Real-World Economics Review Blog

from Lars Syll

One of the most important tasks of social sciences is to explain the events, processes, and structures that take place and act in society. But the researcher cannot stop at this. As a consequence of the relations and connections that the researcher finds, a will and demand arise for critical reflection on the findings. To show that unemployment depends on rigid social institutions or adaptations to European economic aspirations to integration, for instance, constitutes at the same time a critique of these conditions. It also entails an implicit critique of other explanations that one can show to be built on false beliefs. The researcher can never be satisfied with establishing that false beliefs exist but must go on to seek an explanation for why they exist. What is it that maintains and reproduces them? To show that something causes false beliefs – and to explain why – constitutes at the same time a critique. Read more…

from Asad Zaman

Chapter 2 of Goodhart’s “Evolution of Central Banks” cites in detail several arguments made by Bagehot (pronounce Badge-it) in favor of a free banking system without a Central Bank. After listing them, he notes that Bagehot is “engagingly naïve”, as a gentle critique. It is astonishing that a hard-nosed practical financial analyst like Bagehot would indulge in such visionary daydreams about a “free market” system. This testifies to the power of ideology to blind one to the faults of idolized system. Here are some of the “naïve” arguments advanced by Bagehot in favor of free banking:

1. In a competitive free banking system, every bank would maintain adequate reserves, to create credibility.
2. Also, in case of panics, they would lend to distressed banks, in order to protect the financial system.
3. This system of multiple reserves (where each bank keeps its own reserves) would be superior to a centralized system, where only one bank keeps reserves., due to the benefits of competition over monopoly.

Goodhart shows that this starry-eyed idealization of free banking is contradicted by Bagehot’s own practical experience in context of the workings of the Central Banking system.  read more

from Norbert Häring

Sudan has a transitional government that depends on the goodwill of the USA. This is an opportunity to use the country for the largest field trial to date, to put an entire population on the digital leash through cash abolition and a universal basic income.

For several years now, the World Bank, Better Than Cash Alliance and various UN organizations have been massively promoting and advertising the purely digital transmission of financial aid for the needy in poor countries. Declared goals are cost savings and prevention of corruption and theft, as well as “financial inclusion”. The latter is the real reason, but not in the harmless meaning of giving everyone the chance to get a bank account, but in the meaning of “bringing everyone into the system”, as the head of Paypal, Dan Schulman, defined it at a Financial Inclusion Forum in Washington in 2015.

The system is the one in which Paypal, Microsoft and Co. can make money with every transaction and, as Microsoft founder Bill Gates made clear at the same event, in which the US government can track, save and if necessary block every transaction.

Read more…

from Maria Alejandra Madi

Ten years after the 2008 global financial crisis, the commodification of health, the spread of fiscal austerity programmes, deep social marginalization and climate change challenges revealed that health issues are “vital matters” that economists should address. Moreover, the outcomes of the coronavirus crisis call for a reflection on the contemporary threatens related to individual freedom, control on individuals and insecurity in social interrelations.

Indeed, it has long seemed to me the need to call for reflection and action upon what is ethical in our behavior in the world and the role of ethics in economics education.

In a recent piece titled “How Should Colleges Prepare for a Post-Pandemic World”, published in The Chronicle of Higher Education (https://www.chronicle.com/article/How-Should-Colleges-Prepare/248507), Brian Rosemberg wrote: If one were to invent a crisis uniquely and diabolically designed to undermine the foundations of traditional colleges and universities, it might look very much like the current global pandemic.  read more

from Ikonoclast (originally posted as a comment)

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from Lars Syll

One may wonder how much calibration adds to the knowledge of economic structures and the deep parameters involved …

First, few ‘deep parameters’ have been established at all …

Second, even where estimates are available from micro-econometric investigations, they cannot be automatically imported into aggregated general equilibrium models …

Third, calibration hardly contributes to growth of knowledge about ‘deep parameters’. These deep parameters are confronted with a novel context (aggregate time-series), but this is not used for inference on their behalf. Rather, the new context is used to fit the model to presumed ‘laws of motion’ of the economy …

Hugo Keuzenkamp

There are many kinds of useless economics held in high regard within mainstream economics establishment today. Few — if any — are less deserved than the macroeconomic theory/method — mostly connected with Nobel laureates Finn Kydland, Robert Lucas, Edward Prescott and Thomas Sargent — called calibration.

Hugo Keuzenkamp and yours truly are certainly not the only ones having doubts about the scientific value of calibration. In Journal of Economic Perspective (1996, vol. 10) Lars Peter Hansen and James J. Heckman write: Read more…

from David Ruccio

How many of you read Car and Driver magazine?

Not many of you, I presume. But maybe you should. At least the June 2020 issue.

It’s certainly a sign of our obscenely unequal times that a magazine better known for its reviews of foreign supercars and domestic muscle cars and for an editorial policy that courts controversy only when it attacks SUVs (in favor of minivans and cars) highlights the story of Oliver, Jason M. Vaughn’s family’s 260,000-mile Subaru in a piece subtitled “The Fear of Failure.”

Turning the key has become an act of faith. As the engine grumbles to life on this fine southwest Colorado morning, the yellow check-engine light comes on, as it has every day for the past four years, and the same questions swirl in my mind. Is this the day that tiny head-gasket leak turns into a gusher? Is this the day the catalytic converter chokes closed for good? Is this the day that one speck of sand too many works its way into that cracked CV-joint boot, causing it to seize up at some bend in the road and send me spinning into a ravine, not to be discovered until spring?. . .

I intimately know everything wrong with this car. I feel the squishy brakes and the engine straining to get up a hill, and I hear the ominous grinding sounds coming from under the right-front wheel well. But I can’t afford to do anything to ward off those looming disasters.

That’s because Vaughn’s family is like many American households, who don’t have any emergency savings and therefore can’t cover a surprise $400 expense without borrowing money or selling something. Or they can’t come up with the money at all. Read more…

from Lars Syll

Expansionary policy with a strong redistributive component is an attractive proposal … Higher output and real wages would likely stimulate productivity growth. Global warming can and should be attacked seriously.

With regard to foundation myths for MMT, Chartalism adds little to the observation that a modern macro economy operates on the basis of fiat money supported by state power which transcends enforcing the mere payment of taxes.

Functional finance is the heart of fiscalist Keynesianism incorporating automatic stabilizers for the business cycle. The MMT job guarantee proposal could be helpful as a supplement to the existing system of stabilizers …

A fiscal expansion poses the risk of price inflation. It is unlikely to turn into a Wicksellian cumulative process so long as wages are repressed. But ending wage repression is presumably an MMT policy objective …

MMT’s aims are exemplary but their intellectual support adds little to the ideas of Godley, Lerner, and Keynes. The doctrine blends them effectively but is certainly no striking new intellectual synthesis.

Lance Taylor

Taylor may be right on the question of how much — as a macroeconomic theory — MMT really has added to the Keynes-Lerner-Godley-Minsky framework. But there is undoubtedly at least one positive contribution of MMT — especially from a European point of view — and that is that it has made it transparently clear why the euro-experiment has been such a monumental disaster. The neoliberal dream of having over-national currencies just doesn’t fit well with reality. When an economy is in a crisis, it must be possible for the state to manage and spend its own money to stabilize the economy. Read more…

from Norbert Häring

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from Alanso Kihano (originally posted as a comment)

What’s the use of economics? I think Alan Kirman’s post is completely off the target. Economics is used to achieve political aims. Politics it the first and major use of economics! The major purpose of economics today is to educate (or brainwash if you prefer) specialists, who can serve, and run the current socio-economic system without understanding it. Therefore, economics is obliged to create complex, but inadequate models. That suits perfectly the aim – the system could not be understood, and economics simulates sciences to gain credibility.

Why that is necessary? To answer this question we need some retrospection. The contemporary mainstream economics is founded on the school of Adam Smith. Turn back to the political context of that time. Why Smith created his theory? The answer is given by Friedrich list in 1841 in his “National system …”. After summarising the principles of English colonial and trade practices on about 3 pages, he writes “In Adam Smith’s time, a new maxim was for the first time added to those which we have above stated, namely, to conceal the true policy of England under the cosmopolitical expressions and arguments which Adam Smith had discovered, in order to induce foreign nations not to imitate that policy.” The initial use of Adam Smit’s theory was the attempt to delude the other nations of how to reach economic development. Mainstream economics serves exactly the same aim today with Read more…

from Ikonoclast (originally posted as a comment)

The key obstacle to theoretical progress is the fact that economics is both a prescriptive and a descriptive discipline. We have not developed an economic ontologly to deal with this issue.

The real economy is a real system. The natural environment is a real system. The set of legal laws, legal property relations, institutional arrangements, financial rules and calculations which we innovate and use as “rules and score-keeping of the game” are formal systems. How are we to integrate a subject encompassing and utilizing real systems and formal systems? What method can we devise to achieve the integration of such a discipline? These are the fundamental questions for economics. Economics has this foundational ontological problem in that it encompasses two categories of existence, the real and the formal or notional.

The following example illustrates the problem. Physics studies real systems and uses observational and experimental methods to do that. Experiments (other than thought-experiments and virtual simulations) are done in real systems. The formal system of pure physics (the pure mathematics utilizing SI table dimensions, dimensional analysis etc.) is used to formalize hypotheses, make predictions and analyze experimental test results. What we do not see in physics is a humanly created “rule” entering into the real interactions being studied and thus changing their behavior. Humans cannot make a “rule” which alters a Fundamental Law of real systems. We cannot make a rule, legal law, recommendation etcetera which will alter the Laws of Thermodynamics. This indicates that we are talking here, in physics and the hard sciences of standard “upward causation”.  Read more…

from David Ruccio

There are lies, there are outrageous lies, and there are statistics.

— Robert Giffen, Economic Journal (1892)

Are U.S. unemployment numbers rigged? Sure, they are!

They’re not rigged in the way Paul Krugman implied last Friday (“This being the Trump era, you can’t completely discount the possibility that they’ve gotten to the BLS”). Or in the way former General Electric CEO Jack Welch suggested back in 2012 (when he asserted that the Obama White House had manipulated the job figures for political gains). Or in the way Donald Trump used to say the unemployment rate was “phony” (“The number is probably 28, 29, as high as 35 [percent]. In fact, I even heard recently 42 percent.”) until, of course, he became president and declared the rising jobs numbers a “blowout” (even though he and his economic advisers used some questionable math) and, most recently, the falling unemployment rate a “great day” (for George Floyd, whom Trump said was “looking down right now and saying this is a great thing that’s happening for our country,” and “for everybody”).

No, the jobs numbers are not manipulated in those ways. They’re rigged—in my view, much more seriously—in terms of the ways the various categories are defined and measured and the manner in which the data are collected. And, of course, the ways values are imputed to the rising and falling numbers. Read more…

from Lars Syll

The simple question that was raised during a recent conference … was to what extent has — or should — the teaching of economics be modified in the light of the current economic crisis? The simple answer is that the economics profession is unlikely to change. Why would economists be willing to give up much of their human capital, painstakingly nurtured for over two centuries? For macroeconomists in particular, the reaction has been to suggest that modifications of existing models to take account of ‘frictions’ or ‘imperfections’ will be enough to account for the current evolution of the world economy. The idea is that once students have understood the basics, they can be introduced to these modifications.

However, other economists such as myself feel that we have finally reached the turning point in economics where we have to radically change the way we conceive of and model the economy. The crisis is an opportune occasion to carefully investigate new approaches. Paul Seabright hit the nail on the head; economists tend to inaccurately portray their work as a steady and relentless improvement of their models whereas, actually, economists tend to chase an empirical reality that is changing just as fast as their modelling. I would go further; rather than making steady progress towards explaining economic phenomena professional economists have been locked into a narrow vision of the economy. We constantly make more and more sophisticated models within that vision until, as Bob Solow put it, “the uninitiated peasant is left wondering what planet he or she is on” (Solow 2006) … Read more…

from Peter Radford

I don’t often comment on politics here, but I want to record my thoughts as I watch the extraordinary convulsions running through America at the moment.

First: racism is a basic fact of American life.  It has been apparent to me since I moved here.  White America simply doesn’t want to be forced to engage with it, so it ignores all the plentiful evidence that it exists.  It is too painful and too difficult to deal with, no matter how sympathetic people are, so they want to avoid the topic.  They prefer, instead, to pretend that it is an historic artifact and not a current one.  Worse, when outrage hits the streets, as it has recently, a good proportion of the white population gets upset: they believe that there has been sufficient effort made to heal the breach, and that any current anger is a sign of disrespect for that effort.  They then accuse the black population of being ungrateful for, or of squandering, that effort.

Second: American politics is massively shaped by race. Read more…

from Lars Syll

Voltaire once said of the Holy Roman Empire that it was “Neither Holy, nor Roman, nor an Empire”. Something similar might be said of Modern Monetary Theory … It is neither modern, nor genuinely monetary, and it is at least as much a set of policy proposals as a theory.

It might be thought that “modern” refers to the fiat money world in which we have lived since major currencies broke with gold convertibility in the 1930s … In fact, however, it is a kind of inside joke, motivated by this observation of Keynes

“The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contracts. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time – when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern states and has been so claimed for some four thousand years at least. (Keynes 1930, p. 4).”

As regards “monetary”, MMT is notable for its rejection of concerns about the money supply, and monetary measures of budget balance and public debt. On the contrary, its focus is on the employment of the real resources available to the economy …

Finally, in theoretical terms, MMT offers little in the way of radical innovation. Rather it is a variant of traditional Keynesianism, drawing heavily on the functional finance approach of Abba Lerner (1943), and rejecting both the Hicks-Samuelson neoclassical synthesis and (even more strongly) the ‘New Keynesian’. The central point of functional finance is that, since the budget balance is a policy instrument, it is incorrect to think of taxes as ‘financing’ public expenditure. Rather, for any given level of public spending, taxes ensure that the budget balance is at a level (which may be a surplus or deficit in conventional accounting terms) sufficient to keep the economy in a stable equilibrium with full employment and low inflation.MMT incorporates some post-Keynesian ideas, such as Minsky’s (1982) model of financial instability, but makes little use of other post-Keynesian ideas, such as that of fundamental uncertainty.

MMT is also prominently associated with particular policy proposals, such as that for a Jobs Guarantee. This is a variant of the traditional Keynesian case for full employment based on aggregate demand management, but is not unique to MMT.

John Quiggin

Although it may sound somewhat dismissive of MMT, I think Quiggin gets it right here. Read more…

from David Ruccio

Where did all the capitalist surplus in the United States go last year?

Well, as in recent years, a large portion was paid to the Chief Executive Officers of the nation’s largest corporations, the ones that make up the S&P 500. Read more…

from Peter Radford

I was having a conversation this morning in which I argued the word “capitalism” has no meaning.  Or, perhaps, it has too many meanings.  It is a fraught one as well.  People get vexed in its presence.  I ought also have said the same thing about the word “labor”. Both words are relics of the early years of industrialization when they meant more to those throwing them around back then.  In our contemporary economy they mean rather less.  To me they reference things quite different from what they are in typical economic thinking, they are place-holder words for a power relationship that exists in a modern economy between employer and employee.  That relationship is better described in a corporate context, in which case the notorious “capitalist” slides from view to be replaced by the sort of managers agency theory is purported to talk about, while the power lurks in the background.

That power relationship was massively asymmetrical in the decades before the emergence of modern democracy, but has been made more benign subsequently.  Note that I am not arguing all is well.  It has been made more benign, not perfect.  Far from it.  Democracy is the counterweight to the excesses erstwhile capitalists unleash on us all.  It is why plutocrats, as I prefer to call them, are constantly trying to pervert democracy.  It’s a power struggle that never ends.  So we ought expect the latest batch of plutocrats to seek to do evil to democracy: it dilutes their power and thus threatens their wealth.  There is nothing new in this power struggle, most societies have had a self-serving elite trying its damnedest to pillage the underclass.  Our modern economy is no different. Read more…

from Lars Syll

A great video, but — there’s always a but — unfortunately also not without some analytical shortcomings. Read more…

from David Ruccio

More than 50 years ago (on 14 April 1967), Martin Luther King Jr. delivered one of his famous speeches, on “The Other America,” at Stanford University.* King patiently explained to the audience of students and faculty members that, while in his view “riots are socially destructive and self-defeating,” they are “in the final analysis. . .the language of the unheard.” Read more…