unethical and criminogenic dogma that optimizes the design of a criminogenic environment.
Mankiw's myths
People Face Tradeoffs. To get one thing, you have to give up something else.
Making decisions requires trading off one goal against another.
This can be true, but Mankiw pushes his principle to the point that it becomes a myth. Life
is filled with positive synergies and externalities. If you study logic or white-collar criminology
you will make yourself a far better economist. You may trade off hours of study, but not "goals."
If your "goal" is to become a great economist you will not be "trading off one goal against another"
if you become a multidisciplinary scholar – you will strongly advance your goal. If you study
diverse research methods you will be a far better economist than if you study only econometrics.
The Cost of Something is What You Give Up to Get It. Decision-makers have
to consider both the obvious and implicit costs of their actions.
"Opportunity costs" are an important and useful economic concept, but Mankiw's definition sneaks
ideological baggage into both sentences that turns his principle into multiple myths. Mankiw implicitly
assumes fraud and other forms of theft out of existence in the first sentence. "Cost" is often
not measured in economics by "what you give up to get it." If your inherit a home that lacks fire
insurance and immediately burns down there is a cost to you (and society) even though you gave
up nothing to inherit the home. If the CEO loots "his" firm he gave up nothing to get the millions,
but if he loses those millions he will consider it to have a "cost." Theoclassical economists
have a primitive tribal taboo against even using the "f" word (fraud).
Decision-makers frequently ignore the "costs of their actions." There is nothing in economic
theory or experience that supports the claim that the "decision-makers" "have" to consider costs.
It is rare that decision-makers must do – or not do – anything.
It is likely that Mankiw means that optimization requires decision-makers to "consider" all
"costs of their actions," but that too is a myth. Theoclassical optimization requires perfect,
cost-free information, pure "rationality," and no externalities. None of these conditions exist.
Car buyers have no means of knowing the costs of buying a particular car. If they bought a GM
car the ignition mechanism defect could cause the driver to lose the ability to control the car
– turning it into an unguided missile hurtling down (or off) a highway at 70 mph. The car buyer
does not know of the defect, does not know who will be driving when the defect becomes manifest,
does not know who the passengers will be, and does not know who and what else could be injured
or damaged as a result of the defect. The theoclassical view is that the buyer who "considers"
the costs of buying his defective car to others (negative externalities) and pays more money to
buy a car that minimizes those negative externalities is not acting ethically, but irrationally.
It is typically cheaper (for the producer, not society) to produce goods of inferior (but difficult
to observe) quality. The inability of the consumer to "consider" even the true costs to the consumer
and the consumer's loved ones of these hidden defects means that economists began warning 46 years
ago that "market forces" could become criminogenic. George Akerlof's 1970 article on markets for
"lemons" even coined the term "Gresham's" dynamic to describe the process. A Gresham's dynamic
is a leading form of a criminogenic environment.
[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty,
therefore, lies not only in the amount by which the purchaser is cheated; the cost also must
include the loss incurred from driving legitimate business out of existence.
Akerlof was made a Nobel laureate in economics in 2001 for this body of work. Economics is
the only field in which someone would write a textbook ignoring a Nobel laureate whose work has
proven unusually accurate on such a critical point. There is only one reason to exclude this reality
from Mankiw's myths – Akerlof's work falsifies Mankiw's myths, so Akerlof's work disappears from
Mankiw's principles, as does the entire concept of fraud.
Rational People Think at the Margin . A rational decision-maker takes action
if and only if the marginal benefit of the action exceeds the marginal cost.
The mythical nature of this principle flows from the multiple errors I have described. Mankiw
is being deliberately disingenuous. Theoclassical economics does not claim, for example, that
a firm produces a product "only if the marginal benefit of the action exceeds the marginal cost."
Theoclassical economists claim that a firm sells a product "only if the marginal benefit of the
action to the seller exceeds the marginal cost to the seller." The seller ignores social costs
and benefits.
For the sake of brevity, I will summarize that Mankiw's third principle is a myth for five
reasons known to every economist. First, it implicitly assumes out of existence positive and negative
externalities, which means that supposedly rational, self-interested decision-makers he postulates,
even if they had perfect, cost-free information, would not contract to maximize social welfare.
Second, as Mankiw morality implicitly admits, the actual optimization principle under theoclassical
economics would be determined by the marginal benefits and costs of an action to the decision-maker
– the CEO – not the firm, and certainly not society. Theoclassical economists, however, refuse
to admit that explicitly, so it disappears from Mankiw's 10 commandments.
Third, the information provided by CEOs is often not simply incomplete and costly, but deliberately
deceptive. Where information is merely incomplete, consumers may pay far more for a product than
they will benefit from the purchase. Where the seller provides deceptive information about quality,
the buyer and members of the public may be harmed or even killed. The CEO may also be looting
"his" firm as well as the customers. Mankiw has implicitly assumed perfect, cost-free information
and implicitly assumed that fraud does not exist.
Fourth, conflating rationality with optimization of personal costs and benefits is wrong on
multiple grounds. It defines ethical behavior as "irrational" where the consumer or CEO takes
into account social costs and benefits and protects the interests of others in an altruistic manner.
Everything we know from behavioral economics also makes clear that humans are not "rational" in
the manner predicted by theoclassical economics. Mankiw has implicitly assumed out of existence
thirty years of economic research on how people actually behave and make decisions.
Fifth, firms with monopoly power, according to theoclassical economics, maximize their profits
by deliberately reducing production to a point that the social cost of producing the marginal
unit is less than the marginal benefit to the consumer. Mankiw has implicitly assumed away monopolies.
People Respond to Incentives. Behavior changes when costs or benefits change.
I have responded to this myth in a
prior article . The implications of his fourth principle in conjunction with Mankiw morality
are devastating for theoclassical economics. CEOs create the incentives and understand how "behavior
changes" among their agents, employees, and subordinate officers in response to those incentives.
Under theoclassical principles this will unambiguously lead "rational" CEOs to set incentives
to rig the system in favor of the CEO. Because fraud and abuse creates a "sure thing" that is
certain to enrich the CEO, Mankiw's fourth commandment predicts that control frauds led by CEOs
will be ubiquitous. Fortunately, many CEOs are ethical and remain ethical unless they are subjected
to a severe Gresham's dynamic. As a result, Mankiw's commandments over-predict the incidence of
fraud and abuse by CEOs. Similarly, experiments demonstrate that humans frequently act in altruistic
manners despite financial incentives to act unfairly.
Trade Can Make Everyone Better Off .
Trade allows each person to specialize in the activities he or she does best. By trading with
others, people can buy a greater variety of goods or services.
See my
article on faux "trade deals" that exposes this myth.
Markets Are Usually a Good Way to Organize Economic Activity .
Households and firms that interact in market economies act as if they are guided by an "invisible
hand" that leads the market to allocate resources efficiently. The opposite of this is economic
activity that is organized by a central planner within the government.
Again, the key interaction under theoclassical theory is between CEO and consumers, employees,
creditors, shareholders, and the general public. "Markets" are vague constructs and they work
best when ethical and legal provisions reduce fraud to minor levels. When these ethical and legal
institutions are not extremely effective against fraud, the incentives created by the market can
be so perverse that they create a criminogenic environment that produces epidemic levels of fraud.
Mankiw's myth is to describe only one possible incentive and treat it as the sole possibility
other than what he falsely describes as "the opposite" – a government planner. The opposite incentive
to the so-called "invisible hand" is the Gresham's dynamic. Mankiw mythically presents the government
as the threat to an effective economy rather than an institution that is essential to producing
and enforcing the rule of law that prevents a Gresham's dynamic.
Governments Can Sometimes Improve Market Outcomes .
When a market fails to allocate resources efficiently, the government can change the outcome through
public policy. Examples are regulations against monopolies and pollution.
The myth here is that government only has a desirable role where there is a "market fail[ure]."
Mankiw treats "markets" as the norm and implicitly assumes that the government normally has nothing
to do with making markets succeed. Even conservative classical economists admitted that the rule
of law was essential to an effective economy and required an effective government. Well-functioning
governments always improve "market outcomes." Indeed, they are typically essential to making possible
well-functioning "markets."
Mankiw also fails to explain that "markets" will be fictional and massively distort resource
allocation (that is what a hyper-inflated bubble does) when there is an epidemic of control fraud.
As I have explained, Mankiw's own principles predict (indeed, over-predict) that deregulated "markets"
will frequently prove so criminogenic that they will produce epidemics of control fraud.
A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.
Countries whose workers produce a large quantity of goods and services per unit of time
enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average
income.
First, the CEOs of sectors such as finance that are immensely unproductive – so unproductive
that they cause enormous losses rather than growth, and receive exceptional income because they
loot. Income is often based not on productivity, but on the CEOs' wealth and economic and political
power that allows them to rig the economy. A nation's standard of living also depends on its employment
levels, which can be crushed by economic policies such as austerity.
The issue is not what happens to "average income," but what happens to median income, wealth,
the income and wealth of the lowest quartile or particular minorities, and to income and wealth
inequality. A nation can have high average productivity, yet have poor performance for decades
in these other critical measures.
Consider what has happened to the folks who tried to do everything right to boost their productivity
according to the theoclassical economic "experts'" advice. This is what has happened to Latino
and black households where a head of the household has at least a college degree. The source is
economists at the extremely conservative
St. Louis Fed .
Hispanic and black families headed by someone with a four-year college degree, on the other
hand, typically fared significantly worse than Hispanic and black families without college
degrees. This was true both during the recent turbulent period (2007-2013) as well as during
a two-decade span ending in 2013 (the most recent data available).
White and Asian college-headed families generally fared much better than their less-educated
counterparts. The typical Hispanic and black college-headed family, on the other hand, lost
much more wealth than its less-educated counterpart. Median wealth declined by about 72 percent
among Hispanic college-grad families versus a decline of only 41 percent among Hispanic families
without a college degree. Among blacks, the declines were 60 percent versus 37 percent.
One of the reasons that college-educated Latino and black families lost so much wealth compared
to their white and Asian-American counterparts is that they were more likely to get their degrees
from the for-profit colleges that theoclassical economists touted – colleges that frequently provided
a very expensive and very poor education, often involving defrauding the students. Another reason
that college-educated Latino and black families lost so much wealth compared to their white and
Asian-American counterparts is that they were far more likely to be the victims of predatory home
lending – an activity for which theoclassical economists served as the primary apologists.
Mankiw also ignores critical factors that determine "a country's standard of living." Yes,
China reports higher growth, but it is also operating in an unsustainable fashion that has destroyed
much of its environment and threatens to be a major contributor to the global suicide strategy
of causing severe climate change.
Prices Rise When the Government Prints Too Much Money . When a government
creates large quantities of the nation's money, the value of the money falls. As a result, prices
increase, requiring more of the same money to buy goods and services.
No, and Mankiw knew this was a myth when he wrote it. First, "prices rise" for many reasons.
Pharmaceutical prices rise because hedge fund managers take over pharma firms or encourage others
to do so in order to increase prices on existing drugs by hundreds, sometimes thousands of percent.
Prices rise because accounting control fraud recipes hyper-inflated the largest bubble in history
in U.S. real estate. Prices rise because of cartels. Prices rise because oil cartels cause oil
shocks. Prices rise due to real bottlenecks, e.g., shortages of a skill or material.
Inflation has not risen, indeed general price levels have often fallen (deflation) despite
record creation of money by central banks and private banks. Theoclassical economists have regularly
predicted hyper-inflation. As Paul Krugman emphasizes, virtually none of them even admits their
serial prediction failures.
Society Faces a Short-Run Tradeoff Between Inflation and Unemployment . Reducing
inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding
the short-run effects of changes in taxes, government spending and monetary policy.
Mankiw ends his ten myths with a series of myths. Foolish, counterproductive austerity often
causes inflation to fall to harmfully low – even negative (deflation) – levels that can lead to
prolonged recessions that cause severe damage to people and economies. Stimulus provides a win-win
that improves economic growth and reduces human suffering without causing harmful inflation.
A nation is able to operate at extremely high levels of employment without producing harmful
inflation. Mankiw is a partisan Republican. When Republican presidents in the modern era are faced
with recessions they junk their theoclassical dogmas and adopt stimulus programs, though they
generally do so largely through the economically inefficient and less effective means of slashing
tax rates for the wealthy.
Democrats: Please Renounce Mankiw's Myths
Unlike the Republicans, who always rise above their theoclassical principles when their president
is in office and faces a recession, the "New Democrats" are the ones who seem to have drunk the theoclassical
Kool-Aid and strive endlessly to create the self-inflicted wound of austerity when they are in power.
New Democrats also love to bash Republican presidents for running deficits even when those deficits
produced no harmful inflation and helped produce recovery. It is sensible and honest to point out
that tax cuts for the wealthy are a far less effective form of stimulus and to present and support
superior alternatives such as job guarantee and infrastructure programs. It would be superb if Democrats
were to point out that by far the most effective, prompt means of cutting taxes to stimulate the
economy in response to a recession is to cease collecting the Social Security taxes for several years.
It is not fine to praise Bill Clinton for taking the harmful step of running a budget surplus or
to bash Republicans because they – correctly – increased fiscal stimulus (and therefore the short-term
deficit) in response to a recession.
Democrats also need to stop spreading the myth that Bill Clinton was an economic marvel. He was
the luckiest president in history in terms of timing. His economic "success" was the product of two
of the largest bubbles in history (the dot.com and real estate bubbles). The real estate bubble is
the only thing that prevented his dot.com bubble from causing an economic collapse during his term.
The real estate bubble was so enormous that it made it easy for the fraudulent CEOs to "roll" (refinance)
the fraudulent loans they made, which helped cause the bubble to hyper-inflate. The saying in the
trade is "a rolling loan gathers no loss." This meant that the bubble was Bill Clinton and George
Bush's bubble, but it collapsed on George Bush's watch so Clinton gets the credit for the high employment
produced by the twin bubbles and Bush gets the blame for the massive unemployment that a massive
bubble will create when it collapses (if it is not replaced by an even larger bubble).
The pots are calling the kettles black; standard politics, redundancy easily replaced by automation.
You do know that Bernie isn't going after Hillary because he has his skeletons, especially
in the medical university complex, don't you. Ever live in Vermont. You did notice that Hillary
just threatened him, to the core of his argument.
This… "Energy is information, most of which humans ignore."…and this… "Public Education policies
are disgusting to anyone who really wants to learn…" are the important elements although I would
add that humans don't ignore so much as don't know/are not taught, and I would say Public education
has been purposefully corroded to the point of disgusting.
Pharmaceutical prices rise because hedge fund managers take over pharma firms or encourage
others to do so in order to increase prices on existing drugs by hundreds, sometimes thousands
of percent. Prices rise because accounting control fraud recipes hyper-inflated the largest bubble
in history in U.S. real estate. Prices rise because of cartels. Prices rise because oil cartels
cause oil shocks. Prices rise due to real bottlenecks, e.g., shortages of a skill or material.
- Bill Black
----–
All of these examples treat relative price rises in the affected sector, not the general
inflation which saw the U.S. CPI increase by a factor of ten (10) since 1950. Hedge funds and
cartels couldn't do that, no matter how successful they were in increasing their share of the
pie.
The same logic is used by union busters to claim that "greedy labor unions" cause inflation
- an equally false notion. Labor can increase its share of national income at the expense of corporate
profit, but it cannot cause a general inflation.
This unprecedented secular inflation did, however, coincide with government bonds surpassing
gold as the Federal Reserve's largest holding in 1945, and with the dollar's gold link being severed
in 1971.
Bill Black evidently hews to the scholarly tradition of the eminent Argentine economist and
former central banker Mercedes Marcó del Pont:
"It is totally false to say that the printing more money generates inflation; price increases
are generated by other phenomena like supply and external sector's behaviour," said Marcó del
Pont.
I would argue that the real estate bubble caused genuine inflation because it was a credit
bubble, but I agree on your other points. Intuitively I think of inflation as a rise in prices
without a corresponding rise in (average) affordability. It's why a Big Mac today can cost multiple
times what it did 30 years ago without being any less affordable for the average customer.
Mankiw's definition isn't precisely wrong but it's oversimplified. He doesn't address the role
of banks in money creation, he doesn't define money (what about credit?) he doesn't discuss the
factors that might cause government to print more or less money, and he doesn't say how much is
too much. Without more rigor than he provides, it's only useful as a plausibility argument after
the fact.
Regarding Black's comment:
Inflation has not risen, indeed general price levels have often fallen (deflation) despite
record creation of money by central banks and private banks.
I would say this was because they were doing it during the deflation of a credit bubble on
a large enough scale that money creation by the government was a drop in the bucket by comparison,
and that was what caused deflation. Which again points to the importance of defining terms and
operating constraints (why couldn't the government print money on a massive scale to compensate?
What are the drawbacks and limitations on that approach?)
Economists do love to make doomsday hyperinflation predictions that never seem to pan out.
As far as I can tell, that's because they think that the economy is inherently unstable and will
lapse naturally into massive inflation (see: wage-price spiral) or some other disastrous state
without the wise guiding hand of a central banker to prevent it. There seems to be very little
evidence of this actually happening in reality, and the few genuine examples of hyperinflation
(Weimar, Zimbabwe) have typically resulted from a collapse in production coupled with debts denominated
in other currencies that (a) considerably exceed the country's ability to pay and (b) require
the attempt to be made anyway.
Notice that Mankiw managed to say nothing about "Economic instability or deflation, and eventually
economic depression, is caused when the government prints TOO LITTLE money", which is actually
true and happens quite reliably.
If it is physically impossible for something to occur, it won't, and finance be damned.
Economics is first and foremost a branch of the physical sciences, though most economists have
forgotten this.
Supply and demand.
Unintended consequences.
High productivity does not create high wages. High wages create high productivity. If you
spend a lot of money on water-conservation technology at the base of Niagara Falls, will it
increase the economic value of water there?
The physical utility of a commodity (including labor) is not related to its economic value.
Adam Smith did get something right.
Nothing in this universe can grow exponentially for very long. Societies with sustained
high fertility rates will always be miserably poor, and only societies that have first reduced
their fertility rate can hope to become rich.
A (more-or-less) free market is indeed a powerful and essential optimization mechanism
("the invisible hand") but it is nonlinear. Like all such nonlinear optimization mechanisms,
it can and does get stuck in local minima and require external directed efforts to move to
a more optimal solution. This is basic math.
Inflation occurs when prices go up. That's it.
"Capitalism" guarantees neither poverty nor prosperity. The market is neutral. Even as
the laws of physics are obeyed equally well by a building that stands tall as by one that collapses
into a heap of rubble, the laws of the market are also obeyed in miserably poor Bangladesh
as well as in prosperous Switzerland. With 100 desperate people competing for every job, wages
for the many will be low and profits for the few will be high. And vice versa. Blaming "capitalism"
for poverty is silly, as if I threw someone off a cliff and then blamed the law of gravity
for their death. Trying to deny market forces is equally silly, like trying to legislate gravity
out of existence. It simply must be worked with.
"Free to choose to own or employ slaves", "Free trade includes the ability of big corporations
to restrict trade to maximize their profits", "Free to buy politicians and have them loot the
public treasury in your interest" … Strict libertarianism is logically incoherent and ethically
vile.
I quibble with 6 & 8. "A more or less free market" is a well regulated market. How much "more
free" or "less free" a market needs to be to best distribute its product depends entirely on its
particular conditions and vagaries. The insinuation that a market should be "stuck in a local
minima" before oversight can improve its performance echoes Mankiw's 7th misconstruction, that
(in Bill Black's words) "government only has a desirable role when there is a market failure."
I especially disagree that markets are neutral. Markets exist at the pleasure of the Capitalists
who create and smother them for profit. Capitalists are forever cajoling "market opportunities"
out from under every rock they can turn over. They invent, shape, split, combine, dissect, analyze,
produce, reproduce, abandon, corner and strangle markets in pursuit of lucre. There is no market
for Ford electric cars in California beyond the handful required by statute, despite ample demand,
because individuals at Ford have determined that creating that particular market will eat into
the personal profit they might extract from other markets. "Efficient" markets, that only return
a gazilionth of a point on investment because of optimal competition, cease to be because the
margin is too low to justify the hassle or the capital risk. Switching gears, labor markets in
Bangladesh & Switzerland exist when Capitalists decide to hire workers. Hirees agree to be paid
what Capitalists choose to pay, whether "freely" or under the duress of the State.
There is no market equivalent to gravity or the law of planetary motion. The model of supply
and demand is a hypothetical post rationalization of a shifting negotiation – while it's helpful
to a degree, supply/demand doesn't make "lawfull" (or useful) predictions until demand nears infinity
(see health care: "how much will that be, doc?" – "how much have you got?", or housing: "how much
can you borrow from a fractional reserve player who lends without risk and won't verify your income?")
As the local monopolists of violence, States can engage markets as they see fit. They can supply
(Volkswagon & the post office), demand (food stamps, R&D grants), regulate, open (ACA) or close
them (pharmaceutical imports) to their hearts desire. Good or bad outcomes depend entirely on
the wisdom of the policy.
Whoa. Exhale. To be sure, I inhaled. Too many words when I should just say:
Nice.
Its good we agree that policy should be just and compassionate.
The values and ideology represented in the Economics textbook Bill Black analyzed didn't
arise in a vacuum. The points Black lists reflect the ideology, values, ethics and interests of
a narrow segment of our society who have accumulated enormous personal wealth through a variety
of extra-legal and illegal mechanisms, and who use a small portion of that wealth to fund "Economics
Chairs" in our public and private universities; economics "think tanks"; and speeches, books,
consulting engagements, and board memberships for "prominent economists".
This matter is really about whose values will control government economic policy and law.
Excellent analysis. Thank you, Bill Black, for all you do and have done.
I see much of the underlying theory of classical economics as simplifications that make the
math easier. One of my favorite examples of misallocation of resources was the market for Burbank
Russet potatoes in 2001. Basically, producers wanted $6.50 per hundredweight for spuds. The big
buyer, Simplot offered farmers $4.50 pre-season. Many farmers decided to wait until harvest, hoping
the spot market would give them a better price. I should also mention that in Idaho, farmers not
wishing to plant in a given year, could sell their water to other farmers, or to the federal government
which uses the water to help salmon and to produce hydropower. Thus, producing potatoes carried
the opportunity cost of water leasing. But leasing water leasing to the federal government is
culturally taboo in the ag. community. 2001 was a dry year and most of the ag. water was consumed
growing spuds.
The outcome was a banner year in production, driving the spot market price to $0.50 per hundredweight,
far less than the cost of production. Many acres of potatoes were plowed under – a total loss
– to everyone.
My point is – there is no way to know, in advance, what the price of a commodity will be in
the future unless you know, or can limit, the rate of production and control demand.
Did the banks which loaned billions to the gas frackers of North Dakota know that production
would exceed demand and cause a crash? Perhaps the loan officer might have such concern, but would
more likely be most concerned with his/her own bottom line – a meme Yves explores in Econned.
I suppose I am a bit defensive of classical microeconomics because it is elegant. But I am
also terribly suspicious of its answers because one never has either the information or the control
to be anywhere near as certain as the calculus would suggest.
On point #9: "Prices Rise When the Government Prints Too Much Money". Recent inflation data
suggests it's a myth. But if restated as "When government prints money, prices rise on the goods
and services that the people who receive the money tend to buy", then it's NOT a myth.
That was the whole problem with the Federal Reserve's damned QE efforts. They printed gobs
of money, and it all landed in the pockets of the wealthy. The stuff they buy (stocks, real estate,
luxury goods, premium educations, etc.) has seen prices rise MUCH faster than nominal inflation.
And the people who didn't get any of the newly printed money (i.e., most of us)… Well, these sad
folks couldn't afford to spend any more than before, so anybody who attempted to impose prices
hikes on low-end consumer goods saw a loss of sales volume.
Newly-printed money CAN cause inflation, but WHERE the price rises happen depends greatly
on the pockets in which the money lands.
stocks, real estate, luxury goods, premium educations, etc.
But it's hard to produce more of those, so with an increase in money chasing them their prices
will rise. If the government handed money to poor people, they would buy food, clothes, cars,
televisions, etc. In other words, things that society can produce more of. That's my read, anyway.
Partially. Prices for good where quantities are truly fixed (like acres of land in San Francisco)
can rise sharply when extra money pours in.
But even when there is opportunity to increase production, manufacturers must purchase equipment
(like farm equipment for more food) or hire more workers (thereby tightening the labor market
and pushing wages up). These result in price hikes. More modest price hikes than San Francisco
real estate, but still real hikes. It's the classic supply vs. demand curve from classic microeconomics.
That said, "QE to the people" is certainly less objectionable than the "QE to the bankers and
the 1%" that we've seen over the past five years. Prices would go up, but people would get to
buy more things they want or need, and hiring would likely go up as well. [And at a minimum, there
needs to be at least *some* growth in the money supply to keep up with population growth. Otherwise
we see deflation and the ability to become wealthier by hoarding cash.]
"Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes
at the top of the income distribution have fallen substantially over the past few years.
"According to the most recent IRS data, between 2007 and 2009, the 99th percentile income
(AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income
fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879
to $32,396."
This kind of ignorant cluelessness is pretty prevalent among the oligarchy and its supporters
like Mankiw. Just like that guy in Davos who simply couldn't understand why there's so much social
unrest in the world today. They live in a completely different world.
The big difference being that $70k to the 99th percentile means the difference between a new
Beemer this year or next while $500 for the median family means choosing which child goes hungry
for the second half of December.
And of course, Anonymous's excellent point. You are cherry picking old data based on a stock
market and real estate bubble crash. Median income families don't "own" real estate and certainly
don't own stocks.
Mankiw is either psychotic or was gleefully obfuscating when he presenting that out-dated analysis.
I say Kill the Rich and feed their bodies to the poor. It's not a solution at all (and I am
rich myself) but it would be deeply, deeply satisfying!
My first exposure to Mankiw's principles was actually an early version of the talk by Yoram
Bauman in this video. It hits
several of the points Mr. Black makes and is also pretty funny. It definitely demonstrates how
Mankiw attempts to cloak his biases in supposedly neutral terms.
As for number 6, I couldn't disagree with you more. Organisational power is dependent on it
being enforced BY THE GOVERNMENT. Without that coercion, individuals would find other solutions
for the want provided for by that particular organisation. I would suggest that you look at the
history of Pennsylvania circa 1681-1690 or Moresnet (in what is now Aachen) circa 1816 until the
end of WWI to understand what is possible when the free market really operates.
I am actually a returning undergrad student and starting an econ course next week. I just
looked at the text book… and its Mankiw. Should be a fun semester.
Don't argue with the PR. You need to be strategic. Regurgitate the BS but be sure to read enough
corrective material that the toxins don't infect your brain.
I doubt Mankiw will accept 100% estate tax on the justification that the cost of bequests
is zero to the recipient. (and thus a 100% estate tax doesn't incur large costs on the recipient)
Greenspan phony "Shocked disbelief" reminds classic "...I am shocked - shocked, there is gambling
going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart
& Claude Rains in Casablanca. Compare with "... "Those of us who have looked to the self-interest
of lending institutions to protect shareholders' equity, myself included, are in a state of shocked
disbelief," he said. ..."
Notable quotes:
"... "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief," ..."
"... Greenspan spurned the Republican acolytes trying desperately to defend the faith and blame the crisis on the Community Reinvestment Act and the powerful lobby of poor people who forced powerless banks to do reckless things. ..."
"... Private greed, not public good, caused this catastrophe: "The evidence now suggests, but only in retrospect, that this market evolved in a manner which if there were no securitization, it would have been a much smaller problem and, indeed, very unlikely to have taken on the dimensions that it did. It wasn't until the securitization became a significant factor, which doesn't occur until 2005, that you got this huge increase in demand for subprime loans, because remember that without securitization, there would not have been a single subprime mortgage held outside of the United States, that it's the opening up of this market which created a huge demand from abroad for subprime mortgages as embodied in mortgage-backed securities. ..."
"... But having admitted the failure of his faith, Greenspan could not abandon it. Credit default swaps had to be "restrained," he admitted. Those who create mortgages should be mandated to retain a piece of them to insure responsible lending. Otherwise, the old faith still applied. No new regulations were needed, because the markets "for the indefinite future will be far more restrained than would any currently contemplated new regulatory regime." ..."
"... The only Guantanamo that the United States has any business running is a concentration camp for the hundreds of wall street executives and their cronies in Bushland that conspired to defraud the American people from their hard earned dollar. ..."
"... There are no free markets in America, any more than there is free lunch. ..."
"... So it wasn't the military-industrial complex that did us in after all . . . ..."
"... It's clear from comments on this contribution that few readers of Truthout believe Alan Greenspan's sorry testimony before Congress. What has faith in something to do with enforcing the policies of fiduciary responsibility already on the books? All these so-called "experts" on capitalism are now coming out to say "I'm sorry." Well, I won't be sorry for them until they are held monetarily and criminally responsible for their actions, inept or not. ..."
"... If it looks like class warfare, as David Harvey, author of Neoliberalism, has stated, call it class warfare and act accordingly. ..."
"... it doesn't take a genius to understand that when financial instruments are created based on crap (subprime mortgages), that eventually problems will occur with those instruments. In fact, Greenspan and his cronies knew that, which is why they resisted these instruments being regulated by the SEC or even the CFTC. ..."
"... Sounds like the "maestro" hit a flat note in his orchestra of greed and deregulation. ..."
"... Did anybody even bother to consult the Math PhDs who created these instruments to run possible scenarios -- just in case? why bother when you know you can scare congress, the president and the treasury and ultimately the people into bailing your ass out of worldwide collapse? ..."
"... Shocked Disbelief is a ploy. When they were all riding high, they didn't give a crap. They were going to come out richer than hell anyway. ..."
"... Where's Ayn Rand when you need her? Give me a break Mr Greenspan. Never let history and reality get in the way of the big unregulated celebration of greed like we have had since "Saint Ronald Wilson Reagan", and the other "Free Market" "government is the problem" ideologues ..."
"... What about the 1994 Act of Congress that required the Fed to monitor and regulate derivatives? The Act Greenspan ignored? ..."
"... "...I am shocked - shocked, there is gambling going on in this establishment...." "...here are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca ..."
by: Robert Borosage, The Campaign for America's Future
On October 23, former Federal Reserve Chairman Alan Greenspan testified before a House Oversight
and Government Reform Committee hearing on the role of federal regulators in the current financial
crisis.
It marks the end of an era. Alan Greenspan, the maestro, defender of the market fundamentalist faith,
champion of deregulation, celebrator of exotic banking inventions, admitted Thursday in a hearing
before Rep. Henry Waxman's House Committee and Oversight and Government Reform that he got it wrong.
"Those of us who have looked to the self-interest of lending institutions to protect shareholders'
equity, myself included, are in a state of shocked disbelief," he said.
As to the fantasy that banks could regulate themselves, that markets self-correct, that modern
risk management enforced prudence: "The whole intellectual edifice, however, collapsed in the summer
of last year."
Greenspan spurned the Republican acolytes trying desperately to defend the faith and blame
the crisis on the Community Reinvestment Act and the powerful lobby of poor people who forced powerless
banks to do reckless things. Greenspan dismissed that goofiness in response to a question from
one of its right-wing purveyors, Rep. Todd Platts, R-Pa., noting that subprime loans grew to a crisis
only as the unregulated shadow financial system securitized mortgages, marketed them across the world,
and pressured brokers to lower standards to generate a larger supply to meet the demand. Private
greed, not public good, caused this catastrophe:
"The evidence now suggests, but only in retrospect, that this market evolved in a manner which
if there were no securitization, it would have been a much smaller problem and, indeed, very unlikely
to have taken on the dimensions that it did. It wasn't until the securitization became a significant
factor, which doesn't occur until 2005, that you got this huge increase in demand for subprime
loans, because remember that without securitization, there would not have been a single subprime
mortgage held outside of the United States, that it's the opening up of this market which created
a huge demand from abroad for subprime mortgages as embodied in mortgage-backed securities.
But having admitted the failure of his faith, Greenspan could not abandon it. Credit default
swaps had to be "restrained," he admitted. Those who create mortgages should be mandated to retain
a piece of them to insure responsible lending. Otherwise, the old faith still applied. No new regulations
were needed, because the markets "for the indefinite future will be far more restrained than would
any currently contemplated new regulatory regime."
Now hung over from their bender, the banks could be depended upon to remain sober "for the indefinite
future." Or until taxpayers' money relieves their headaches, and they are free to party once more.
IN ACCORDANCE WITH TITLE 17 U.S.C. SECTION 107, THIS MATERIAL IS DISTRIBUTED WITHOUT PROFIT TO
THOSE WHO HAVE EXPRESSED A PRIOR INTEREST IN RECEIVING THE INCLUDED INFORMATION FOR RESEARCH AND
EDUCATIONAL PURPOSES. TRUTHOUT HAS NO AFFILIATION WHATSOEVER WITH THE ORIGINATOR OF THIS ARTICLE
NOR IS TRUTHOUT ENDORSED OR SPONSORED BY THE ORIGINATOR.
"VIEW SOURCE ARTICLE" LINKS ARE PROVIDED
AS A CONVENIENCE TO OUR READERS AND ALLOW FOR VERIFICATION OF AUTHENTICITY. HOWEVER, AS ORIGINATING
PAGES ARE OFTEN UPDATED BY THEIR ORIGINATING HOST SITES, THE VERSIONS POSTED ON TO MAY NOT MATCH
THE VERSIONS OUR READERS VIEW WHEN CLICKING THE "VIEW SOURCE ARTICLE" LINKS.
Comments
This is a moderated forum. It may take a little while for comments to go live.
Sun, 10/26/2008 - 23:37 - Captain America (not verified)
The only Guantanamo that the United States has any business running is a concentration camp
for the hundreds of wall street executives and their cronies in Bushland that conspired to defraud
the American people from their hard earned dollar.
What they did dwarfs the damage caused to this country by 911, (no disrespect for the many
innocents who died). However, here, every single citizen is a victim of fraud and corruption on
a scale that was heretofore inconceivable. Greenspan, Bush and now Paulson have done more than
Bin Laden and his hordes could do in a 100 years.
By the way, if you protest YOU wind up locked up for being un-American. What happened America
?
There are no free markets in America, any more than there is free lunch. The game was always
fixed and Greenspan was the ultimate shill for the fixers. The past thirty years have been an orgy
of greed with common sense shoved aside for the sake of uncommon expediency. Americans became infatuated
by arcane formulas and dense incomprehensible mathematics to the point that they forget simple arithmetic.
America wake up it was only a dream, and a bad one at that.
It's clear from comments on this contribution that few readers of Truthout believe Alan Greenspan's
sorry testimony before Congress. What has faith in something to do with enforcing the policies
of fiduciary responsibility already on the books? All these so-called "experts" on capitalism
are now coming out to say "I'm sorry." Well, I won't be sorry for them until they are held monetarily
and criminally responsible for their actions, inept or not. The truth is as plain as the
nose on your face: Greenspan, the Federal Reserve, the investment banks, the Bush administration
and several members of Congress unobtrusively acted to consciously and knowingly to rob the national
treasury for the sake of capitalism's sacred cow: capital accumulation on behalf of the nation's
political and economic elite. If it looks like class warfare, as David Harvey, author of Neoliberalism,
has stated, call it class warfare and act accordingly.
We have heard statements like "the mathematical models used for knowing the behavior of derivatives
based on subprime mortgages were too difficult to understand", etc. But it doesn't take a
genius to understand that when financial instruments are created based on crap (subprime mortgages),
that eventually problems will occur with those instruments. In fact, Greenspan and his cronies
knew that, which is why they resisted these instruments being regulated by the SEC or even the
CFTC. And this is why they turned a blind eye to many of the rating agencies giving many
of these instruments AAA ratings. I am sure that a real investigation will reveal numerous instances
of fraudulent activity in conjunction with this debacle. Those perpetrators must be identified
and brought to justice. While this will not fix our current problem, it hopefully should serve
as a deterrent to those who would in the future attempt to again engage in such activities.
Sun, 10/26/2008 - 08:13 - Robert Iserbyt (not verified)
Well here you have it a confessional lie from the biggest fraud perpetrator in the history of
American finance Why the markets ever listened to this criminal in the first place is evidence
that our entire nation should be required to take a full year of real unfettered economics just
in case they don't understand what is going on now. All the pundits on MSNBC and all the talking
heads should be removed from the airwaves. The Bailout what will that do? the answer lies before
you.
Sounds like the "maestro" hit a flat note in his orchestra of greed and deregulation.
Come on, do you really think we are all so stupid to buy into the story that you couldn't predict
a melt down knowing that those writing the subprimes held no responsibility for their actions?
That's like giving a "get out of jail card" to someone who just created a felony! Did anybody
even bother to consult the Math PhDs who created these instruments to run possible scenarios --
just in case? why bother when you know you can scare congress, the president and the treasury
and ultimately the people into bailing your ass out of worldwide collapse?
I'm a former real estate broker and my son is a mortgage broker. From about 2004 through the beginning
of this "greatest financial crisis since '29", we frequently talked on the phone about the disaster
which would ensue when the real estate value appreciation stopped, and people were no longer fueling
the economy with money borrowed against their equity, and the sub-prime loan fiasco would end.
We knew it would be disastrous, and both of us were astonished that neither the FED nor congress
was willing to say or do anything about it. Anyone who has witnessed over the years the cycle
of boom/bust/boom/bust in the real estate market knew that after eleven years of unprecedented
"boom" -- '96 through '2007 -- the "bust" would be like an earthquake. Paulson and Greenspan and
their ilk now denying that they suspected this is just is just their lying to protect the GOP
which was benefitting from the booming economy. They should both end up in prison, with all of
the GOP members of congress who have had their hands in the cash register.
Dance clown, dance. First you were against the FED until you became head of the FED. Then you
were for trickle down economics and letting the "system" regulate itself until you saw the inevitable
destruction it caused. Dance clown, dance. You should be the first one sent to prison under the
"Un-American activities act". The arrogance of your testimony before the committee was appalling.
You honestly couldn't believe you were wrong !!!
This is like telling the Fox to watch the Hens and then walking away and trusting him to do the
right thing. Government has to return to regulation and see that there is no hanky, Banky going
on anymore. Monopolies have to be busted up, like the Communication industry's, the Drug industries
and any other Corporations that control to much of the way the Country operates. No more Outsourcing
any Government duties.
Where's Ayn Rand when you need her? Give me a break Mr Greenspan. Never let history and reality
get in the way of the big unregulated celebration of greed like we have had since "Saint Ronald
Wilson Reagan", and the other "Free Market" "government is the problem" ideologues. We can
spend trillions on war and corporate bailouts, but we can't have a single payer health system?
We can't rebuild our infrastructure? Say it again- give me a break!
"...I am shocked - shocked, there is gambling going on in this establishment...." "...here
are your winnings..." exchange between Humphrey Bogart & Claude Rains in Casablanca
"... By Gerald Friedman, Professor of Economics, University of Massachusetts, Amherst. A version of this post first appeared at the Institute for New Economic Thinking website ..."
"... Lesser Depression ..."
"... The reason why elite economists and politicians were so angry at my analysis of Sanders' proposals was that it disrupted a consensus that nothing can be done by government to improve the performance of the economy. After all, if things are already as good as they can be, it is irresponsible pie-in-the-sky to even suggest to the general public that we can do better. Instead, the task of economists and other policy elites becomes to explain to the general public why they should accept stagnant incomes and rising inequality, and applaud the anemic growth of recent years as the best possible outcome. But the real danger of such thinking is that it leaves liberals like Hillary Clinton with few policy options to offer in response to the siren song of demagogues like Donald Trump. The self-proclaimed "responsible" elite economists see their role as to persuade the public that nothing can be done, in the hope of heading off the challenge of those who would capitalize on the electorate's appetite for change. They have to slap down critics. "Responsible" elite economists have to keep the party of "good arithmetic" from overpromising at all costs. It should not surprise us, though, that those whose living standards have suffered most from stagnant growth are more inclined to believe politicians promising change. ..."
"... John Maynard Keynes showed how active government policy can raise employment and output; his followers, including Joan Robinson and Nicholas Kaldor, showed how full employment encourages further investments and leads businesses to find ways to raise labor productivity to match increasing product demand. New Deal American economists, such as Rexford Tugwell and John Maurice Clark, showed how active government policy can raise growth rates with investments in infrastructure, in public services, in human capital development, and in research and development. By listening to these ideas, economists associated with liberal American politics helped produce 25 years of relatively rapid and egalitarian growth after World War II. Abandoning these ideas, we have suffered 30 years of relatively slow growth and rising inequality, culminating in the current Lesser Depression. ..."
"... I had dinner last night with two excellent people who happen to be doing well at this time. They could not comprehend why anyone would be voting for Trump, whom they saw as a dangerous lunatic. They have supported Sanders and voted for him in the NY primary, but are absolutely going to vote for Clinton in the Fall. What I view as the credible case against Clinton has not reached them with any strength or registered at all. I was asked (because I had said nothing while they talked–I hate this kind of confrontation) what problem people could have with Hillary? I said: Libya, Ukraine, and Nicaragua. They really didn't know what I was talking about and although I spoke up for why I thought this made her a neocon like the ones that surrounded Dubya, they simply didn't know any of the details and we left it at that. ..."
"... HRC's recap of Reaganite Latin America policy is her most vile achievement. If anything demonstrates a continuity of imperialist strategy across administrations, that's it. ..."
"... " I said: Libya, Ukraine, and Nicaragua. They really didn't know what I was talking about and although I spoke up for why I thought this made her a neocon like the ones that surrounded Dubya, they simply didn't know any of the details and we left it at that." ..."
"... I run into this all the time. Utter and complete foreign policy illiteracy, particularly from otherwise politically correct millennials who know so little that Hillary gets a complete pass. ..."
"... This is a common story and illustrates that our current detachment from the world around us and our fellow citizens is coming to an end. We are being forced out of our individual bubbles. Modern corporations have supplied the populations of the world with abundance of goods, but in order to accomplish this feat, have destroyed and are destroying the cultural glue, if you will, that holds society together. ..."
"... TINA will be maintained by propaganda and physical force. We see that the propaganda is starting to weaken because the contradictions of the message can no longer be hidden. The destruction is too widespread and the inequality can no longer be hidden. You can hollow out a social system only so much before it collapses. The collapses we are witnessing is the promise of democracy. A collapse of the ideals of moderation and compromise. ..."
"... We are entering a phase of civil war. It is still carried out in a polite manner and intellectually, the discussion is still couched in Orwellian doublespeak. However, criticisms of the ruling elite are becoming more straightforward and more people are waking up to the fact that the system is rigged against them. ..."
"... This civil war is a battle over leadership. It is a battle to demand good government instead of no government. It is a battle to demand a government for and by the people. A battle for the common good. Evaluated not in some abstract terms like "trickle down" economics, but direct support and action. The hearts and minds of the population was won over long ago to wholeheartedly support capitalism and private ownership of the world's resources. This is proving to be a disaster. ..."
"... Supporters of unfettered capitalism know only one way. Privatization of ALL the worlds resources and potential. They showed their hand in 2008 with the bailouts and implementation of austerity policies. In their minds, there is no turning back. To compromise means failure. For them, TINA is real and logical. This is the perspective of owners of capital. They gain strength and advantage from seeming to compromise, but in the end know they can always reverse course and regain private control. Subterfuge and force allows the resilience of capitalism as the reigning social order. ..."
"... Jonathan Haidt is a psychologist, sometimes featured in the New York Times, who apparently believes the capability of people to be convinced by reasoned argument is not strong. From my limited reading of his work, he suggests that humans are instinctive beings who, when they have strong beliefs, their reasoning powers are used to justify these beliefs, not to cast doubt about these beliefs. ..."
"... For example, I believe HRC is little more than a well-connected and well traveled mediocrity, with a record of few positives and many egregious negatives that justifies this assessment. I view her as potentially more damaging to the USA, as President, than Trump. ..."
"... Successful big ideas and big projects require cheap abundant energy, resources and intelligent design. It'll be mighty funny when the Keynesians finally implement their plan to overhaul the national highway infrastructure, creating tons of high paying jobs and speeding up the economy–right when our access to cheap oil collapses. That's dumb design at its finest, yet this sort of thing is almost certainly the best that the lobotomized Keynesian planners will be able to think up and do. ..."
"... A truly innovative program to get the economy moving in a positive direction would be to outlaw personal vehicles and rebuild the nation's railway network. ..."
"... I share your antipathy toward freeways. I remember the big Freeway they built in Fresno when I was a child, destroying hundreds, if not thousands of modest homes (we had to move from a grand rental to a dilapidated house that cost more – were the landlords behind getting rid of a surplus of houses????) – to save maybe – maybe at the most 3 minutes in transit time over driving an existing surface street. Jobs were part of the rationale. ..."
"... "Sorry, nothing more can be done for you." TINA. ..."
The ferocious
reaction
to my
assessment
that Senator Bernie Sanders' economic and health care proposals could create long-term economic
growth shows how mainstream economists who view themselves as politically liberal in America have
abandoned progressive politics to embrace a political economy of despair. Rationalizing personal
disappointment and embracing market-centric economic theories according to which government can do
little more than fuss around the edges, their conclusions - and the political leadership that embraces
them - have little to offer millions of angry ordinary people for whom the economy simply isn't working.
It has certainly been a rough seven years for the economists in the Obama Administration. While
avoiding a Great Depression, the Administration has presided over what Paul Krugman and Brad DeLong
call a "
Lesser Depression ." One might almost forgive them for a certain defeatism after seven
years of painfully slow economic recovery, and the dismay of seeing urgently needed programs blocked
by the Republican congressional majority. After so many compromises and let-downs, perhaps it is
easier to tell those who expect more that it just can't happen. There is comfort in the Thatcherite
phrase, "There Is No Alternative" (TINA).
Combined with orthodox neoclassical microeconomics, however, rationalization has produced a toxic
political economy that abandons progressive ideals and surrenders political space to xenophobes and
the populist rightwing (see: Donald Trump). The mainstream economists who have attacked my embrace
of Keynesian economics have abandoned, in practice, the notion that government can effectively intervene
in the economy to raise levels of employment, and to promote economic growth and equity. Instead,
they have returned to pre-Keynesian Classical thinking, where the very suggestion that government
action can raise growth rates or wages is taken to be obviously wrong. Criticisms of the
orthodox model and its conservative policies are deemed worthy of scorn, to be dismissed tout
court because they are obviously at variance not only with textbook economics, but with what
we need to believe in order to accept failure .
The mechanism of economic policy paralysis among the liberals who espouse market-centric economics
works like this: If we accept the (flawed) premise that the total supply of goods and services equals
total demand, then we can agree with the Congressional Budget Office (CBO) that potential output
is best measured by observing actual output. And, with that - presto! - unemployment magically disappears,
and we no longer suffer from slow growth. Conveniently align growth projections with the otherwise-disappointing
performance during the Lesser Depression, and, as the CBO has done, estimates of potential growth
now equal actual growth: Instead of the 3 percent average annual growth of the 1959-2007 period,
not to mention the 4 percent growth 1947-73, we are now told to accept 2 percent growth not as a
disappointment, but as recognition of an unfortunate necessity. Such reevaluations say to policy
elites, "Hey, we are doing as well as can be expected." To the general public, the message is: "Sorry,
nothing more can be done for you." TINA.
The reason why elite economists and politicians were so angry at my analysis of Sanders' proposals
was that it disrupted a consensus that nothing can be done by government to improve the performance
of the economy. After all, if things are already as good as they can be, it is irresponsible pie-in-the-sky
to even suggest to the general public that we can do better. Instead, the task of economists and
other policy elites becomes to explain to the general public why they should accept stagnant incomes
and rising inequality, and applaud the anemic growth of recent years as the best possible outcome.
But the real danger of such thinking is that it leaves liberals like Hillary Clinton with few policy
options to offer in response to the siren song of demagogues like Donald Trump. The self-proclaimed
"responsible" elite economists see their role as to persuade the public that nothing can be done,
in the hope of heading off the challenge of those who would capitalize on the electorate's appetite
for change. They have to slap down critics. "Responsible" elite economists have to keep the party
of "good arithmetic" from overpromising at all costs. It should not surprise us, though, that those
whose living standards have suffered most from stagnant growth are more inclined to believe politicians
promising change.
It was only by rejecting classical economics that Franklin Roosevelt was able to save the American
economy and bring about a revolution in social policy. And only by rejecting the new classical economics
and the policy of so-called responsible elite economists can Clinton meet our current economic crisis.
John Maynard Keynes showed how active government policy can raise employment and output; his
followers, including Joan Robinson and Nicholas Kaldor, showed how full employment encourages further
investments and leads businesses to find ways to raise labor productivity to match increasing product
demand. New Deal American economists, such as Rexford Tugwell and John Maurice Clark, showed how
active government policy can raise growth rates with investments in infrastructure, in public services,
in human capital development, and in research and development. By listening to these ideas, economists
associated with liberal American politics helped produce 25 years of relatively rapid and egalitarian
growth after World War II. Abandoning these ideas, we have suffered 30 years of relatively slow growth
and rising inequality, culminating in the current Lesser Depression.
The debate over my little report showed how mainstream economics has left us with a smugly certain
macroeconomics lacking in imagination, and offering no effective policies to move beyond economic
stagnation and escalating inequality. If these economists cannot do better, then we risk more than
personal disappointment; we gamble our liberal political economy against the likes of Donald Trump
and Ted Cruz. Hillary Clinton can do better. And Americans deserve better.
A very bold thing for a man like this to say. I know he will be criticized (vilified?) for
his misplaced belief that Clinton can "do better", but considering who this man is and where he
is coming from, condemning him at this stage of the game would be churlish. He's taken on The
Bigs and the stifling orthodoxy they embody and for that we owe him.
I had dinner last night with two excellent people who happen to be doing well at this time.
They could not comprehend why anyone would be voting for Trump, whom they saw as a dangerous lunatic.
They have supported Sanders and voted for him in the NY primary, but are absolutely going to vote
for Clinton in the Fall. What I view as the credible case against Clinton has not reached them
with any strength or registered at all. I was asked (because I had said nothing while they talked–I
hate this kind of confrontation) what problem people could have with Hillary? I said: Libya, Ukraine,
and Nicaragua. They really didn't know what I was talking about and although I spoke up for why
I thought this made her a neocon like the ones that surrounded Dubya, they simply didn't know
any of the details and we left it at that.
I've had many similar recent encounters. I find that if I ask for a positive reason to vote
Clinton, the first three or four reasons they raise can be dismissed by single phrase references
to past betrayals, Sister Solja, End of Welfare, Nafta etc. and the next few by scandals, Lewensky
or what should be scandals as you mentioned. As a rule after four or five tries I get to watch
them self censor before each subsequent try and don't have to make any negative claims myself.
I doubt I've changed minds, but they no longer doubt mine.
I think that was a slip, but an historically correct one I can completely sympathize with.
HRC's recap of Reaganite Latin America policy is her most vile achievement. If anything
demonstrates a continuity of imperialist strategy across administrations, that's it.
" I said: Libya, Ukraine, and Nicaragua. They really didn't know what I was talking
about and although I spoke up for why I thought this made her a neocon like the ones that surrounded
Dubya, they simply didn't know any of the details and we left it at that."
I run into this all the time. Utter and complete foreign policy illiteracy, particularly
from otherwise politically correct millennials who know so little that Hillary gets a complete
pass.
This is a common story and illustrates that our current detachment from the world around
us and our fellow citizens is coming to an end. We are being forced out of our individual bubbles.
Modern corporations have supplied the populations of the world with abundance of goods, but in
order to accomplish this feat, have destroyed and are destroying the cultural glue, if you will,
that holds society together.
TINA will be maintained by propaganda and physical force. We see that the propaganda is
starting to weaken because the contradictions of the message can no longer be hidden. The destruction
is too widespread and the inequality can no longer be hidden. You can hollow out a social system
only so much before it collapses. The collapses we are witnessing is the promise of democracy.
A collapse of the ideals of moderation and compromise.
We are entering a phase of civil war. It is still carried out in a polite manner and intellectually,
the discussion is still couched in Orwellian doublespeak. However, criticisms of the ruling elite
are becoming more straightforward and more people are waking up to the fact that the system is
rigged against them.
This civil war is a battle over leadership. It is a battle to demand good government instead
of no government. It is a battle to demand a government for and by the people. A battle for the
common good. Evaluated not in some abstract terms like "trickle down" economics, but direct support
and action. The hearts and minds of the population was won over long ago to wholeheartedly support
capitalism and private ownership of the world's resources. This is proving to be a disaster.
Supporters of unfettered capitalism know only one way. Privatization of ALL the worlds
resources and potential. They showed their hand in 2008 with the bailouts and implementation of
austerity policies. In their minds, there is no turning back. To compromise means failure. For
them, TINA is real and logical. This is the perspective of owners of capital. They gain strength
and advantage from seeming to compromise, but in the end know they can always reverse course and
regain private control. Subterfuge and force allows the resilience of capitalism as the reigning
social order.
I bring up the notion of a civil war because these ideas are too important to be left to chance.
In America, the citizenry has been complacent with their lot in life and so have lost control
over their fate. As the world changes around them, they desperately attempt to hold onto their
position while not realizing they are supporting their own impoverishment. Speaking ideas of the
common good -for ALL- and notions of public ownership of land, natural resources, citizens natural
rights to jobs, basic income, and healthcare divide family and friends. Those who are comfortable
don't want to cause trouble and those feeling the pressures brought down upon them by an unrelenting
system are too weak and fearful to act.
In a sense, the revolution has already begun. It is the revolution to convince people that
there is a better and different way to live our lives.
Jonathan Haidt is a psychologist, sometimes featured in the New York Times, who apparently
believes the capability of people to be convinced by reasoned argument is not strong. From my
limited reading of his work, he suggests that humans are instinctive beings who, when they have
strong beliefs, their reasoning powers are used to justify these beliefs, not to cast doubt about
these beliefs.
This can explain why attempting to convince someone to change their political/religious beliefs
is fated to be largely futile.
For example, I believe HRC is little more than a well-connected and well traveled mediocrity,
with a record of few positives and many egregious negatives that justifies this assessment. I
view her as potentially more damaging to the USA, as President, than Trump.
Per Haidt, maybe my beliefs are instinctive and I am willfully blind to all of Clinton's accomplishments
over the last 40 years.
I think that if there are to be any Keynesian big ideas and projects that will help lift us
out of this stagnation, they will much more likely come from a Trump Administration than a Clinton
one.
Successful big ideas and big projects require cheap abundant energy, resources and intelligent
design. It'll be mighty funny when the Keynesians finally implement their plan to overhaul the
national highway infrastructure, creating tons of high paying jobs and speeding up the economy–right
when our access to cheap oil collapses. That's dumb design at its finest, yet this sort of thing
is almost certainly the best that the lobotomized Keynesian planners will be able to think up
and do.
A truly innovative program to get the economy moving in a positive direction would be to
outlaw personal vehicles and rebuild the nation's railway network. But this society isn't
even anywhere close to having something so useful on its agenda. So we'll do some Keynesian program,
funnel the few remaining resources we have left down into some stupid dead end rathole, and then
in a couple of years we'll be envious here in America of the extravagant lifestyles that the Mexicans
are leading. Hell Trump's wall will be a lot more useful keeping the Mexicans in who are trying
to flee. That is the end result of Keynesian programs in a delusional society with bass-ackward
priorities. Way more harm than good.
I share your antipathy toward freeways. I remember the big Freeway they built in Fresno
when I was a child, destroying hundreds, if not thousands of modest homes (we had to move from
a grand rental to a dilapidated house that cost more – were the landlords behind getting rid of
a surplus of houses????) – to save maybe – maybe at the most 3 minutes in transit time over driving
an existing surface street. Jobs were part of the rationale.
I have been gone 20 years, and they had gone on a real freeway building tear while I was gone.
The whole city crisscrossed with freeways laid out as if someone had thrown a bowl of spaghetti
on a map – apparently so every neighborhood can enjoy the sound of traffic.
Really, Fresno is just not that physically big to justify all these freeways. And with its
high unemployment and no real "center" there aren't any places with traffic congestion anyway
– but you get these dubious justifications that millions of dollars are wasted because an implausible
auto trip is 4 minutes longer without the freeway….
There seems to be a developing narrative that the Obama Administration has just been brimming
with big ideas that have been thwarted by evil Republicans.
I don't remember it this way. I do remember an Obama Administration that turned to austerity
shortly after the 2009 stimulus, and one that has been patting itself on the back all along about
what a great job it has done.
"All across America, families are tightening their belts and making hard choices. Now, Washington
must show that same sense of responsibility."
President Obama, April 2009(!)
Now that the pictures we snapped of Obama are finally beginning to develop, where we thought
we had photographed his lush jungle, we're now seeing just a single thin sapling planted for "the
future." And Clinton will soon have a picture of her snapped at this sad tree, with her big lying
smile.
I don't think Friedman is saying this, unless Rex Tugwell has been secretly disinterred and
is serving under Obama. The capitalist ideological counteroffensive that got going in the 70s
has been hegemonically successful. Friedman doesn't acknowledge that enough, he instead focuses
on what sounds more like disciplinary politics.
This type of article or perhaps, all articles about the Economy, deal with the Economy as a
substance to which people are appended as accidents. The economy is the sum total of the effort
of the people and if the people think that enjoying this very present is preferable to an effort
to build a future nothing can be done about it. It is the mind of the people that has to be changed.
Wars are very good mechanisms for that.
I can't remember if I got this link from an NC comment, or elsewhere. In any case, it's a scary
read: "The 14 Defining Characteristics of Facism," augmented by a selection from "They Thought
They Were Free." http://rense.com/general37/fascism.htm
Brings Obama and HRC to mind just as much as Trump, if not more.
"The ferocious reaction to my assessment that Senator Bernie Sanders' economic and health care
proposals could create long-term economic growth shows how mainstream economists who view themselves
as politically liberal in America have abandoned progressive politics to embrace a political economy
of despair."
==========================
Here is the problem: "a political economy of despair" – accepting that economists are a real
objective academic discipline is a BIG mistake – the idea that these technocrats, who never seem
to recognize how much fraud, rent seeking, and capture of the political system
((because the people paying them don't WANT THEM TO)),
decides things like how much inequality there is, which than decides how much demand there is,
and NOT knowing, and apparently NOT WANTING TO KNOW, that it is a POLITICAL economy, and politics
decides how resources are often allocated.
We can have single payer heath care if we choose it and free college education (it wasn't all
that long ago that I went to a CA college essentially for free). HOW is it college used to be
free when GDP was less than 1/6 of what it is now??????
It just doesn't make sense that we used to be able to afford free college and we can't now. It
is a POLITICAL decision – when Krugman says Sanders plan is "too expensive" Krugman is making
a political decision – not some objective scientific assessment. And if he is not even smart enough
to ponder why it used to be free and it is not free now – well, theres your problem right there!
Nice to see this article. When I talk about economics, most people who know anything, only
know what someone on TV tells them, so they often question, well who agrees with you? Nice to
have another name to list.
And then…
"Sorry, nothing more can be done for you." TINA.
Of course for those at the tippy-top, "How can I help you today?"
Economic Models Must Account for Who Has the Power''
: Nobel Prize
winning economist
Joseph
Stiglitz recently highlighted
two schools of thought on how income
is distributed to different groups of people in the economy. Which
school is correct has important implications for our understanding of
the forces that have caused the rise in inequality, and for the
policies needed to reverse this trend. It also relates to another
controversy that has flamed up recently, how economics should be
taught in principles of economics courses. ...
And according to Sraffa's
side in the Cambridge capital controversy labour and capital
do not receive their marginal products, which leaves the
distribution of income to some extent socially or politically
determined.
Now please make a donation to Project Syndicate, and check
out Robert Skidelsky at the same site.
Excellent. It will be taught in graduate school, long after
the little ones have been indoctrinated in reactionary
thought be Econ 101.
P.S. The school of thought that
accepts inequality as a Teh Awesome result of merit cannot
explain why inherited wealth should be allowed to accumulate
- another aspect of how power writes the economic rules.
"It will be taught in graduate school, long after the little
ones have been indoctrinated in reactionary thought be Econ
101."
Joan Robinson's writing on market power was required
reading when I was in graduate school. My undergrad profs
touched on this issue but not as much. I wonder if Greg
Mankiw teaches market imperfections to his undergrad students
at Harvard.
"I wonder if Greg Mankiw teaches market imperfections to his
"undergrad students at Harvard."
According to theoclassical
doctrine, all market imperfections are the result of gummint
innerference. Left to themselves, markets hum with music of
the perfect spheres.
We are way past just one or the other of those explanations
being true. Opportunities come in many forms, but just not
for many people. Competition becomes limited in the womb and
then they go from there. Better schools across all zip codes
and public day care with universal pre-K would be a start.
Even that is doomed to the catch-22 of making a better
informed public requires a better informed public to demand
being better informed. Down east they say "You can't get thar
from here."
I was fortunate enough to grow up in Prince
William County VA in the late sixties just as it was
beginning to boom from growth proximate to the DC Beltway. We
had a new and progressive school system even relative to
NoVA. Still by the 7th grade it was evident to me that the
pedagogy related to reality in dogmatic POVs that were only
relevant to the next generation of yuppie kids that had
gotten a half step advantage in some various way from their
parents.
My half step came from an unusual source though. My dad
was illiterate and my mom only finished the 8th grade, but
they were stoics with exceedingly powerful work ethics
transferred more by their example of excellence in every
menial thing that they did rather than by belittling and
cajoling me. My dad was the best hunter, the most successful
fisherman, grew the most beautiful and bountiful garden, and
was self-sufficient in caring for his car and home. His
position with the state highway department was limited by his
illiteracy to maintenance superintendent, but due to his
ability he still got to supervise the construction of roads
and bridges without the benefit of commensurate pay.
My mom was the best cook, kept the cleanest house, and as
at home day care for a few friends was the best a dealing
with troubled children from potty training to outbursts of
anger. It was a tough act to follow. Furthermore it did not
fit the status quo mold that public schools were designed to
reinforce. My half step freed me to reject the intellectual
authority of my instructors even though their administrative
authority was still sacrosanct in my home. I did well in
school and even better on tests eking by to enter the Honor
Society and passing the SAT test well enough to qualify for
Mensa, but I dropped out of college first semester mostly
just to relocate away from home to find a job in the city.
So, I got drafted and went to Viet Name, but was lucky enough
to survive and develop a successful career in IT systems
management large systems capacity planning and performance
management. The best break that I got was being laid off in
June 2015 with a severance package good enough to afford me a
retirement income equal after the change in expenses from
leaving the professional world behind to what I had been
making while working.
The moral to my story is that one can despise our
education system and still do very well by themselves with
it. One can reject our higher education and still do very
well by themselves without it. One can despise our corporate
"meritocracy" system and still have a successful career and
maybe even a comfortable retirement, but the ladder has been
raised for the latter. How anyone can be successful in school
and/or in career without recognizing their own half step
advantage or recognizing the intellectually and morally
vacant institutions that they traversed in their journey is
deeply puzzling to me.
P.S. I had the good fortune to relocate from Prince William
County to Orange County VA in summer 1966 before my senior
year in high school when my dad cashed out his state
retirement fund saving to start an electric motor/ john boat
livery and concession stand at Lake Orange, a VA Game and
Fisheries Commission state fishing lake.
The high school teachers were probably just as intelligent as
in Manassas Park, but far more socially challenged at least
in the academic curriculum. Still, the kids with that half
step from their successful parents did well enough to attend
decent colleges, but academic performance overall was much
lower than it had been in Manassas Park back in Prince
William County. The kids in Orange with really successful
parents all attended private prep schools.
P.P.S. Relative to the thread topic then we have a fairly
rigid establishment that favors the haves and keeps the
have-nots at bay. Monopoly rents are just one of the
luxurious rent extracting tools of an aristocracy of social
exclusion. Bankers, proto-industrialists, and slave owners
established the meme of republicanism as the conservative
power that protects us all from tyranny of the majority, but
perhaps a little too well. More importantly they established
the US Constitution as a nearly inviolable foundation for
preserving their world view of well-deserved elite privilege.
And they did it all in the name of democracy while showing
Thomas Paine the door.
It's a cool rainy day in central VA. Being retired and
primarily a person of outdoor interests then today I have an
abundance of time to waste. And commenting on the EV blog
sure beats a colonoscopy, which is what I will be getting
this time next week :<)
John Kenneth Galbraith used to write about countervailing
power. Unfortunately Galbraith has been pretty much consigned
to the dustbin. Even when he was writing, economics courses
did not talk about his ideas much...I guess he did not use
enough math symbols.
Business has long understood the
concept of what I'll call leverage points...critical
intellectual property, experience, and know how. Control of
these critical factors is a key to pricing power and
profitability. As one example, Symbol Technologies dominated
the handheld bar code scanner market for years, not because
they had superior technology or marketing, but because they
held the patent on the trigger, which was critical to
activating the scanner for reading. Their market power
affected not only competitors but suppliers and customers as
well.
Leverage points like this are commonplace in business
today. Yet I'm not aware that economics, with its orientation
towards competitive markets, has ever tried to model this
common behavior or even dealt with it.
Likewise, businesses have also understood the importance
of market and marketing channel domination to their long term
survival and profitability. Firms who fail to dominate must
specialize. These concepts are considered elementary in
business schools. Yet I don't know that economists have ever
managed (or even tried) to incorporate them into their
models.
It might help if more economists took business courses to
understand how the game is played...
I still say that until economists can reach consensus on the
objective of an economy, they remain divided on the
objective. Simply defining it as "for the general good" is a
cop-out --- and economists and everybody else know this full
well. Define what "general good means"....then see if
consensus can be reached. I seriously conclude this cannot be
done, since only by compromises can they reach consensus, and
this means defining the objective in subjective, vague
terms... just like "the general good" is vague and
subjective.
The cop-out used by economists is at the heart
of what Thomas' blog subject is about: Policy makers .. i.e.
gov't decides the objectives of an economy, which is to say
that economic power defines it. And of course economic power
will define it to maintain and extend their economic
power.... and at the very least to minimize any erosion
thereof.
So one must wonder how, if gov't is controlled by economic
power, that gov't will NOT insure the maintenance and
extension of that economic power? Is it possible in a
democracy defined by the U.S. constitution to significantly
reduce the economic power of those who have it? The
constitution in fact makes it impossible.
Even when congress occasionally finds a large enough
majority to make law to erode or reduce economic power in
gov't, the constitution enables 5 people in robes to deem it
unconstitutional OR the next congress, or the next will make
law that erode or reduce the effect of prior congress's law(s)
that reduced or eroded economic power.
If this were not the case we'd long since have had
universal single payer health care, strong labor unions, tax
policies that don't give unearned income a huge break, and
don't give offshore income an out by not taxing it until its
"repatriated", welfare systems that don't keep people in
poverty, and an educational system that provide free & equal
education to all (not one that gives communities, county's,
and States with the highest incomes & property values the
best education and everybody else with a lesser one.
Nor, will I add would it be possible to rape the nation's
environment by contaminating the nation's rivers, soils, and
the air with green-house gases .. not just "paying" fines
after the fact for doing so or putting low cost "caps" on
green-house gas emissions.
So what does "the general good" actually mean? Economists
can't agree on it, nor the means of achieving it of course
nor can policy makers.... and this is the fundamental problem
not being addressed.
One comment: You wrote "...individuals are
rewarded according to their contributions to the economic
well being of society. Those who contribute the most to the
production of the goods and services we all enjoy receive the
highest rewards and climb to the top of the income
distribution." I would add that having power includes being
able to dictate that rewards are allotted according to
economic contributions as opposed to other contributions. Cue
my go-to Chris Lasch quote: "... individuals cannot learn to
speak for themselves at all, much less come to an intelligent
understanding of their happiness and well-being, in a world
in which there are no values except those of the market....
the market tends to universalize itself. It does not easily
coexist with institutions that operate according to
principles that are antithetical to itself: schools and
universities, newspapers and magazines, charities, families.
Sooner or later the market tends to absorb them all. It puts
an almost irresistible pressure on every activity to justify
itself in the only terms it recognizes: to become a business
proposition, to pay its own way, to show black ink on the
bottom line. It turns news into entertainment, scholarship
into professional careerism, social work into the scientific
management of poverty. Inexorably it remodels every
institution in its own image."
"... Alternative theories would have led to very different policies. For instance, the tax cut in 2001 and 2003 under President Bush. Economists that are very widely respected were cutting taxes at the top, increasing inequality in our society when what we needed was just the opposite. Most of the models used by economists ignored inequality. They pretended that macroeconomy was unaffected by inequality. I think that was totally wrong. The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand. ..."
"... ditto...everyone from Tyler Cohen to Mark Perry of the AEI does daily posts about the markets working for everything...a daily "Market Failure in Everything" would provide a useful alternative to that point of view... ..."
"... Nobel-prize winner Joseph Stiglitz said monetary policies have exacerbated inequality and need to be redirected to better target getting money flowing into economies and helping small and medium-size businesses. ..."
"... policies such as quantitative easing were a "version of trickle-down economics" and the subsequent increase in asset prices only affected the wealthiest in society ..."
"... "The key problem is the access of credit to small and medium-size enterprises, is getting that flow of money into the real economy," Stiglitz said. It's "nice to have a stock market bubble if you have a lot of stock. But if you are in the bottom 80 percent of America, you have a little stock and you can feel a little good about the stock going up. But let's face it, the overwhelming bulk of our stock market is owned by the 1 percent." ..."
"... Oh my god. He lumps in Bernanke with Greenspan. What are the Fed worshippers going to do now? Their deity is under attack from Stiglitz. Of course it is nothing but fact that bernanke denied that bubbles in real estate were possible OR that a bubble could become s problem for the economy. Hats off to Stiglitz. ..."
"... How much more evidence do we need that the current trickle down monetary policy has failed? "The weak growth for the quarter puts this recovery even further behind any prior recovery at the same stage. After eight and a quarter years, the economy is only 10.1 percent larger than its pre-recession level of output. A more typical recovery would have seen at least twice as much growth." ..."
...White: ... To what extent do you feel economist and economic theory
is culpable for the crisis? What is the role of an economist going
forward?
Stiglitz: The prevalent ideology-when I say prevalent it's not all
economists- held that markets were basically efficient, that they were
stable. You had people like Greenspan and Bernanke saying things like
"markets don't generate bubbles." They had precise models that were
precisely wrong and gave them confidence in theories that led to the
policies that were responsible for the crisis, and responsible for the
growth in inequality.
Alternative theories would have led to very
different policies. For instance, the tax cut in 2001 and 2003 under
President Bush. Economists that are very widely respected were cutting
taxes at the top, increasing inequality in our society when what we
needed was just the opposite. Most of the models used by economists
ignored inequality. They pretended that macroeconomy was unaffected by
inequality. I think that was totally wrong. The strange thing about
the economics profession over the last 35 year is that there has been
two strands: One very strongly focusing on the limitations of the
market, and then another saying how wonderful markets were.
Unfortunately too much attention was being paid to that second strand.
What can we do about it? We've had this very strong strand that is
focused on the limitations and market imperfections. A very large
fraction of the younger people, this is what they want to work on.
It's very hard to persuade a young person who has seen the Great
Recession, who has seen all the problems with inequality, to tell them
inequality is not important and that markets are always efficient.
They'd think you're crazy. ...
When I first started blogging, I used to do posts with the title
"Market Failure in Everything." as a counter to "the prevalent ideology."
Maybe I should revive something similar.
ditto...everyone from Tyler Cohen to Mark Perry of the
AEI does daily posts about the markets working for
everything...a daily "Market Failure in Everything" would
provide a useful alternative to that point of view...
Nothing about Ricardian Equivalence or RBC fallacies.
While
inequality is certainly important for consumption demand, PCE
has not been a significant problem in the recovery. OTOH,
reduction of the federal budget deficit explains virtually
all of the deficient demand we have experienced. Obama and
the Dems bought into RE and are paying the price now.
"Nobel-prize winner Joseph Stiglitz said monetary policies have exacerbated inequality
and need to be redirected to better target getting money
flowing into economies and helping small and medium-size
businesses.
In a Bloomberg Television interview Tuesday with Francine
Lacqua and Michael McKee in New York, he said policies such
as quantitative easing were a "version of trickle-down
economics" and the subsequent increase in asset prices only
affected the wealthiest in society.
"The key problem is the access of credit to small and
medium-size enterprises, is getting that flow of money into
the real economy," Stiglitz said. It's "nice to have a stock
market bubble if you have a lot of stock. But if you are in
the bottom 80 percent of America, you have a little stock and
you can feel a little good about the stock going up. But
let's face it, the overwhelming bulk of our stock market is
owned by the 1 percent."
Stiglitz's comments come as some central banks around the
world are being forced to delve deeper into their policy
tools to help support their economies. As policy makers
struggle to find a way out of the economic malaise, some have
even raised the idea of helicopter money, which aims to
direct cash straight to consumers.
The Columbia University professor, who said the Federal
Reserve can do more to "channel" money to small companies and
the economy, was also critical of negative rates. This is
partly because of their potential impact on lending.
"The dangers of negative interest rates -- if you don't
manage it extraordinarily well; some countries are doing it
reasonably well, some are not -- is that it actually weakens
the banking system," he said. "If it weakens the banking
system, the banks are going to provide even less credit.
While it might have some effect on financial markets, in
terms of what we really should be concerned about, which is
the flow of credit to businesses, that's not working."
http://www.bloomberg.com/news/articles/2016-04-26/stiglitz-says-misdirected-monetary-policies-increased-inequality
What's the point of low interest rates, if they only serve
the interests of Wall Street banks and their wealthy
clientele? Oh, right! That IS the point. And most economists
are just fine with that.
Oh my god. He lumps in Bernanke with Greenspan. What are
the Fed worshippers going to do now? Their deity is under
attack from Stiglitz. Of course it is nothing but fact that
bernanke denied that bubbles in real estate were possible OR
that a bubble could become s problem for the economy. Hats
off to Stiglitz.
Falling Investment and Rising Trade Deficit Lead to Weak
First Quarter
By Dean Baker
Health care costs remain well-contained, barely growing as
a share of GDP.
GDP grew at just a 0.5 percent annual rate in the first
quarter. This weak quarter, combined with the 1.4 percent
growth rate in the 4th quarter, gave the weakest two quarter
performance since the 3rd and 4th quarters of 2012 when the
economy grew at just a 0.3 percent annual rate.
Growth was held down by both a sharp drop in
non-residential investment and a further rise in the trade
deficit. Equipment investment fell at an 8.6 percent annual
rate, while construction investment dropped at a 10.7 percent
annual rate. The latter is not a surprise, given the
overbuilding in many areas of the country. The drop in
equipment investment was undoubtedly in part driven by the
worsening trade situation, as many factories curtailed
investment plans as U.S.-made products lost out to foreign
competition, weakening demand growth. There was also a drop
in information processing equipment, indicating that those
who are expecting that robots will replace us all will have
to wait a bit longer.
The rise in the trade deficit was due to a 2.6 percent
drop in exports, as imports were nearly flat for the quarter.
Trade subtracted 0.34 percentage points from growth for the
quarter.
Consumption continued to grow at a modest 1.9 percent
annual rate, adding 1.27 percentage points to growth.
Consumption growth was held down in part by weaker demand for
new cars, which subtracted 0.33 percentage points from growth
for the quarter. This was the second consecutive decline in
the sector. It is likely that car purchases will be up
somewhat in future quarters.
The savings rate for the quarter was 5.2 percent, which is
up slightly from the 5.0 percent from the prior three
quarters and the 4.8 percent rates from 2013 and 2014, before
people started saving their oil dividends. But seriously,
there may be some modest room for this rate to decline, but
for the most part consumption growth will depend on income
growth going forward.
Health care services added 0.26 percentage points to
growth, its smallest contribution since a reported decline in
the first quarter of 2014. Spending in the sector remains
well contained, growing at just a 3.8 percent annual rate
over the last quarter and by 4.4 percent over the last year
in nominal spending.
Housing grew at a 14.8 percent annual rate, adding 0.49
percentage points to growth. Housing has being growing at a
double digit rate since the fourth quarter of 2014. While the
sector is likely to continue to grow in subsequent quarters,
the pace is almost certain to slow.
The government sector was a modest positive in the
quarter, growing at a 1.2 percent rate. State and local
spending increased at a 2.9 percent annual rate, more than
offsetting a 1.6 percent drop in federal spending, all of it
on the military side. Future quarters are likely to show
comparable growth, although the composition may be somewhat
different.
A slower rate of inventory accumulation reduced growth by
0.33 percentage points, as final sales of domestic product
grew at a 0.9 percent rate. This is the third consecutive
quarter in which the pace of inventory accumulation slowed,
although the current pace is not especially low. It is likely
that inventories will grow somewhat more quickly in the rest
of the year, being at least a small positive in the growth
story.
The weak growth for the quarter puts this recovery even
further behind any prior recovery at the same stage. After
eight and a quarter years, the economy is only 10.1 percent
larger than its pre-recession level of output. A more typical
recovery would have seen at least twice as much growth.
[Graph]
On the whole this is a weak report. The headline 0.5
percent figure probably overstates the weakness somewhat, but
it is not a good sign when two consecutive quarters have an
average growth rate of less than 1.0 percent. Inflation
remains well under control, although there was a modest
uptick in the rate of inflation shown by the core personal
consumption expenditure deflator to 1.7 percent over the last
year. Nonetheless, with an economy barely growing and an
inflation rate that remains below target, it is difficult to
envision the Federal Reserve raising interest rates further
any time soon.
How much more evidence do we need that the current trickle
down monetary policy has failed? "The weak growth for the
quarter puts this recovery even further behind any prior
recovery at the same stage. After eight and a quarter years,
the economy is only 10.1 percent larger than its
pre-recession level of output. A more typical recovery would
have seen at least twice as much growth."
Market failures aren't really market failures but market
responses to market conditions. They are failures only in the
sense that something deemed bad (e.g., falling home prices)
is the market response. An extreme example is what's being
called secular stagnation, which is just the market response
to the shift of an enormous volume of production and income
from the U.S. and Europe to China and other like places with
much higher levels of inequality and savings. It's a market
failure only in the sense that something bad (wage
stagnation, slow economic growth) happened in the U.S. and
Europe. Those responsible for the shift in production and
income to China et al. (i.e., U.S. and European business
executives) were either ignorant of the likely market
response or didn't care as long as it increased profits (via
lower costs). But that's not a market failure, it's an
executive failure.
Peter, -1
"I think almost surely both Hillary and Bernie Sanders are
very very committed to a pro-equality agenda, and the
differences are more in details, more in one's confidence in
their ability to execute this in a political context."
Disappointing. I guess we'll find out if he's right. Also his
suggestion that the economy would have done just as well with
no QEs is very disappointing.
"Stiglitz: I think they were right. They originally said,
"When we hit 6 percent that's full employment." Now they know
that 4.9 isn't full employment, there's weak labor market.
They should have focused more on improving the channel of
credit to make sure that money was going to small and
medium-sized enterprises They should have said to the
bank-like some other countries have done-if you want access
to the Fed window you have to be lending to SMEs. "
Which was Bernie's suggestion. Hillary has said nothing.
"... The case for additional public investment is as strong in the UK (and Germany ) as it is in the US. Yet since 2010 it appeared the government thought otherwise. ..."
"... However since the election George Osborne seems to have had a change of heart. ... ..."
The economic case for investing when the cost of borrowing is so cheap (particularly when the
government can issue 30 year fixed interest debt) is overwhelming. I had guessed the majority
would be pretty large just by personal observation. Economists who are not known for their anti-austerity
views, like
Ken Rogoff, tend to support additional public investment.
Thanks to a
piece by Mark Thoma I now have some evidence. His article is actually about ideological bias
in economics, and is well worth reading on that account, but it uses results from the ChicagoBooth
survey of leading US economists. I have used this survey's results on the impact of fiscal policy
before, but they have
asked a similar question about public investment. It is
"Because the US has underspent on new projects, maintenance, or both, the federal government
has an opportunity to increase average incomes by spending more on roads, railways, bridges
and airports."
Not one of the nearly 50 economists surveyed disagreed with this statement. What was interesting
was that the economists were under no illusions that the political process in the US would be
such that some bad projects would be undertaken as a result (see the follow-up question). Despite
this, they still thought increasing investment would raise incomes.
The case for additional public investment is as strong in the UK (and
Germany)
as it is in the US. Yet since 2010 it appeared the government thought otherwise. ...
However since the election George Osborne seems to have had a change of heart. ...
"... It should never be forgotten that the conservative orthodoxy -- of low taxes on the wealthiest, deregulation of finance, small govt deficits, and the need for inequality to spur individual initiative -- was also economics departments orthodoxy for decades. Economists put their imprimatur on this whole mess, with VERY few exceptions. ..."
"... 70% of the population STILL believes that federal deficits are a big problem, and also believes that this is standard economic orthodoxy. Until the crash, most people were ready to accept some degree of privatization of Social Security, and Martin Feldstein pushed on this repeatedly with no counterargument from the economics departments. The Clinton economic team was instrumental in pushing financial deregulation, upon the supposed orthodoxy that it is good for the economy. Even the worst nonsense in Friedmans Capitalism and Freedom and Free to Choose barely saw any push-back from other economists in the op-ed pages. ..."
"... Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence. That 70% currently includes college graduates who took economics classes and traders on Wall Street. ..."
"... Nonsense. Polls of profession economists opinions abound. Reaganomics/neoliberalism has predominated in economics until recently. On a few big issues (notably, on whether the size of federal deficits as % of GDP should be reduced) the split remained even. ..."
It should never be forgotten that the "conservative orthodoxy" -- of low taxes on the wealthiest,
deregulation of finance, small gov't deficits, and the need for inequality to spur individual
initiative -- was also "economics departments orthodoxy" for decades. Economists put their imprimatur
on this whole mess, with VERY few exceptions.
It's been a first-rate intellectual scandal, perpetrated by some of the biggest names in the
economics racket, and with most of the lesser lights tagging along, for fear of ostracism.
And most of them STILL don't have a clear view of what the real problems are.
70% of the population STILL believes that federal deficits are a big problem, and also believes
that this is standard economic orthodoxy. Until the crash, most people were ready to accept some
degree of privatization of Social Security, and Martin Feldstein pushed on this repeatedly with
no counterargument from the economics departments. The Clinton economic team was instrumental
in pushing financial deregulation, upon the supposed orthodoxy that it is good for the economy.
Even the worst nonsense in Friedman's "Capitalism and Freedom" and "Free to Choose" barely saw
any push-back from other economists in the op-ed pages.
"Conservative orthodoxy" can be laid squarely at the feet of the economics departments, up
until the crash. If the ones who are supposed to know better, don't make a concerted effort to
refute the tons of nonsense spouted in the name of economics, then they should resign their tenure.
It most certainly WAS taken as the orthodoxy. Reaganomics was approved by most economists
either through mood affiliation or intellectual incompetence. That 70% currently includes college
graduates who took economics classes and traders on Wall Street.
"Reaganomics was approved by most economists either through mood affiliation or intellectual incompetence."
Not even remotely true. Criticized by liberal economists. Blasted by the conservative economists
who refused to work for the Reagan White House. Even blasted by a young Greg Mankiw but that is
before he drank the Bush Kool Aid.
Lee - your claim here is just wrong. And the more you defend it, the worse it gets.
Nonsense. Polls of profession economists' opinions abound. Reaganomics/neoliberalism has predominated
in economics until recently. On a few big issues (notably, on whether the size of federal deficits
as % of GDP should be reduced) the split remained even.
(1992 -- responses from 464 US economists):
"A large federal budget deficit has an adverse
effect on the economy" 78.7% agree (includes 'agree with provisos').
"The money supply is a more important target that interest rates for monetary policy" 56.7%
agree.
"As the USSR moves toward a market economy. a rapid and total reform (i.e., "going cold turkey")
would result in a better outcome than a slow transition" 57.6% agree.
"A minimum wage increases unemployment among young and unskilled workers" 78.9% agree.
"An economy in short-run equilibrium at a real GNP below potential GNP has a self-correcting
mechanism that will eventually return it to potential GNP" 50.8% agree.
"Changes in aggregate demand affect real GNP in the short run but not in the long run" 52.8%
agree.
"Lower marginal income tax rates reduce leisure and increase work effort" 55.4% agree. (Alston
et al., "is there a global economic consensus?" AEA Papers and Proceedings, 1992)
"... Sometimes … demand is restricted by the fact that nobody has any money in their pocket. ..."
"... the only takeaway is that most economists are nothing more than rancid witch doctors doing
backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged. ..."
"... Modern neoliberal economics is just an ideology not a science. It exists to justify the current
distribution of wealth with pseudoscientific nonsense written in abstruse mathematical language. Milton
Friedman was to economics what T.D. Lysenko was to Soviet biology. Pseudoscience in service to the ruling
class. ..."
"... [Economists are] clueless about the real world because their fat paycheck magically appears
in their bank account, while producing nothing. ..."
By Ashoka Mody, Professor of Economics at Princeton. Originally published at
Project
Syndicate
For starters, world trade is growing at an anemic annual rate of 2%, compared to 8% from 2003
to 2007. Whereas trade growth during those heady years far exceeded that of world GDP, which averaged
4.5%, lately, trade and GDP growth rates have been about the same. Even if GDP growth outstrips growth
in trade this year, it will likely amount to no more than 2.7%.
The question is why. According to Christina and David Romer of the University of California, Berkeley,
the aftershocks of modern financial crises – that is, since World War II –
fade after 2-3 years . The Harvard economists
Carmen Reinhart
and Kenneth
Rogoff say that it takes
five years
for a country to dig itself out of a financial crisis. And, indeed, the financial dislocations
of 2007-2008 have largely receded. So what accounts for the sluggish economic recovery?
One
popular explanation lies in the fuzzy notion of "secular stagnation": long-term depressed demand
for goods and services is undermining incentives to invest and hire. But demand would remain weak
only if people lacked confidence in the future. The only logical explanation for this enduring lack
of confidence, as Northwestern University's Robert Gordon has
painstakingly documented
and argued , is slow productivity growth.
Before the crisis – and especially from 2003 to 2007 – slow productivity growth was being obscured
by an illusory sense of prosperity in much of the world. In some countries – notably, the United
States, Spain, and Ireland – rising real-estate prices, speculative construction, and financial risk-taking
were mutually reinforcing. At the same time, countries were amplifying one another's growth through
trade.
Central to the global boom was China, the rising giant that flooded the world with cheap exports,
putting a lid on global inflation. Equally important, China imported a huge volume of commodities,
thereby bolstering many African and Latin American economies, and purchased German cars and machines,
enabling Europe's largest economy to keep its regional supply chains humming.
This dynamic reversed around March 2008, when the US rescued its fifth-largest investment bank,
Bear Sterns, from collapse. With the eurozone banks also deeply implicated in the subprime mortgage
mess and desperately short of US dollars, America and much of Europe began a remorseless slide into
recession. Whereas in the boom years, world trade had spread the bounty, it was now spreading the
malaise. As each country's GDP growth slowed, so did its imports, causing its trading partners' growth
to slow as well.
The US economy began to emerge from its recession in the second half of 2009, thanks largely to
aggressive monetary policy and steps to stabilize the financial system. Eurozone policymakers, by
contrast, rejected
monetary stimulus and implemented
fiscal
austerity measures , while ignoring the deepening distress of their banks. The eurozone thus
pushed the world into a second global recession.
Just when that recession seemed to have run its course, emerging economies began to unravel. For
years, observers had been touting the governance and growth-enhancing reforms that these countries'
leaders had supposedly introduced. In October 2012, the IMF
celebrated
emerging economies' "resilience." As if on cue, that facade began to crumble, revealing an inconvenient
truth: factors like high commodity prices and massive capital inflows had been concealing serious
economic weaknesses, while legitimizing a culture of
garish inequality and rampant corruption .
These problems are now being compounded by the growth slowdown in China, the fulcrum of global
trade. And the worst is yet to come. China's huge industrial overcapacity and property glut needs
to be wound down; the hubris driving its global acquisitions must be reined in; and its corruption
networks have to be dismantled.
In short, the factors that dragged down the global economy in 2015 will persist – and in some
cases even intensify – in the new year. Emerging economies will remain weak. The eurozone, having
enjoyed a temporary reprieve from austerity, will be constrained by listless global trade. Rising
interest rates on corporate bonds portend
slower growth in
the US. China's collapsing asset values could trigger financial turbulence. And policymakers are
adrift, with little political leverage to stem these trends.
The IMF should stop forecasting renewed growth and issue a warning that the global economy will
remain weak and vulnerable unless world leaders act energetically to spur innovation and growth.
Such an effort is long overdue.
ArkansasAngie , January 6, 2016 at 6:17 am
"But demand would remain weak only if people lacked confidence in the future"
Sometimes … demand is restricted by the fact that nobody has any money in their pocket.
James Levy, January 6, 2016 at 6:45 am
Is he kidding:
The only logical explanation for this enduring lack of confidence, as Northwestern University's
Robert Gordon has painstakingly documented and argued, is slow productivity growth.
Real wages for a hefty percentage of the population haven't risen since 1971. Most people are
treading water or losing ground. Over 90% of the modest gains since the 2008 crash have gone to
1% or less of the population. But the problem is productivity! And this guy has a tenured job
at Princeton. Standards for employment there must include smug self-assurance, ideological blinders,
and the inability to assimilate any facts not cogent to people richer than you are.
Jim Haygood, January 6, 2016 at 11:37 am
If Princeton's most illustrious alumnus can finally make some serious loot in the private sector,
soon the author will be toiling at the Bernanke School of Economics.
Skippy, January 6, 2016 at 8:18 am
Productivity is the cocaine of the labour pool, like the old cocaine ad of the 80s in Calif
[during the epidemic].
White square room about 6M X 6M, top shelf sale executive sort doing laps like a con and the
verse goes like…. I do cocaine because I'm more productive… so I make more money… so I can do
more cocaine… over and over and with each litany increases his speed until a blur….
Skippy…. the end is a wrung out wretch sitting on the step of some low socioeconomic apt talking
about losing, wife, kids, job, everything…. w burnt out dopamine receptors as a lullaby till morte'
efschumacher, January 6, 2016 at 8:50 am
Here in the US:it's not like there's a shortage of work to be done to fix the massively inappropriate
national infrastructure – to make it human sustainable – I mean for the 'little people'. There
is of course the perennial lack of congressional vision and long term planning. There lies a huge
root of the problem.
RabidGandhi, January 6, 2016 at 9:12 am
Is this meant as a good cop/bad cop contrast piece with the Ann Pettifor post?
Here, I gave up any hope of Mody being at all earnest when he cited Rogoff and Reinhart (!!!).
Then the rest of the article completely self-destructs: weak productivity and insufficient innovation
are the issue?
When combined with yesterday's NYT article on inequality, the only takeaway is that most
economists are nothing more than rancid witch doctors doing backflips to skirt the basic explanation
that aggregate demand has been deliberately sabotaged.
Stephen Gardner, January 6, 2016 at 9:33 am
Modern neoliberal economics is just an ideology not a science. It exists to justify the
current distribution of wealth with pseudoscientific nonsense written in abstruse mathematical
language. Milton Friedman was to economics what T.D. Lysenko was to Soviet biology. Pseudoscience
in service to the ruling class.
cnchal, January 6, 2016 at 9:43 am
. . . the only takeaway is that most economists are nothing more than rancid witch doctors
doing backflips to skirt the basic explanation that aggregate demand has been deliberately sabotaged.
They are the useless eaters. [Economists are] clueless about the real world because their
fat paycheck magically appears in their bank account, while producing nothing.
Here is Mody
The US economy began to emerge from its recession in the second half of 2009, thanks
largely to aggressive monetary policy and steps to stabilize the financial system.
Totally clueless.
susan the other, January 6, 2016 at 2:02 pm
"Lack of confidence" – let me count the ways. This is a phrase to match every vacuous denial
of human economic chaos ever pontificated. Yuck.
"... [The financial crisis is worse than thought …] ..."
"... – Yes Prime Minister, A Real Partnership ..."
"... Economists: purveyors of fictions upon which the superstructure of organized robbery is raised. ..."
"... "Market Failure" is the name that economists who believe that the market cannot ever fail use when the market fails. ..."
"... "Economists put decimal points in their forecasts to show that they have a sense of humour" ..."
"... "Did you ever think that making a speech on economics is a lot like pissing down your leg? It seems hot to you, but it never does to anyone else." ..."
A6: None. They're all waiting for the unseen hand of the market to correct the lighting disequilibrium.
tony, December 30, 2015 at 6:12 am
Q: What do you call an economist that makes a prediction?
A: Wrong.
ben, December 30, 2015 at 3:28 pm
Two economists are walking on the street. They notice a pile of horseshit, and the older
one says to the younger one: "I'll pay you twenty thousand if you eat that." The younger one
ponders for a moment, then agrees and eats it. They walk a bit more and run into another pile
of horse feces. So the younger one tells the elder: "I'll pay you twenty thousand if you eat
that!". The older economist considers the offer and starts eating. After a while the younger
economists stops and asks: "What was the point of this? We both ate a pile shit and neither of
us got richer." The older one answers: "What are you talking about? We both produced and
received twenty thousand worth in income and services."
GDP. Great deposits of poo.
Clive, December 31, 2015 at 5:41 am
"This economy is really terrible."
"How bad is the economy?"
"The economy is so bad, this year oysters are making fake pearls…"
"The economy is so bad, organised crime just laid off 10 judges…"
(and so on)
Paul Jonker-Hoffrén, December 30, 2015 at 7:27 am
"Knock Knock!"
"Who's there?"
"It's Return to Growth!"
Two years later…
"Knock Knock!"
"Who's there?"
"It's Return to Growth!"
And ad finitum…
Clive, December 30, 2015 at 6:21 am
"Knock Knock"
"Who's there?"
"Janet Yellen"
"Well there's no need to shout, I heard you knocking"
Joaquin Closet, December 30, 2015 at 7:42 am
The number of economists is the only thing that contradicts the Law of Supply and Demand.
craazyboy, December 30, 2015 at 9:00 am
Q: How many economists does it take to change a light bulb?
A: Three. A micro-economist to hold the ladder, a macro-economist to rotate the room, and a
university economist to develop the math model and forecast how long it will take.
Ulysses, December 30, 2015 at 9:56 am
A mathematician, an accountant and an economist apply for the same job at an oil company.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The
mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at
the interviewer hard and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two
equal?" The accountant says "On average, four – give or take ten percent, but on average,
four."
Then the interviewer calls in the economist and poses the same question "What do two plus two
equal?" The economist gets up, locks the door, closes the shade, sits down next to the
interviewer and says, "What do you want it to equal"?
Paul Tioxon, December 30, 2015 at 10:02 am
What do you call a cruise ship sinking with 500 PhD economists chained below deck?
A good start.
allan, December 30, 2015 at 10:03 am
Frederic Mishkin.
Yves Smith, December 30, 2015 at 4:32 pm
Oh, that is good!
Paul
An economist is someone who will tell you tomorrow why what they predicted yesterday didn't happen
today.
An economist, a physicist, and an engineer are stranded on an island with a can of food, and no
opener.
The engineer says, "Let's smash the can open with a rock and eat". The physicist replies, "Naw, that's going to splatter the food all over the place. Let's light a
fire, the expanding gases will force the can to pop open and presto: warm food!" The economist says, "Bad idea: the can will explode and the food will be all over the place. Now…
let's assume we have a can opener…."
Blue Meme
A physician, an engineer, and an economist were discussing who among them belonged to the oldest
profession. The physician said, "Remember, on the sixth day God took a rib from Adam and fashioned
Eve, making him the first surgeon. Therefore, medicine is the oldest profession."
The engineer replied, "But, before that, God created the heavens and earth from chaos, thus he
was the first engineer. Therefore, engineering is an older profession than medicine."
Then, the economist spoke up. "Yes," he said, "But who do you think created the chaos?"
aj
The First Law of Economists: For every economist, there exists an equal and opposite economist. The Second Law of Economists: They're both wrong.
fresno dan
Pareto's law of optimal economic theory: an economic theory has reached an optimal state when no other economist can make it wronger
pat b
The Third Law of Economists : The two economists theories don't add up.
twonine
"Economics is extremely useful as a form of employment for economists." ― John Kenneth Galbraith
gordon
JKG has some excellent one-liners. My favourite:
"The trouble with competition is that in the end somebody wins."
Joe Hill
"Again, since I'm not an economist I really have no idea what the wrong solution is."
~ @RudyHavenstein
Ramanan
[The financial crisis is worse than thought …]
James Hacker: Bernard, Humphrey should have seen this coming and warned me.
Bernard Woolley: I don't think Sir Humphrey understands economics, Prime Minister;
he did read Classics, you know.
James Hacker: What about Sir Frank? He's head of the Treasury!
Bernard Woolley: Well I'm afraid he's at an even greater disadvantage in understanding
economics: he's an economist.
Economists: purveyors of fictions upon which the superstructure of organized robbery is raised. (apologies to Ambrose Bierce)
Synoia
Q: What do you call an Economist who tells the truth?
A: Unemployed.
Ivy
If you laid all the economists end to end,
it would probably be a good thing.
They still wouldn't reach a conclusion.
ben
A farmer and two bankers are shipwrecked on an island. Two weeks later help finally arrives. The
bankers greet their rescuer who remarks how well they look.
BankerA: "we realised the potential of the natural resources on this island were tremendous".
BankerB: "I created some fiat money, we divided it up. I lent BankerA ten times my share for a
coconut farm startup, he invested ten times his share in an accountancy startup."
Rescuer: "well that's amazing, only where is it all, I don't see any produce – how did you actually
survive?"
BankerA: "We each used our debt to invest in futures given the fertile land it was clear the land
could generate wealth once labour was applied. We both realised significant paper profits. Oh and
we ate the farmer"
--
Bankers live off our backs.
Nortino
What did the supply curve say to the demand curve?
If you shift a little to the right, I'll give you some more of what you want.
_________
Why did the economist cross the road?
Because his models predicted he would.
TG
"Market Failure" is the name that economists who believe that the market cannot ever fail use
when the market fails.
Synoia
Hmm, it seems you should take your own advice to heart. :-)
What is a person called who claims to predict the future and has a history of 100% failure
in predictions?
a) A Charlatan b) An Economist c) A prophet
afreeman
In the same vein: econ entropy: money invented from hot air evaporates, what do you expect?
How many economists does it take to screw in a lightbulb?
Only one, but the lightbulb has to be hanging from the ceiling. Because economists can only screw
things up.
Minnie Mouse
It takes one economist to change a light bulb and take the entire power grid down.
James McFadden
"Did you ever think that making a speech on economics is a lot like pissing down your leg?
It seems hot to you, but it never does to anyone else." Lyndon Johnson
"... the ideal markets that would produce Pareto Optimal allocations don't actually exist ..."
"... 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. ..."
"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.
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....
Richest in U.S. Shape Private Tax System to Save Billions
By NOAM SCHEIBER and PATRICIA COHEN
The 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.
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.
;
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.
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. ;
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. ]
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. ]
"... the ideal markets that would produce Pareto Optimal allocations dont actually exist ..."
"... 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 isnt. ..."
"... In short, Pareto Optiimality 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. ..."
"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.
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....
Richest in U.S. Shape Private Tax System to Save Billions
By NOAM SCHEIBER and PATRICIA COHEN
The 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.
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.
;
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.
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. ;
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. ]
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. ]
"... Summers is right that bubbles are usually accompanied by some kind of financial euphoria. ..."
"... 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. ..."
"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.
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.
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 Syaloch...
"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.
Dan Kervick said in reply to pgl...
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.
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.
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.
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.
"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.
The Advantages of Higher Inflation - The New York Times
From 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.
Inflation expectations are becoming un-anchored on the downside but nobody cares because ....
oil.
Dan Kervick said in reply to Peter K....
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.
"... And of course, some folks accuse the economics profession of being a front for laissez-faire ideology. ..."
"... 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. ..."
"... 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. ..."
"... 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. ..."
"... 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. ..."
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).
"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.
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.
"... "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. ..."
"... 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. ..."
"... 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. ..."
"... 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. ..."
"... 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. ..."
"... A 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. ..."
"... The piece that VK posted by Keen was essentially a rejection of the macroeconomic theory that was formulated to replace Keynesian theory. ..."
"... 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. ..."
"... 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. ..."
"... So yes debt is a big problem with a poorly regulated banking industry (financial industry really because of shadow banking). ..."
Beware Economics 101. The peer review mechanism has horribly failed.
When 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.
Dennis Coyne, 12/04/2015 at 6:11 pm
Hi VK,
No 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.
Krugman 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.
The 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.
Rune 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.
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.
The 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.
I 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.
Perhaps 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.
A 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.
Krugman 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.
Are 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.
There 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.
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.
"... 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. ..."
"... 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.) ..."
"... In 2005, at the annual Jackson Hole, Wyo., conference of the worlds 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 peoples 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.) ..."
"... 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 its due not just to ideology; its 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 Departments Antitrust Division in the Clinton administration; the Analysis Group; and Charles River Associates. ..."
"... 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. ..."
"... It is difficult to get a man to understand something when his salary depends upon his not understanding it. ..."
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.
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.
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.
1. 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.
reason:
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?
"... 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". ..."
"... 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. ..."
"... 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. ..."
"... 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! ..."
Hi 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 here
Dennis:
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 Minqi Li,
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.
The 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.
"…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.
I 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…).
Theoretically- 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.
I agree with the idea that trying to achieve a zero growth economy is the only path towards
sustainability.
Two 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
If 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 design
If 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.
"... Every year, in the backwaters of America, that economy seems to put out fewer and fewer chairs. ..."
"... 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 dont 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. ..."
"... 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 lots 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. ..."
"... 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 Hillarys position). ..."
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.
"Supporters of expanded social provision must find better ways to engage poor people, to get out
their votes."
Of course Republicans are doing everything they can to keep poor people from voting.
cm -> pgl...
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.)
Alan 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?
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.
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.
Dan Kervick -> Peter K....
"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.
Syaloc -> Dan Kervick...
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.
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.
djb said...
a lot of it , I am sure, has to do with the "there is no difference between democrats and republicans"
constant brainwashing
which helps the republicans big time
DrDick -> djb...
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 now
DrDick said in reply to djb...
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).
Avraam Jack Dectis said...
.
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.
cm -> Avraam Jack Dectis...
"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).
"... 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. ..."
"... 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. ..."
"... 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. ..."
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.
It's not about Adam Smith, it's about well paid intellectual prostitutes hired to restore the rule
of financial oligarchy. The books discussed are
Chicagoedonomics: The Evolution of Chicago Free Market Economics by By Lanny Ebenstein (278pp)
and ECONOMICS RULES The Rights and Wrongs of the Dismal Science By Dani Rodrik (253pp)
Notable quotes:
"... 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. ... ..."
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.
...
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.
likbez -> pgl...
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.
"... 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 ..."
"... 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. ..."
"... "efficient markets hypothesis": ..."
"... tendency in the policy world to liberalise as many markets as possible and to make regulation as light as possible ..."
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 thinking
Jerry 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?
"... 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. ..."
"... it has squeezed out the space for mindless, abstract theorising or modelling for the sake of modelling. ..."
"... 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. ..."
"... 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. ..."
"... 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. ..."
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)
"... 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. ..."
"... 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. ..."
"... 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. ..."
"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-crash
What'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.
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."
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.
"... 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. ..."
"... No - we dont allow MDs to prescribe or treat on the basis of theory alone. Its 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. ..."
"... 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). ..."
"... 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 ..."
"... 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. ..."
"... And so - though we proceed slowly because of our ideologies, we might not proceed at all without them. - Joseph Schumpeter ..."
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...
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.
RogerFox 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.
DeDude 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.
RGC 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
pete 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.
Syaloch 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."
The 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.
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.
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. ]
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/1812737
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.
"... Of course, the Cato Institute, Heritage, and Team Republican economists are proud that their
opinions are bought and paid for. ..."
"... 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. ..."
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...
"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.
Brookings fellow resigns after Senator Warren accuses him of conflicts
By SARAH N. LYNCH - Reuters
WASHINGTON
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.
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.
Second Best said...
Money corrupts research as sure as the Pope is Catholic...
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!"...
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.
Alan Kirman is a great economist. Amazingly clear exposition of complex subjects.
Notable quotes:
"... 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 1950s, to try to show
that a market or an economy would converge on that. But we gave up on that in the 70s when there
were results that showed that essentially we couldnt 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.
..."
"... 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. ..."
"... The idea that anything even close to laissez faire ever exisited is silly ..."
"... Laissez faire has never existed; it is code for when the govt allows the rich to trample
the poor, and the govt actively sides with the rich ..."
"... 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. ..."
"... You can reduce unit labor costs, which usually means reducing wages. But that has all sorts
of consequences, which are not perceived. ..."
"... 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. ..."
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. ...
e abrams said...
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.
"... 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? ..."
"... Theory of Moral Sentiments ..."
"... 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 ..."
"... 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. ..."
"... 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. ..."
"... 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. ..."
"... The Road to Serfdom ..."
"... 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. ..."
"... 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? ..."
"... 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. ..."
"... 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. ..."
"... 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. ..."
"... "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? ..."
"... 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. ..."
"... 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. ..."
"... 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. ..."
"... 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? ..."
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.
"... In 1959, noted American
economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term
changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth
of output." ..."
"... In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and
chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known
issues such as the fact that GDP does not capture changes in the quality of the products (think of
mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent
in the home). The commission also cited evidence that GDP growth does not always correlate with increases
in measures of well-being such as health or self-reported happiness, and concluded that growing GDP
can have deleterious effects on the environment. ..."
"... Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures
economic activity or output. Rather, our issue is with the nature of that activity itself. Our question
is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity
of our society. ..."
"... Robert Shiller
of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s
that stock market prices did not always reflect fundamental value, and sometimes big gaps could open
up between the two. ..."
"... And therein lies the difference between a poor society and a prosperous one. It isn't the amount
of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it
is the availability of the things that create well-being-like antibiotics, air conditioning, safe
food, the ability to travel, and even frivolous things like video games. It is the availability of
these "solutions" to human problems-things that make life better on a relative basis-that makes us
prosperous. ..."
"... This is why prosperity in human societies can't be properly understood by just looking at monetary
measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems. ..."
The most basic measure we have of economic growth is gross domestic product. GDP was developed from
the work in the 1930s of the American economist Simon Kuznets and it became the standard way to measure
economic output following the 1944 Bretton Woods conference. But from the beginning, Kuznets and
other economists highlighted that GDP was not a measure of prosperity. In 1959, noted American
economist Moses Abramovitz cautioned that "we must be highly skeptical of the view that long-term
changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth
of output."
In 2009, a commission of leading economists convened by President Nicolas Sarkozy of France and
chaired by Nobel laureate Joseph Stiglitz reported on the inadequacies of GDP. They noted well-known
issues such as the fact that GDP does not capture changes in the quality of the products (think of
mobile phones over the past 20 years) or the value of unpaid labor (caring for an elderly parent
in the home). The commission also cited evidence that GDP growth does not always correlate with increases
in measures of well-being such as health or self-reported happiness, and concluded that growing GDP
can have deleterious effects on the environment. Some countries have experimented with other
metrics to augment GDP, such as Bhutan's "gross national happiness index."
Our issue isn't with GDP per se. As the English say, "It does what it says on the tin"-it measures
economic activity or output. Rather, our issue is with the nature of that activity itself. Our question
is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity
of our society.
Since the field's beginnings, economists have been concerned with why one thing has more value than
another, and what conditions lead to greater prosperity-or social welfare, as economists call it.
Adam Smith's famous diamond-water paradox showed that quite often the market price of a thing does
not always reflect intuitive notions of its intrinsic value-diamonds, with little intrinsic value,
are typically far more expensive than water, which is essential for life. This is of course where
markets come into play-in most places, water is more abundant than diamonds, and so the law of supply
and demand determines that water is cheaper.
After lots of debate about the nature of economic value in the nineteenth and early twentieth
centuries, economists considered the issue largely settled by the mid-twentieth century. The great
French economist Gerard Debreu argued in his 1959 Theory of Value that if markets are competitive
and people are rational and have good information, then markets will automatically sort everything
out, ensuring that prices reflect supply and demand and allocate everything in such a way that everyone's
welfare is maximized, and that no one can be made better off without making someone else worse off.
In essence, the market price of something reflects a collective judgment of the value of that thing.
The idea of intrinsic value was always problematic because it was inherently relative and hard to
observe or measure. But market prices are cold hard facts. If market prices provide a collective
societal judgment of value and allocate goods to their most efficient and welfare-maximizing uses,
then we no longer have to worry about squishy ideas like intrinsic value; we just need to look at
the price of something to know its value.
Debreu was apolitical about his theory-in fact, he saw it as an exercise in abstract mathematics
and repeatedly warned about over-interpreting its applicability to real-world economies. However,
his work, as well as related work in that era by figures such as Kenneth Arrow and Paul Samuelson,
laid the foundations for economists such as Milton Friedman and Robert Lucas, who provided a devastating
critique of Keynesianism in the 1960s and '70s, and recent Nobel laureate Eugene Fama, who pioneered
the theory of efficient markets in finance in the 1970s and '80s. According to the neoclassical theory
that emerged from this era, if markets are efficient and thus "welfare-maximizing," then it follows
that we should minimize any distortions that move society away from this optimal state, whether it
is companies engaging in monopolistic behavior, unions interfering with labor markets, or governments
creating distortions through taxes and regulation.
These ideas became the intellectual touchstone of a resurgent conservative movement in the 1980s
and led to a wave of financial market deregulation that continued through the 1990s up until the
crash of 2008. Under this logic, if financial markets are the most competitive and efficient markets
in the world, then they should be minimally regulated. And innovations like complex derivatives must
be valuable, not just to the bankers earning big fees from creating them, but to those buying them
and to society as a whole. Any interference will reduce the efficiency of the market and reduce the
welfare of society. Likewise the enormous pay packets of the hedge-fund managers trading those derivatives
must reflect the value they are adding to society - they are making the market more efficient. In
efficient markets, if someone is willing to pay for something, it must be valuable. Price and value
are effectively the same thing.
Even before the crash, some economists were beginning to question these ideas. Robert Shiller
of Yale University, who ironically shared this year's Nobel with Fama, showed in the early 1980s
that stock market prices did not always reflect fundamental value, and sometimes big gaps could open
up between the two. Likewise, behavioral economists like Daniel Kahneman began showing that
real people didn't behave in the hyper-rational way that Debreu's theory assumed. Other researchers
in the 1980s and '90s, even Debreu's famous co-author Arrow, began to question the whole notion of
the economy naturally moving to a resting point or "equilibrium" where everyone's welfare is optimized.
An emerging twenty-first century view of the economy is that it is a dynamic, constantly evolving,
highly complex system-more like an ecosystem than a machine. In such a system, markets may be highly
innovative and effective, but they can sometimes be far from efficient. And likewise, people may
be clever, but they can sometimes be far from rational. So if markets are not always efficient and
people are not always rational, then the twentieth century mantra that price equals value may not
be right either. If this is the case, then what do terms like value, wealth, growth, and prosperity
mean?
Prosperity Isn't Money, It's Solutions
In every society, some people are better off than others. Discerning the differences is simple. When
someone has more money than most other people, we call him wealthy. But an important distinction
must be drawn between this kind of relative wealth and the societal wealth that we term "prosperity."
What it takes to make a society prosperous is far more complex than what it takes to make one individual
better off than another.
Most of us intuitively believe that the more money people have in a society, the more prosperous
that society must be. America's average household disposable income in 2010 was $38,001 versus $28,194
for Canada; therefore America is more prosperous than Canada.
But the idea that prosperity is simply "having money" can be easily disproved with a simple thought
experiment. (This thought experiment and other elements of this section are adapted from Eric Beinhocker's
The Origin of Wealth, Harvard Business School Press, 2006.) Imagine you had the $38,001 income of
a typical American but lived in a village among the Yanomami people, an isolated hunter-gatherer
tribe deep in the Brazilian rainforest. You'd easily be the richest Yanomamian (they don't use money
but anthropologists estimate their standard of living at the equivalent of about $90 per year). But
you'd still feel a lot poorer than the average American. Even after you'd fixed up your mud hut,
bought the best clay pots in the village, and eaten the finest Yanomami cuisine, all of your riches
still wouldn't get you antibiotics, air conditioning, or a comfy bed. And yet, even the poorest American
typically has access to these crucial elements of well-being.
And therein lies the difference between a poor society and a prosperous one. It isn't the amount
of money that a society has in circulation, whether dollars, euros, beads, or wampum. Rather, it
is the availability of the things that create well-being-like antibiotics, air conditioning, safe
food, the ability to travel, and even frivolous things like video games. It is the availability of
these "solutions" to human problems-things that make life better on a relative basis-that makes us
prosperous.
This is why prosperity in human societies can't be properly understood by just looking at monetary
measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems.
These solutions run from the prosaic, like a crunchier potato chip, to the profound, like cures for
deadly diseases. Ultimately, the measure of a society's wealth is the range of human problems that
it has found a way to solve and how available it has made those solutions to its citizens. Every
item in the huge retail stores that Americans shop in can be thought of as a solution to a different
kind of problem-how to eat, clothe ourselves, make our homes more comfortable, get around, entertain
ourselves, and so on. The more and better solutions available to us, the more prosperity we have.
The long arc of human progress can be thought of as an accumulation of such solutions, embodied in
the products and services of the economy. The Yanomami economy, typical of our hunter-gatherer ancestors
15,000 years ago, has a variety of products and services measured in the hundreds or thousands at
most. The variety of modern America's economy can be measured in the tens or even hundreds of billions.
Measured in dollars, Americans are more than 500 times richer than the Yanomami. Measured in access
to products and services that provide solutions to human problems, we are hundreds of millions of
times more prosperous.
"... 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. ..."
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…
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
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)
How the Financial Elite Con Us into Wanting the Wrong Thing
Competitive 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."
"... 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. ..."
"... 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 ..."
...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
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"?
LOL! 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?
"...The reason the Friedmanian era turned out to be vastly different from the Keynesian era
was because the neoclassical economic reforms were colossal failures."
"...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. "
"..."Krugan's free-trade ideology rhetoric shows he's more New Keynesian (neoclassical synthesis)
than Keynesian. More neoliberal than liberal.""
"...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.) "
"...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. "
Yes 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.
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.
"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?
The 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.
Economic 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.
Generalizations 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
I 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.
EMichael said in reply to Peter K
Not 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.
... 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.
... ... ...
likbez 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.
chris herbert 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."
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.
bakho said...
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.
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.
"...Personally, 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."
"...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. "
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.
"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.
Personally, 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.
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".
