Real-World Economics Review Blog

from Lars Syll

Beyond the significant financial expenses required to conduct RCTs … critics have raised concerns about considerable opportunity costs associated with their privileged status in programme and policy assessment. These costs result from how an over-emphasis on experimental evaluations in evidence generation systematically undermines alternative research methods potentially better equipped to answer questions about causal mechanisms (or the channels by which interventions work to induce change) …

Notably, many political economy factors might help to explain this methodological fetishism … For instance, some authors have argued how, and in contrast with the value and theory-free discourse endorsed by experimentalists, RCTs have clear ideological commitments aligned with dominant (neo)liberal economic reforms … Similarly, comparative education scholars have documented longstanding efforts by international organisations to promote the credibility of their data and methods and, therefore, to bolster the influence of their findings.

Juan David Parra & D. Brent Edwards

Parra and Edwards’ interesting article highlights some of the fundamental problems with the present idolatry of ‘evidence-based’ policies and randomization designs in the field of education. Unfortunately, we face the same problems in economics. Read more…

The population of Argentina is suffering. The purchasing power of people who still have a job is down (a lot), and unemployment must have doubled (it was 5,7% in the last quarter of 2023) if it has not tripled. Less government spending, less consumer spending, and, no doubt, less private investment means that Argentina is experiencing an economic disaster which will scar the country for decades. Retail sales (volume): down around 20% while, at this moment, people will still be able to use their savings to maintain their standard of living!

Read more…

from Dean Baker

The belief in free-market fundamentalism runs very deep. When I say that, I don’t mean that support for the concept runs deep, I mean the belief that we had been pursuing free-market policies in the years before the Trump and Biden presidency runs very deep. I was reminded of this fact in a New York Times column by Farah Stockman, touting the development of a new post-free-market fundamentalist paradigm.

To be clear, the period of so-called free-market fundamentalism was one in which we saw a massive upward redistribution of wealth and income as has been extensively documented in numerous studies. It is understandable that the people who are happy about this upward redistribution would like to attribute it to the natural workings of the market.

The story goes, yeah Elon Musk and Bill Gates are very rich, and lots of ordinary workers are kind of screwed, but shit happens. If we feel bad enough about it, we can toss some dimes to the left behind. After all, Bill Gates started a big foundation to help the world’s poor.

That’s a far more generous story for the rich than the reality. It was not just a case of “shit happens,” where the natural workings of the market gave them all the money. It was a story where they actively rigged the rules to ensure that a huge amount of money would be redistributed upward.

The place where I always begin is with government-granted patent and copyright monopolies. It is mind-boggling that serious people can think that these massive forms of government intervention are somehow the “free market.” Read more…

from Lars Syll

As has become abundantly clear during the last couple of years, it is obvious that most mainstream economists seem to think that Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with. That is actually very telling about the total lack of knowledge of their own discipline’s history these modern mainstream guys like Summers, Rogoff and Krugman have.

New? Cranks? Reading one of the founders of neoclassical economics, Knut Wicksell, and what he wrote in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise) soon makes the delusion go away: Read more…

from Lars Syll

In a word, Economics is an Impossible Science because by its own definition the determining conditions of the economy are not economic: they are “exogenous.” Supposedly a science of things, it is by definition without substance, being rather a mode of behavior: the application of scarce means to alternative ends so as to achieve the greatest possible satisfaction—neither means, ends, nor satisfaction substantially specified. Exogenous, however, is the culture, all those meanings, values, institutions, and structures, from gender roles, race relations, food preferences, and ethnicities, to technical inventions, legal regulations, political parties, etc., etc. The effect is a never-ending series of new theoretical breakthroughs, each an Economics du jour worthy of a Nobel prize, consisting of the discovery that some relevant little bit of the culture has something to do with it. Only to be soon superseded and forgotten since the continuous development and transformation of the culture, hence of the economy, leaves the Science in its wake. An impossible Science, by its own premises.

Marshall Sahlins

Read more…

from Asad Zaman and WEA Pedagogy Blog

The Most Valuable Kind of Knowledge

These lectures aim to provide the reader with knowledge. But what is knowledge? Our lives consist of a small number of infinitely precious moments. What makes it worthwhile to invest these moments in the acquisition of knowledge? Is it the kind of knowledge that can teach us how to lead better lives—how to make the most of the few moments that we have? This has been the central preoccupation of philosophers and thinkers across the millennia of human history. What is the good life, and how can we learn to live it? This type of knowledge would be invaluable, well worth the time invested in learning it. Knowledge that distracts us from these central questions would be useless. Knowledge that provides us with the wrong answers would be harmful, leading us to pursue the wrong goals and waste our lives.

But puzzlingly, questions about the “Meaning of Life” have themselves become meaningless today. How did this come to pass, leading to lives that feel devoid of purpose? And why does the search for meaning remain the most important quest we face? To explore this, let’s first illustrate the modern dismissive attitude toward this question. Here are a few quotes that trivialize existential inquiries: Read more…

from Dean Baker

New York Times columnist Peter Coy did a piece yesterday questioning the existence of a gap between productivity growth and the typical worker’s pay. This gap was established decades ago by my friends and former colleagues at the Economic Policy Institute (EPI). The fact that it is now being questioned says a lot about economics and even more about politics in this country.

First, let me be clear, my purpose is not at all to beat up on Coy. I’ve known him for many years and consider him a very good reporter/columnist who tries to get things right. The fact that he could be caught up in this mud-throwing effort speaks volumes about the influence of well-funded conservative think tanks and their ability to push their agenda even when it has no basis in reality.

The Productivity-Pay Gap, What Is at Issue?

When my former boss at EPI, Larry Mishel first began to write about the gap between productivity and pay, more than three decades ago, he was always very clear: the gap was between the productivity growth and the pay of the median or typical worker.

He and various colleagues at EPI, including Jared Bernstein, John Schmitt, Josh Bivens, Heidi Shierholtz, Sylvia Allegretto, and Elise Gould, were always pointing out that the gap was not between productivity and average pay, the source of the gap was within the wage distribution. In other words, money was going from workers at the middle and the bottom to workers at the top, like CEOs and Wall Street types, not from wages to profits. Read more…

from Edward Fullbrook

Humankind urgently needs a new discipline.  Our very survival may depend on it.  Natural science tells us that the economy now threatens humanity with calamity and potentially with extinction; and the daily news tells us that the economy’s forty-year upward redistribution of wealth, income and power threatens democracy and social order.  But meanwhile the only discipline that directly engages with today’s economy is the one whose “wisdom” has guided it to its present state.

Don’t get me wrong: I am not saying that economists have knowingly guided us to the ultimate precipice.  But we find ourselves on this precipice today because economics’ conceptual framework (equilibrium, utility, independent agents, marginalism, linearity, micro reductionism, and GDP obsession) has blinded us to the larger reality, the one that includes the biosphere and society.

Because of the scale of today’s economy and the size of the human population, it is now the economy’s effects beyond the economy itself that are the most significant and pressing when it comes to human welfare.  But economics’ underlying conceptual system prevents it from considering these effects except on an ad hoc and usually casual and non-professional basis.  Therefore, humanity urgently needs a discipline that brings together on equal footing natural science, social science, and economics so to provide the broader narrative.

To get discussion going, I am giving this yet to exist discipline a name, “perinomics”, its Greek etymology being “surrounding or enclosing accounts” rather than “economics”’ “home or family accounts”.  The creation of perinomics would quickly enable five significant things.

1. It would bring natural scientists, social scientists, and economists into the same room.
2. It would provide an on-going narrative focused on the economy’s impact on the biosphere and society.
3. Because perinomics would identify itself as a discipline separate from economics, it would immediately sidestep the power structure of economics that marginalizes the teachings of those who dissent from the traditional “wisdom”.
4. In public discussion regarding the economy, perinomists would soon command a prominent place on the platform.
5. The new discipline’s agenda would be publicly welcomed by many natural scientists.

from Lars Syll

In practice, what math does is let macro-economists locate the FWUTVs [facts with unknown truth values] farther away from the discussion of identification … Relying on a micro-foundation lets an author say, “Assume A, assume B, … blah blah blah … And so we have proven that P is true. Then the model is identified.” …

Distributional assumptions about error terms are a good place to bury things because hardly anyone pays attention to them. Moreover, if a critic does see that this is the identifying assumption, how can she win an argument about the true expected value the level of aether? If the author can make up an imaginary variable, “because I say so” seems like a pretty convincing answer to any question about its properties.

Paul Romer

Yes, indeed, modern mainstream economics — and especially its mathematical-statistical operationalization in the form of econometrics — fails miserably over and over again. Modern mainstream economics is based on the belief that deductive-axiomatic modelling is a sufficient guide to truth. That belief is, however, Read more…

from Jayati Ghosh

The international-development sector has become fixated on calculating financing gaps. Hardly a day goes by without new estimates of the funds low- and middle-income countries (LMICs) need to meet their climate targets and achieve the United Nations Sustainable Development Goals (SDGs).

The Independent High-Level Expert Group on Climate Finance, for example, estimates that developing and emerging economies (excluding China) need $2.4 trillion annually by 2030 to close the financing gap for investments in mitigation and adaptation. Achieving the SDGs would require an extra $3.5 trillion per year. Similarly, the UN’s 2023 Trade and Development Report suggests that LMICs need roughly $4 trillion per year to meet their climate and development goals.

Such estimates can elicit a range of psychological and policy responses. Ideally, they would encourage greater ambition and urgency in crafting and implementing policies at both the national and international levels. But they can also be distracting and demoralising, especially given the shortfalls in climate and development financing. Read more…

from Dean Baker

Suppose the G-7 finance ministers sat down and worked out a plan to spend tens of billions of dollars a year to subsidize developing countries in their transition to a green economy. Many of us might think this is a good idea since global warming poses a real threat to the planet.

Unfortunately, the G-7 finance ministers seem to have done the exact opposite. According to the coverage in the New York Times, they discussed ways to retaliate against China over its own plans to subsidize the transition to a green economy.  

The article tells us:

Policymakers worry that a flood of heavily subsidized Chinese green energy technology products will cripple the clean energy sectors in the United States and Europe, leading to lost jobs and reliance on China for solar panels, batteries, electric vehicles and other products.

….

’We need to stand together and send a unified message to China so they understand it’s not just one country that feels this way, but that they face a wall of opposition to the strategy that they’re pursuing,’ Ms. Yellen said at a news conference at the opening of the meetings.

It is worth distinguishing two separate issues here. Read more…

from Lars Syll

While one can understand that some of the elements in DSGE models seem to appeal to Keynesians at first sight, after closer examination, these models are in fundamental contradiction to Post-Keynesian and even traditional Keynesian thinking. The DSGE model is a model in which output is determined in the labour market as in New Classical models and in which aggregate demand plays only a very secondary role, even in the short run.

In addition, given the fundamental philosophical problems presented for the use of DSGE models for policy simulation, namely the fact that a number of parameters used have completely implausible magnitudes and that the degree of freedom for different parameters is so large that DSGE models with fundamentally different parametrization (and therefore different policy conclusions) equally well produce time series which fit the real-world data, it is also very hard to understand why DSGE models have reached such a prominence in economic science in general.

Sebastian Dullien

Neither New Classical nor ‘New Keynesian’ microfounded DSGE macro models have helped us foresee, understand or craft solutions to the problems of today’s economies. But still, many young academic macroeconomists want to work with DSGE models. That certainly should be a very worrying confirmation of economics — at least from the point of view of realism and relevance — becoming more and more a waste of time. Read more…

from Peter Radford

A pile of bricks is not a house.  A group of individuals is not an economy. A lot has to happen between the one and the other.  Which is why writing theories about economies as if it were simply an accumulation of individuals and their associated capital base misses the mark.  Nor is it simply a matter of how those individuals behave —rationally or not — their interactions create novelty that cannot and does not exist at the individual level.

Of course economists realize this, which is why they introduce the “market” as a placeholder for all that novelty.  They ignore alternative aggregate centers of novelty and center all their attention on the moment of transaction in the abstraction of their markets.  This is the culmination of the steady narrowing down of the focus of economics into the logic of allocation.  Any economic interaction between, or behavior of, individuals prior to or after a transaction is pushed to the sideline or ignored completely.

It was not always thus.  There was a time when economics had more ambition than to be the study solely of allocation.  There were moments of opportunity for economics to encompass the entire economic process from creation or discovery, through production, into the market, and then toward consumption and disposal of waste.  It could have been comprehensive.  But that opportunity was lost.  The 1930s and subsequent decades have a lot to answer for.

Most economists seem to have forgotten how grand economics once was.

A case in point: Read more…

from Dean Baker

For the last quarter century, those of us hoping we could slow global warming were anxious to see a quick conversion to electric vehicles (EVs). If we could get most people using electric vehicles, and have the energy coming from clean sources, we could radically reduce greenhouse gas emissions.

The problem was that EVs were considerably more expensive than their conventional counterparts. There were savings in operation due to lower maintenance, and the electricity generally costing less than gas, but that usually was not enough to offset the higher purchase price.

This was the motivation for the tax credit that the Biden administration included in the 2022 Inflation Reduction Act. The idea was to bring the price of EVs closer to the price of conventional cars.

After worrying for decades that the price of EVs was too high, we now have a different problem, the price is too low. China is now producing over ten million electric cars a year, some carrying price tags of under $10k. This has prompted terror here, with politicians tripping over themselves to find ways to keep people from buying them. Read more…

from Dean Baker

The New York Times reported that Jim Simons, the founder of Medallion hedge fund, died this week. As a result of his fund, according to the article, he accumulated more than $20 billion over his lifetime.

Simons was a math genius who had made many important breakthroughs in various areas of math. Back in the 1980s, he decided that he could make far more money on Wall Street than in doing math at a university. He thought that with sophisticated algorithms and cutting-edge computers, he could beat the market by finding patterns in trading.

This meant literally making trades seconds or even fractions of a second before other traders became aware of a price shift. If a trade could make a margin on even a few fractions of a percentage point on trades, hundreds of times, that can translate into big bucks.

According to the NYT, the Medallion fund averaged returns of 66 percent a year for several decades. This translates into some serious money.

It is worth reflecting on this one for a moment. Read more…

from Peter Radford

You can’t fight a war without understanding your enemy.  That’s an adage as old as war itself.  Which means it’s very old.

Joe Stiglitz doesn’t understand his enemy.

Now, that’s an odd thing to say bout someone who’s worldview is hardly a secret.  Stiglitz has given it his best shot for decades.  He’s one of the few big name economists worth reading on a regular basis.  But that doesn’t mean he always says things that add up.

He’s a roll lately and his latest book is attracting a lot of attention. So it should because it is an attempt to undo some of the immense damage economists have done to society over the past few decades.  In particular it is an attempt to reframe the notion of “freedom”.

Let’s set the stage:  In a recent article in Project Syndicate Stiglitz begins thus:

“Around the world, populist nationalism is on the rise, often shepherding to power authoritarian leaders. And yet the neoliberal orthodoxy – government downsizing, tax cuts, deregulation – that took hold some 40 years ago in the West was supposed to strengthen democracy, not weaken it. What went wrong?

Part of the answer is economic: neoliberalism simply did not deliver what it promised. In the United States and other advanced economies that embraced it, per capita real (inflation-adjusted) income growth between 1980 and the COVID-19 pandemic was 40% lower than in the preceding 30 years. Worse, incomes at the bottom and in the middle largely stagnated while those at the very top increased, and the deliberate weakening of social protections has produced greater financial and economic insecurity.”

What’s wrong with this?  Read more…

from Lars Syll

It’s hard not to agree with DeMartino’s critique of mainstream economics — an unethical, irresponsible, and harmful kind of science where models and procedures become ends in themselves, without consideration of their lack of explanatory value as regards real-world phenomena.

Many mainstream economists working in the field of economic theory think that their task is to give us analytical truths. That is great — from a mathematical and formal logical point of view. In science, however, it is rather uninteresting and totally uninformative! The framework of the analysis is too narrow. Even if economic theory gives us ‘logical’ truths, that is not what we are looking for as scientists. We are interested in finding truths that give us new information and knowledge of the world in which we live.

Scientific theories are theories that ‘refer’ to the real world, where axioms and definitions do not take us very far. To be of interest to an economist or social scientist who wants to understand, explain, or predict real-world phenomena, the pure theory has to be ‘interpreted’ — it has to be an ‘applied’ theory. An economic theory that does not go beyond proving theorems and conditional ‘if-then’ statements — and does not make assertions and put forward hypotheses about real-world individuals and institutions — is of little consequence for anyone wanting to use theories to better understand, explain or predict real-world phenomena. Read more…