Real-World Economics Review Blog

from David Ruccio

The existing alphabet soup of possible recoveries—V, U, W, and so on (which I discussed back in April)—is clearly inadequate to describe what has been taking place in the United States in recent months.

That’s because there’s no single path of recovery for everyone. For some, the recovery from the pandemic crisis has been just fine, while for many others there has been no recovery at all. Instead, things are going from bad to worse. In other words, there’s a growing gap between the haves and have-nots—or, as Peter Atwater has put it, “there have been two vastly divergent experiences.”

That’s why Atwater invented the idea of a K-shaped recovery.

I think he’s right, although I don’t divide the world up in quite the same way.

The stem of the K illustrates the quick and deep crash that almost everyone experienced as the pandemic spread and large parts of the U.S. economy were shut down. Then, as time went on, with massive federal bailouts and businesses reopening, the arm and leg of the K have moved in very different directions. Read more…

from Ikonoclast

The essential problem is that heterodox economics needs to develop an agreed ontology and agreed modeling methods, including broad agreements on the likely limits to modeling. Peter Radford has pointed out some of the ways (and reasons why) the economy cannot be modeled accurately in key respects.

Orthodox economics has an agreed framework. Orthodox economists mostly agree on their framework and they accept their implied economic ontology, without question or discussion for the most part. Of course, the problem is that their framework lacks an empirically supportable ontology and thus is itself entirely un-empirical. Orthodox economists can’t see it. Every scientist and philosopher of the sciences and social sciences can see it. But while political power supports false ontologies, they are sociopolitically unassailable until effective rebellion and/or until the structures and systems built on false ontologies collide with real system obstacles and limits.

Economics is not a science and it never will be a science in the hard sciences sense. I think it is better to state this up front and as often as necessary. Economics is a prescriptive discipline. The hard sciences are descriptive disciplines: meaning physics, chemistry, biology and the systems sciences which follow on from them like cosmology and ecology. Read more…

from Lars Syll

To complete his theory, Keynes tied these elements together. The market for money determined interest. Interest (and the state of business confidence) determined investment. Investment, alongside consumption, determined effective demand for output. Demand for output determined output and employment. Consumption out of incomes determined savings. Employment determined the real wage.

In this world, a change in monetary policy, such as a cut in interest rates leading to an increase in bank credit, now had fundamental real consequences. The classical dichotomy, in economics as in physics, had been broken. And with the deconstruction of labor and capital markets, the reductionist idea of microfoundations had also to be abandoned. Workers, Keynes pointed out, bargain for money wages, not real wages. The act of dropping money wages would generate feedbacks through previously unrecognized–monetary–channels in the system … The system interacts with itself, and a full employment equilibrium cannot be achieved within the labor market. Economic space-time is curved.

In the long run, Keynes did not achieve what he hoped … In the United States, the prevailing view became that of Paul Samuelson, who transposed Keynes’s unemployment theory into the proposition that wages are “sticky” … What Samuelson did was to push the daemon of Keynesian relativity back into its box. And modern American Keynesians, even down to the New Keynesians currently in fashion around Harvard, MIT, Princeton, and the Council of Economic Advisers, are Newtonian and Samuelsonian to the core …

Too bad. For one cannot say, as one can with Newtonian physics, that Newtonian economics is good enough for practical situations … The failure of Keynesian macroeconomics to establish full theoretical independence from the classical labor market and the classical neutrality of money means that we are, in effect, now denied fair discussion of Keynesian solutions to policy problems. The end result is that we cannot cope now, any more than could the classics in their day, with stagnation and involuntary unemployment.

James K. Galbraith

from Blair Fix

I’ve always been baffled why ‘modern monetary theory’ is called a theory. I don’t mean this in a disparaging way. As far as theories of money go, I think modern monetary theory (MMT for short) is the correct one. But having a correct theory of money is a bit like having a correct theory of traffic lights.

Traffic lights (like money) are a social convention. We agree that red means stop and green means go. Why we’ve chosen these particular colors is an interesting question, as is why we choose to put traffic lights where we do. But the fact that red means stop and green means go just is. It’s something we’ve defined to be true. The workings of money are similar. True, money is more complex than a traffic light — but only in application. In conceptual terms, money is equally simple. It’s a social convention that we’ve defined into existence.

To frame our discussion of money, let’s begin with what it isn’t. Money isn’t a thing. True, money can have concrete forms like dollar bills and metal coins. But it needn’t. It can be as abstract as digits in a bank account, or tallies on a stick. Money is an idea. It’s an agreement to tie our social relations to a unit of account. To understand money creation, we need only look at the principles of double-entry bookkeeping. Debt goes on one side, credit goes on the other. The two sides carry opposite signs and so cancel out. This allows us to create money while simultaneously balancing our accounts.

Here’s a simple example. Suppose that a friend does a favor for me. I want to return the favor, but don’t have the time to do so immediately. So I give my friend a note that says “Blair owes you one favor”. This note is money. It is created from nothing using the principles of bookkeeping. On one side is a debt: I owe my friend a favor. On the other side is a credit: my friend is due a favor. And that’s all there is to it. My friend can now exchange my IOU with other people. It becomes money in circulation. Read more…

from Lars Syll

Public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt ‘cancels’ itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren ‘repay’ the public debt these payments will be made to our children and grandchildren. Read more…

from Dean Baker

It is standard for economic reporters to treat higher stock prices as good news. A rising stock market is often touted in the same way that job gains or GDP growth are touted, as evidence of a stronger economy.

This can be true. When the economy is growing at a healthy pace, the stock market is usually rising also. But the link is far more tenuous than is generally recognized. The market is in principle a measure of expected future profits. Policies that redistribute income from workers or taxpayers, such as anti-union laws or a corporate tax cut, would be expected to lead to a rising stock market, even if they did not spur economic growth.

But even beyond this direct redistributive issue, there is another sense in which a rising stock market can be bad for the 90 percent of the population that doesn’t own much stock (this includes 401(k)s). Higher stock prices encourage rich people to spend more money.

To see why this is an issue we need to pull out our MMT or Keynesian handbook. (MMT is essentially Keynes. That is not an insult; the term “modern monetary theory” is taken from the Keynes’ Treatise on Money.) To my view, the main takeaway from MMT is that the limit on the government’s ability to spend is inflation. This goes against the line pushed by the deficit hawks, that we have to worry about the government borrowing too much, because at some point lenders will be unwilling to lend us money. Read more…

from Peter Radford

Economists have been talking about complexity for a very long time.  This may surprise many of you given the state of mainstream economics, but it is true.  A good place to discover a preliminary history of complexity in economics would be the short volume edited by David Colander published in 2000.  The papers it contains were all presented at a History of Economics Society Conference in 1998.  Colander provides a good introduction and tries to put complexity into the context of economics since its inception.  There are times when, in my opinion, he errs a little too much in favor of the older methodologies as if he finds it difficult to shed old habits himself.  Nonetheless the papers in the volume cover a wide and interesting territory, including the similarities between biology and economics.

There is no point in presenting a summary of the various papers here, but perhaps it is worth mentioning that in Colander’s own contribution he evaluates some of the more well-known names in the history of economics and determines whether they would be more or less important were their standing simply built upon their understanding of the role of complexity.  The people coming under his scrutiny are a who’s-who of economic thought: Smith, Malthus, Ricardo, Mill, Marx, Walras, Marshall, Hayek, and Keynes all get a going over.  Happily for those us unconvinced by the dead-end that is called general equilibrium Walras gets a solid demotion, as does Ricardo.

In my last note I mentioned that economics has, traditionally, been heavily interested in what I called “a battle with scarcity”.  This seems to have confused people.  It is not exactly a novel idea on my part! Robbins put it this way in 1932: Read more…

from Lars Syll

Alex Rosenberg — chair of the philosophy department at Duke University, renowned economic methodologist and author of Economics — Mathematical Politics or Science of Diminishing Returns? — had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine a couple of years ago. Writes Rosenberg:

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics:

‘Specifically: we have a body of economic theory built around the assumptions of perfectly rational behavior and perfectly functioning markets. Any economist with a grain of sense — which is to say, maybe half the profession? — knows that this is very much an abstraction, to be modified whenever the evidence suggests that it’s going wrong. But nobody has come up with general rules for making such modifications.’

The trouble is that the macroeconomic evidence can’t tell us when and where maximization-and-equilibrium goes wrong, and there seems no immediate prospect for improving the assumptions of perfect rationality and perfect markets from behavioral economics, neuroeconomics, experimental economics, evolutionary economics, game theory, etc.

But these concessions are all the New Classical economists need to defend themselves against Krugman. After all, he seems to admit there is no alternative to maximization and equilibrium.

I think Rosenberg is on to something important here regarding Krugman’s neglect of methodological reflection. Read more…

from Norbert Häring

Ten years ago, the Rockefeller Foundation published the eerily prescient, autocratic Lock-Step-Scenario and, apparently, has been working to make it true. The most recent initiative in this regard is a cooperation of the Rockefeller-funded GAVI immunization alliance with Mastercard and a biometric ID company named TrustStamp.

Before getting to this cooperation, let me briefly remind you of a selection of the assumptions of the Lock Step scenario builders have made their choices 10 years ago:

• A virus pandemic with high contagion and high mortality
• Non-authoritarian response of US-government fails
• Authoritarian Chinese approach works much better
• Other nations emulate authoritarian, high surveillance Chinese approach
• Endurance of more authoritarian rule after pandemic
• Shocked populations welcoming more surveillance
• … and authoritarian rule
• Biometric ID gets a boost
• A multipolar IT-world with US-dominance emerging
• Philanthropic foundations becoming part of US external and security policy.

Read more…

from David Ruccio

Read more…

from Lars Syll

The atomic hypothesis which has worked so splendidly in Physics breaks down in Psychics. We are faced at every turn with the problems of Organic Unity, of Discreteness, of Discontinuity – the whole is not equal to the sum of the parts, comparisons of quantity fails us, small changes produce large effects, the assumptions of a uniform and homogeneous continuum are not satisfied. Thus the results of Mathematical Psychics turn out to be derivative, not fundamental, indexes, not measurements, first approximations at the best; and fallible indexes, dubious approximations at that, with much doubt added as to what, if anything, they are indexes or approximations of.

Where ‘New Keynesian’ and New Classical economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they have to put a blind eye on the emergent properties that characterize all open social and economic systems. The interaction between animal spirits, trust, confidence, institutions, etc., cannot be deduced or reduced to a question answerable on the individual level. Macroeconomic structures and phenomena have to be analyzed also on their own terms.

from Dean Baker

I have written many times that I thought the focus on wealth inequality, as opposed to income inequality, was misplaced. There are many practical, political, and legal problems associated with taxing wealth that are considerably smaller when we talk about altering the economic structures that redistribute so much income upward.

But beyond the issue of whether inequalities of income or wealth are more easily tackled, there is also a very strange argument for focusing on wealth that is based on its impact on political power. The argument is that people like the Koch brothers or Mark Zuckerberg can gain enormous political power as a result of their immense wealth. Therefore, if we believe in democracy, we have to bring such outsized fortunes down to earth.

It is certainly true that the rich and very rich enjoy enormous political power under our current system, but it does not follow that attacking their wealth is the most effective way to restore a more functional democracy. To see this point, just imagine the most optimistic plausible scenario. Read more…

from Peter Radford

The economy as a sea of information, constantly churning, far from equilibrium, with computation its key activity.  It is complex.  It is inscrutable to any method that fails to accommodate its multitude of layers, interconnections, feedback loops, and constant dynamism.  Since reading Ilya Prigogine ages ago I have never understood how anyone could not view the economy through such a lens.  The interplay between creative forces needed to sustain life and the constant dissipation or disordering that inevitably follows upon such creativity is, to me, the central theme being played out in an economy.

Given this, attempts to contain analysis within a neat box simply defy reality.  The instances of an economy that are unstable and out of equilibrium far outnumber, enormously, those that are stable or in equilibrium.  Disorder is normal.  Order is rare.  Vanishingly so.  And, given the radical uncertainty that permeates the economy, we can only focus on the short term.

So, an economy can never be “efficient” because we have no way of knowing how to anchor the universal analysis of such efficiency.

Nor can it be “optimal” because Read more…

from Robert Wade and RWER issue no.92

The bottom line is that North and South are coherent blocs in important ways. The income gap between the North-South blocs is – persistently – larger than the income gaps within them. If we plot the share of world population living in countries arranged by average income we see a pronounced bimodal distribution, with not much population in between.

Countries of the North enjoy common economic benefits from their superior position in the world hierarchy, making for common interests in protecting their position from challengers. They translate common interests into political treaties, such as free trade agreements (e.g. NAFTA), political federations (eg European Union), and security agreements (eg NATO); and into common agreements linking groups of northern countries with regions of the South (e.g. Lome Convention, a trade and aid agreement between the European Economic Commission and 71 African, Caribbean and Pacific countries, signed in 1975). The seven leading economies of the North have concerted their actions through the G7 summits, claiming to be the top table of governance for the world (though not replacing the UN Security Council on security issues); and supported by tiers of other G7 coordination forums.

Countries of the South have broadly similar income levels and are subject to broadly similar pressures from the world economy. But they are Read more…

Fred Zimmerman  (originally a comment)

Taken together, the chapters of Anthropologies of Unemployment, New Perspectives on Work and Its Absence, edited by Jong Bum Kwon and Carrie M. Laneby reveal that there is something new about unemployment today. It is not a temporary occurrence, but a chronic condition. In adjusting to persistent, longstanding unemployment, people and groups create new understandings of unemployment as well as of work and employment; they improvise new forms of sociality, morality, and personhood. Ethnographic studies such as those found in Anthropologies of Unemployment are crucial if we are to understand the broader forms, meanings, and significance of pervasive economic insecurity and discover the emergence of new social and cultural possibilities.

Everyone (media to the ordinary person in the street) make up “what ifs” to help us see and make sense of the unexamined assumptions embedded in the media headlines about unemployment we encounter every day. One of the major strengths of the anthropological approach to studying culture is precisely this exercise of situating the seemingly mundane and taken-for-granted in its wider context. To understand what unemployment means, why it happens, and how it feels, we need to consider it within its appropriate context. Read more…

from Lars Syll

Econometricians typically hail the evolution of econometrics as a “big success”. For example, Geweke et al. (2006) argue that “econometrics has come a long way over a relatively short period” … Pagan (1987) describes econometrics as “outstanding success” because the work of econometric theorists has become “part of the process of economic investigation and the training of economists” …

These claims represent no more than self-glorifying rhetoric … The widespread use of econometrics is not indicative of success, just like the widespread use of drugs does not represent social success. Applications of econometric methods in almost every field of economics is not the same as saying that econometrics has enhanced our understanding of the underlying issues in every field of economics. It only shows that econometrics is no longer a means to an end but rather the end itself. The use of econometric models by government agencies has not led to improvement in policy making, as we move from one crisis to another …

The observation that econometric theory has become part of the training of economists and the other observation of excess demand for well-trained econometricians are far away from being measures of success … The alleged success of econometrics has led to the production of economics graduates who may be good at number crunching but do not know much about the various economic problems faced by humanity. It has also led to the brain drain inflicted on the society by the movement of physicists, mathematicians and engineers to economics and finance, particularly those looking for lucrative jobs in the financial sector. At the same time, some good economists have left the field or retired early because they could not cope with the success of econometrics.

Imad Moosa / RWER

Mainstream economists often hold the view that if you are critical of econometrics it can only be because you are a sadly misinformed and misguided person who dislikes and does not understand much of it.

As Moosa’s eminent article shows, this is, however, nothing but a gross misapprehension. Read more…

from Ikonoclast  (originally a comment)

n C21 Piketty was exposing the automatic outcomes of an axiom-based legal law, regulation and financial system. The real economy is a real system (obviously). The financial economy is a formal system whose operations are prescribed by its axioms. Our system of legal laws, regulations, financial rules and financial calculations (bookkeeping and national accounts) is a formal, prescriptive system founded on ideological property axioms and calculated out via prescribed operations in the numéraire (money or financial capital). The RWER article even happens to mention one property axiom of the modern system: the axiom “for unlimited private accumulation.”

The expression r>g was not put forward by Piketty as a “law”. He put it forward as a tendency under certain conditions. The full expression of the tendency was;

If r>g then inequality increases. Read more…

from Dean Baker

Apparently at the New York Times the answer is no. Elisabeth Rosenthal, who is a very insightful writer on health care issues, had a column this morning warning that we may face very high prices for a coronavirus vaccine. She points out that this is in spite of the fact that the government is paying for much of the cost of the research. Rosenthal then argues we should adopt a system of price controls or negotiations, as is done in every other wealthy country.

While her points are all well-taken, the amazing part is that she never considers the simplest solution, just don’t give the companies patent monopolies in the first place. The story here is the government is paying for most of the research upfront. While does it have to pay for it a second time by giving the companies patent monopolies.

There is no reason that the government can’t simply make it a condition of the funding that all research findings are fully open and that any patents will be in the public domain so that any vaccines will be available as a cheap generic from the day it comes on the market. Not only does this ensure that a vaccine will be affordable, it will likely mean more rapid progress, since all researchers will be able to immediately learn from the success or failures of other researchers.

It is amazing that this obvious route is not being considered in public debate. Government-granted patent and copyright monopolies are one of the main ways in which we generate inequality. Bill Gates would still be working for a living without them.

At a time when the country is newly focused on racial inequality, it is striking that reducing the importance of the factors that generate inequality in the first place is not even up for discussion. This is fitting with the good old “White Savior” theory of politics.

Rather than changing the government-created structures that generate inequality, they would rather have the beneficent government push policies that reverse some of the inequality government structures created in the first place. I suppose this route is more appealing to the liberal psyche, but it ignores economic reality, and also at the end of the day, is likely to be less effective politically.

from Steven Pressman and RWER issue no.92

Thomas Piketty established his professional reputation by using income tax returns to measure income distribution over long time periods in several nations. Long before Capital in the Twenty-First Century (hereafter C21) appeared, Piketty (2001; 2003; & Saez, 2003) showed that, in many capitalist countries, income flowed to the top 1% (really the top .1%). C21 made two new contributions – a theory to explain this phenomenon, r>g, and a policy solution, taxing wealth.

Surprisingly, C21 became an international best seller. Nonetheless, it was criticized by a broad array of economists. Heterodox economists objected to the economic theory Piketty used to explain rising inequality. Neoclassical economists disliked his policy proposal and understood that neoclassical economics didn’t support Piketty’s explanation of rising inequality. And many economists criticized Piketty’s data and his interpretation of the distributional facts (see Pressman, 2016).

Piketty’s follow up, Capital and Ideology, was published in France last fall; an English version appeared in March of 2020. There are many similarities between the two books. Both are massive tomes,¹ well-written and packed with economic data. Both use the term “capital” when really talking about wealth. Finally, literary references abound to support key points.

Despite these similarities, there are many changes. Gone are r>g and any analysis of inequality that rests on neoclassical economic theory. Capital and Ideology contains a different perspective on the causes of inequality. As its title proclaims, it is our beliefs that are crucial. Piketty undertakes a broad sweep of history to argue that the degree of inequality we get depends on how people see inequality and that this varies from time to time and from place to place. A progressive ideology, leading to greater equality during the 20^th century, ran out of steam by the end of the century. It was replaced by the view that markets increase human well-being. There is also a new policy proposal – broader representation on corporate boards.

This paper examines Piketty’s changing views on the causes of inequality and the policy solutions needed to remedy the problem. Section 2 provides a brief overview of some general perspectives on understanding income inequality. Section 3 focuses on how C21 views the causes of inequality. Section 4 then discusses the causes of inequality according to Capital and Ideology. Section 5 looks at key policy proposals to reduce inequality in both books. Section 6 concludes.  read more

 

from Lars Syll

Thus luxury is being hollowed out. For in the middle of general fungibility, happiness clings without exception to what is not fungible. No exertion of humanity, no formal reasoning can alter the fact that the clothing which shimmers like a fairy-tale is worn by the one and only, not by twenty-thousand others. Under capitalism, the utopia of the qualitative — what by virtue of its difference and uniqueness does not enter into the ruling exchange relationship — flees into the fetish character. But this promise of happiness in luxury presupposes once more privilege, economic inequality, precisely a society based on fungibility. That is why the qualitative itself turns into a special case of quantification, the not-fungible into the fungible, luxury into comfort and in the end into senseless gadgets. In such a circle the principle of luxury goes to pieces even without the leveling tendency of mass society, over which the reactionaries sentimentally fuss and fume. The inner composition of luxury is not indifferent to what useless things, through their total embedding in the realm of usefulness, experience. Its remainders, even objects of the greatest quality, already look like junk.

T. W. Adorno