from Lars Syll

At a first glance, DSGE models seem to imply total ignorance because representative agents (or representative groups of agents with limited heterogeneity) featuring objective utility functions populate the literature. At a second glance, however, it becomes obvious that “methodological individualism” prevails and even dominates. To understand this dominance one only has to once again note that the representative agent has fixed properties only within any given model, or paper. Across papers and across time researchers appeal to a great many varieties of properties of agents rendering the notion of the (heterogeneous) representative agents) with stable preferences absurd.

This variety thus not only causes the arbitrariness described above but also reflects the fact that humans are indeed individuals who cannot be objectified. To put it differently, the underlying fabric of the economy permeates economics even against the more or less explicit will of the researchers concerned.

Christian Mueller

Yes indeed, DSGE models and the idea of a representative agent are “absurd.” Why would one derive policy implications from something that is nothing but a convenient untruth? Still, mainstream economists seem to be impressed by the ‘rigour’ brought to macroeconomics by New-Classical-New-Keynesian DSGE models and its rational expectations and representative agent microfoundations!

It is difficult to see why. Read more…

from Peter Radford

Price-gouging is now a topic in politics.  Kamala Harris has put it there.  Naturally there has been the predictable outcry of opposition coupled with and equally predictable sneer of disapproval: how could she say something so uneducated?  Has she no grasp of Econ.101?  Oh the illiteracy!

Perhaps even more predictable is that someone like John Cochrane has felt it necessary to write an article in praise of price-gouging.  After all, hard core libertarian economists are proud of their adherence to the often counter-intuitive claims of economic price theory. 

In his words:

“We should praise price-gouging. Yes, pass a new federal law, one that overrides the many state laws against price gouging.”

There’s not much to say.  From within the straightjacket of price theory economists have no ability to comment on the morality of a price.  It is, as they say, what it is.  Provided that said price is a consequence of the playing out of the logic described in economics.  

It all has to do with scarcity.  As Robbins famously put it: Read more…

from Asad Zaman and current issue of RWER

Our current environmental predicament is fundamentally a crisis of knowledge, rooted in the Enlightenment’s narrow conceptualization of epistemology. This shift fostered an illusion of objectivity that has since permeated our understanding of the world, particularly in the context of societal dynamics. The Enlightenment’s emphasis on objective knowledge marginalized the subjective realms of emotional intelligence, moral intuition, and diverse lived experiences. This exclusion led to a worldview that erroneously equates scientific rationality with absolute truth, consequently overlooking the multifaceted and nuanced nature of human experience and its interaction with the environment. See Zaman (2015) for a detailed discussion of the deification of science.

To truly integrate heart, soul, and lived experiences into our understanding of the world, we must challenge the very notion of objective knowledge as the sole arbiter of truth, especially in the realm of social sciences. For example, Berger and Luckmann (1966) have argued that truth is a social construct.  Society, when viewed as a collective of lived experiences, presents a spectrum of realities, all equally valid yet inherently diverse. This perspective acknowledges that what is considered ‘objective’ often reflects dominant narratives, sidelining alternative ways of experiencing and understanding the world. By embracing this multiplicity of truths, we open ourselves to a richer, more inclusive understanding of our environment and our place within it.  Such a shift in perspective is crucial for addressing the environmental challenges we face, as it fosters a deeper, empathetic connection with the planet and its diverse inhabitants, moving beyond the exploitation and detachment engendered by the Enlightenment’s limited view.  read more

from Edward Fullbrook

A few years ago, I wrote a novel that was published under a pen name and titled Two American Dreams; Which is yours?  Recently its publisher realized that, although set in the Sixties (mostly in Berkeley) this novel pertains to the coming US presidential election to a remarkable degree.  With that in mind, they submitted to Amazon a standard advertisement for the novel in both its paper and Kindle formats.

Amazon says that such adverts are usually approved within 24 hours, but some can take up to 72.  This one did not get a response for over 160 hours, suggesting that the decision to block it came from higher up.  Amazon’s rejection email said:

• Your ad titled “Two American Dreams: Which is yours?” does not comply with our current Creative Acceptance Policies. Specifically for the following reasons:
  • Your ad contains content or book(s) prohibited from advertising. This may include books about a specific political party, issue, or candidate during an election year. Please review section 4.3 Political books under Book Advertising Guidelines and Acceptance Policies and remove the content or book(s) from your ad. 

However, Amazon is still selling Two American Dreams and still accepting gold stars and reviews for it.

from Lars Syll

To be fair to academia, it has realized that the pure DSGE model is incapable of explaining observable phenomena so they have introduced numerous amendments, known, oddly, as “imperfections” in the model. Long-term nominal contracts, other labour market frictions, imperfection in credit markets, all these and more are prayed in aid and, either rigorously or more usually ad hoc, introduced into the model, generating lags that mean it can be represented as fitting the data. Most central banks have a modified DSGE model of this kind …

These modified models are often referred to as “New Keynesian”, presumably because the dead cannot sue for defamation.

Gerald Holtham

Yes indeed — “New Keynesianism” is a gross misnomer. The macroeconomics of people like Greg Mankiw has a lot to do with Milton Friedman, Robert Lucas and Thomas Sargent — and very little, or next to nothing, to do with the founder of macroeconomics, John Maynard Keynes.

If macroeconomic models — no matter what ilk —  assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Macroeconomic theorists — regardless of being New Monetarist, New Classical or “New Keynesian” — ought to do some ontological reflection and heed Keynes’ warnings on using thought models in economics: Read more…

from Dean Baker

The effort to bring back manufacturing jobs has been a major theme in the 2024 election. Both parties say they consider this a high priority for the next administration. However, there is a notable difference in that the Biden-Harris administration has actively supported an increase in unionization, while the Republicans have indicated, at best, neutrality if not outright hostility towards unions.

This distinction is important in the context of manufacturing jobs. Many people seem to assume that manufacturing jobs are automatically good jobs, paying more than non manufacturing jobs.

While that was true four decades ago, before the massive job loss of manufacturing jobs due to trade, it is not clear this is still the case. The figure below shows the average hourly pay, in 2024 dollars, for production and non supervisory workers in manufacturing and elsewhere in the private sector.[1]

Source: Bureau of Labor Statistics and author’s calculations.

Read more…

from Lars Syll

This is not new to most of you of course. You are already steeped in McCloskey’s Rhetoric. Or you ought to be. After all economists are simply telling stories about the economy. Sometimes we are taken in. Sometimes we are not.

Unfortunately McCloskey herself gets a little too caught up in her stories. As in her explanation as to how she can be both a feminist and a free market economist:

“The market is the great liberator of women; it has not been the state, which is after all an instrument of patriarchy … The market is the way out of enslavement from your dad, your husband, or your sons. … The enrichment that has come through allowing markets to operate has been a tremendous part of the learned freedom of the modern women.” — Quoted in “The Changing Face of Economics – Conversations With Cutting Edge Economists” by Colander, Holt, and Rosser

Notice the binary nature of the world in this story. There are only the market (yea!) and the state (boo!). There are no other institutions. Whole swathes of society vanish or are flattened into insignificance. The state is viewed as a villain that the market heroically battles against to advance us all.

It is a ripping tale.

It is shallow and utterly misleading.

Peter Radford

Yours truly can’t but agree with Radford here. That said, however, McCloskey sometimes does get it pretty right: Read more…

from Peter Radford
– a critique of the absurdity of economics

I finally read “The Accountability Machine”, the book by Dan Davies.  It’s worth the effort.  You can read it in a number of ways.  As a peon to cybernetics and Stafford Beer.  As a critique of the absurdity of economics.  As a summary of the development of management theory.  Or as a summary of the ills of neoliberalism.  It’s a mash-up of all those.  It also has the great virtue of being very readable.

Chapter Six will warm the hearts of all you who, like me, relish the opportunity to poke fun at economics as it exists in its more extreme expressions.  A few quotations set the scene perfectly:

“Economists variously describe economics as a subject, a science, a discipline, and even a profession, but it’s really a commitment to certain ways of modeling the world.”

“Depending on political preferences and ideological commitments, they could then go back and make a new model, or declare that the distance [between reality and their model conclusions] represented a failure on the part of reality and suggest a policy to bring the world into line.  It’s not hard to see why these people became influential advisors.”

“As a subject, economics seems to have a fear and disgust of thinking about philosophy and methodology that might be described as Freudian … The vast majority of economists literally don’t know what they’re doing.”

“Consequently, plenty of economists still think that making markets more competitive is a viable substitute for anti-discrimination laws.  It works in the model, as long as you throw away any information that might be relevant to the actual problem.”

“Proving things ‘in the model’ and then acting as if they’re true in the real world is a terrible habit of economists.” Read more…

from Lars Syll

Paul Davidson, the co-founder of the Journal of Post Keynesian Economics (JPKE) and a leading Post Keynesian economist, died on June 20, 2024, in Chicago. He was born in Brooklyn, NY, on October 23, 1930, about a year after the Great Crash of 1929. He was a staunch defender of the importance of John Maynard Keynes, whose ideas, he insisted, differed fundamentally from those of the Neo-Keynesians who came to dominate American macroeconomics after World War II. He viewed Keynes as a monetary economist above all, privileging the liquidity preference theory of interest rates over the doctrine of loanable funds and championing fundamental uncertainty as key to understanding the role of money in the real world. He was a strong supporter of Keynes’ radical internationalism, which argued for an international payments system structured to ensure globally balanced trade …

Paul Davidson will be remembered for his persistent emphasis of the importance of fundamental uncertainty, a central feature of economic reality and a critical idea for understanding the role of money in the real world. However, his greatest legacy is associated with his institution building. Without his teaching, his organizing activities, his support of younger scholars, and his cofounding and editorship of the JPKE, the heterodox economics community would be significantly smaller than it is now. Davidson was combative and forceful in his discussions, particularly about Keynes’ legacy. In retrospect, he was a key figure in the preservation of Keynesian ideas, sticking with them when they had fallen out of fashion and when the economics profession had mistakenly moved away from them. Since the Great Financial Crisis of 2008 there has been a considerable rehabilitation of Keynes’ ideas, prompting talk about “the return of the master.” Paul Davidson never abandoned the master, and he was right.

James K. Galbraith, Thomas I. Palley, Matías Vernengo

I absolutely agree with Galbraith et consortes when they write that Paul mostly will be remembered for his persistent emphasis on the importance of fundamental uncertainty.

Some years ago yours truly had an (as always) interesting discussion — on the Real-World Economics Review Blog — with Paul on ergodicity and the differences between Knight and Keynes re uncertainty. Read more…

from Asad Zaman and WEA Pedagogy Blog

This is the second post in a sequence explaining post WW2 USA strategies for global dominance. For the previous post, see: Hudson on Super Imperialism 1

U.S. Financial Strategies for Global Dominance 

Introduction: Michael Hudson, in his podcast and writings, provides a profound critique of the U.S.’s economic and financial strategies that have underpinned its global dominance. This blog post explores Hudson’s insights into the transition from surplus to deficit financing, the manipulation of European economies, and the economic warfare against Russia. Combining these topics reveals a comprehensive picture of how the U.S. has maintained its imperial power through financial maneuvers and strategic policies.

Post-WWII Economic Strategies: From Surplus to Deficit Financing

Post-WWII Economic Strategies: After World War II, the United States emerged as the world’s leading economic power, possessing a significant portion of the world’s gold reserves. From 1945 until 1950, the U.S. accumulated even more gold, holding over 70% of the global monetary gold supply. This period marked a time of economic strength and dominance for the U.S., but it also set the stage for future financial strategies. Read more…

real-world economics review

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Issue no. 108
July 2024

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The creationist foundations of Herman Daly’s steady state economy
John Gowdy and Lisi Krall
2

Data: a critical perspective
Carlos Guerrero de Lizardi
16

Enlightenment Epistemology and the Climate Crisis
Asad Zaman
29

Fabulous Macroeconomics
Gerald Holtham
33

A Tour of the Jevons Paradox. How Energy Efficiency Backfires
Blair Fix
40

A Debtor Countries Club?  The Cartagena Consensus reloaded
Juan Pablo Bohoslavsky and Francisco Cantamutto
41

Why Has Growth Theory Been a Failure?
Bernard C. Beaudreau
63

Socialism, Fascism and Neoliberalism:
Karl Polanyi’s Institutionalism and the Democratic Question in the XXI Century
Manuel Ramon Souza Luz, Renan Veronesi Compagnoli and Ramon Garcia Fernandez
83

Book Review
Proper Economics?
Yannick Slade-Caffarel’s Introduction to Social Positioning Theory
Cambridge Social Ontology: An Introduction to Social Positioning Theory.
Jamie Morgan
103

Board of Editors, past contributors, submissions, etc.
114

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from Lars Syll

We’ve lots of evidence from different times and places that the elasticity of output with respect to capital is indeed small. In his famous paper which kickstarted this approach to thinking about economic growth, Robert Solow estimated (pdf) that only one-eighth of the increase in US GDP per worker between 1900 and 1949 was due to increases in the capital stock. The rest, he said, was due to technical progress. In Fully Grown, Dietrich Vollrath estimated that from 1950 to 2000 a rise in the US’s physical capital stock per person accounted for only 0.64 percentage points of the 2.2 per cent annual rise in real GDP per capita. Nick Crafts has estimated (pdf) that less than one-third of growth in advanced economies between 1913 and 1973 was due to a bigger capital stock. And Gavan Conlon and colleagues have estimated (pdf) that a fall in capital growth accounted for less than half of the slowdown in the UK’s hourly productivity growth between 2001-07 and 2014-19.

Now, we shouldn’t be fixated on precise numbers here. Aggregate production functions and measures of both the capital stock and depreciation have massive theoretical and practical problems: Solow himself said that such measures “will really drive a purist mad.” But the picture here is clear: it takes a lot of capital spending to deliver only moderate increases in GDP.

Chris Dillow

Adam Smith once wrote that a really good explanation is “practically seamless.”

Is there any such theory within one of the most important fields of social sciences — economic growth? Read more…

from C. P. Chandrasekhar and Jayati Ghosh

In the past three years, global food prices have been on a roller coaster, rising rapidly especially in the first half of 2022 due to a speculative bubble and then falling from July 2022 onwards (Figure 1). The phase of rising food prices led to increasing food prices around the world, especially in lower income countries—and this was obviously associated with growing hunger. According to the FAO, 122 million more people faced hunger in 2022 than in 2019, before the global pandemic. Around 42 per cent of the world’s population—more than 3.1 billion people—were unable to afford a healthy diet in 2021.

Figure 1.

Source: https://www.fao.org/worldfoodsituation/foodpricesindex/en/

The dramatic rise in global food prices (especially for wheat) in the first half of 2022 was largely attributed to the Ukraine War, which was supposed to have affected supply because of Russia and Ukraine being major wheat exporters. But it is now clear that global supply was largely unaffected in this period, because of increased production in other countries. Instead, the rise in prices can be attributed to the combination of profiteering by large agribusinesses in the oligopolistic international food trade, and financial speculation in food commodity futures (see UNCTAD’s Trade and Development Report 2023 for details). Read more…

from Dean Baker

Leading media outlets like The New York Times, The Atlantic, and The New Yorker have about as much concern for intellectual consistency as TikTok videos. In very serious and somber tones they will warn the rest of us about a major problem and then in the next issue, or the next article, present a story that is 180 degrees at odds without ever realizing the contradiction.

My favorite example of this “Which way is up?” problem is the simultaneous concern expressed that AI will eliminate all the jobs and that declining birth rates will lead to worker shortages. We got a taste of the former in an NYT article about efforts by OpenAI’s CEO Sam Altman to promote guaranteed income programs.

According to the piece, Altman and other tech types who share his views, are concerned that AI will lead to mass unemployment and further increase the gap between rich and poor. While this concern is voiced frequently in elite publications it is 180 degrees at odds with almost everything else they write.

First and foremost, if AI is going to lead to massive job loss there is zero reason to worry that declining birth rates will lead to a shrinking workforce. If we don’t have any jobs, why would we need more workers? Read more…

from Lars Syll

The fallacy of composition basically consists of the false belief that the whole is nothing but the sum of its parts.  In society and in the economy this is arguably not the case. An adequate analysis of society and economy a fortiori can’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts. Read more…

from Asad Zaman and WEA Pedagogy Blog

In this sequence of posts, I will present the contents of the video podcast entitled “Michael Hudson: Why the US has a unique place in the history of imperialism? ” For me, Hudson’s book Super Imperialism: The Economic Strategy of the American Empire was an amazing eye-opener, essential reading for anyone who want to understand modern real world economics. The podcast provides a summary of his ideas, and these posts break it down further to make it accessible to a broader audience. This first post covers about the first 20 minutes of the video.

Introduction: Michael Hudson, a distinguished economist and professor at the University of Missouri Kansas City, provides a critical analysis of the economic strategies that underpin U.S. global dominance. In his podcast, Hudson shares insights from his extensive experience as a Wall Street analyst, political consultant, and author. This blog post delves into his early influences and Wall Street experience, and critiques the World Bank’s role in perpetuating U.S. dominance through economic means.

Early Influences Read more…

from Lars Syll

ZEIT: Today, the debate focuses on the labor shortages facing many industrialized countries.

Angus Deaton: I am always cautious when people talk about a scarcity of labor but don’t talk about wages. The argument always is: Americans don’t want to do these jobs, Germans don’t want to do these jobs. So we have to have migrants. But in many cases, it is not that Germans or Americans don’t want to do these jobs, but that they don’t want to do them at the wages we can pay immigrants to do them. So maybe we should increase wages. It would not be a bad thing if lower-paid Americans got more money and improved their working conditions …

ZEIT: If wages rise, it would likely get more expensive for you to fix the roof of your house.

Deaton: Yes, indeed. People tell me their Danish friends can’t afford to put a new roof on their house because even if you correct for differences in purchasing power, it is much more expensive than in the U.S. But maybe that’s a price worth paying for a more equal and inclusive society. I am not saying that higher prices are in themselves a good thing and that we should get rid of migration altogether. But sometimes, cheap stuff and good wages are not compatible.

ZEIT: And when push comes to shove, you would prefer higher wages?

Deaton: Maybe we would live in a less efficient world if we had less immigration and less trade. Economists are obsessed with efficiency. Maybe my yard wouldn’t be as perfect. But maybe it would be a better world and there would be less political polarization.

Die Zeit

from Peter Radford

“Economics has become irrelevant.”

PART ONE

Oh my.  Apparently Brad DeLong and I have the same problem.  He, of course, is part of the elite club.  I am decidedly not.  So it is quite a shock to share something.

What?

He set out to write an 800 word review of Dan Davies’ new book and ended up about 5,000 words later still writing.  I set out to write 1,000 words on William Janeway’s recent article on mesoeconomics, and here I am nearly 5,000 words later, still writing.  The common thread being, from my reading of DeLong, that economics sucks.

That’s a technical term.

Dan Davies seems to agree because he says this:

As long as the ideology of economics maintains its dominant position, there is always a considerable danger of the Friedman doctrine rising back up from the dead. If the highest-level decision-making mechanisms of the world are to be viable systems, they need a philosophy which can balance present against future and create self-identity…. This philosophy cannot look much like mainstream economics…. Any system which is set up to maximise a single objective has the potential to go bonkers…. You can’t have the economists in charge, not in the way they currently are…. The top level of any decision-making system that’s meant to operate autonomously can’t be a maximiser. And so, the governing philosophy of the overall economic system can’t be based on the constrained optimisation methodology that’s currently dominant in the subject of economics…

A more precise term to describe the conundrum is irrelevant.  Economics has become irrelevant.  Which is what Steve Levitt said he feared also.  Economics sets out to solve the insoluble.  Which it can do in make-believe, but not in reality.  Hence the irrelevance.

Why does economics do this?  It seems like a lot of wasted effort.  It does, however, as JK Galbraith once said, keep a lot of economists employed.  So that’s a good thing.  If keeping economists off the streets is the best we can do, at least it’s better than nothing. Read more…

from Lars Syll

So, certainly, both non-theorists and some theorists have little patience for research that displays mathematical ingenuity but has no value as social science. But defining this work exactly is impossible. This sort of work is like pornography quite simple to recognize when one sees it.

Jeffrey Ely

As researchers, we (mostly) want to try to understand and explain reality. How we do this differs between various disciplines and thought traditions. Creating a ‘map’ at a 1:1 scale of reality is of little help. We have to rely on some kind of ‘approximation’ to grasp an often inaccessible reality. Exactly how this approximation is done varies significantly between different research traditions.

In mathematics, by simply defining things clearly and conveniently, some tricky questions are thought to be solvable.

I have no problem with solving problems in mathematics by ‘defining’ them away. In pure mathematics, you are always allowed to take an epistemological view on problems and ‘axiomatically’ decide that 0.999… is 1. But how about the real world? In that world, from an ontological point of view, 0.999… is never 1! Although mainstream economics seems to take for granted that their epistemology-based models rule the roost even in the real world, economists ought to do some ontological reflection when they apply their mathematical models to the real world. Read more…