The Strain is too much
from Peter Radford
Picking up where I left off …
And, just for fun …
We need more billionaires!
No. Really.
That’s the message delivered by Michael Strain last week in the Financial Times.
After all, where would be without them?
Strain is, as we all know, associated with the American Enterprise Institute, and is thus a wholly owned subsidiary of the billionaire class. He is expected to do the bidding of the people who write large checks to purchase the intellectual cover that the AEI produces. In his role as a loyal protector of his benefactor’s interests he has to produce articles, papers, and other influential output that justify their continued dominance of our society.
When last I wrote I was trying to explain how the business class has always had an outsized political influence in American politics. In this effort I was using Arthur Schlesinger’s study of the Jacksonian era as an example of one of the few periods when that grip on society slipped slightly.
My starting point, to repeat myself, was the assertion that democracy exists in its modern incarnation as a mitigating force acting to reduce the anti-social effects of unfettered capitalism. Read more…
Mainstream economics — kick it over!
from Lars Syll
The more I learned about economics, the more I discovered a landscape that is surpassingly strange. Like the land of Mordor, it is dominated by a single theoretical edifice that arose like a volcano early in the 20th century and still dominates the landscape. The edifice is based upon a conception of human nature that is profoundly false, defying the dictates of common sense, before we even get to the more refined dictates of psychology and evolutionary theory. Yet, efforts to move the theory in the direction of common sense are stubbornly resisted.
There is plenty of dissent among economists, and some of the best are working the hardest for change. The folks who award the Nobel Prize in economics don’t like the edifice that much either, and often add their weight by awarding the prize to the contrarians. Yet, even with all that talent, effort, and the prestige associated with the Nobel Prize, the edifice remains standing in one spot like a volcano adding to its own height and spewing out toxic policies. Why does it resist change? One reason is ideological, as we shall see, but another reason involves path dependence. Neoclassical economics provides an outstanding example of the “you can’t get there from here” principle in academic cultural evolution. It will never move if we try to change it incrementally. It must be replaced wholesale with a more realistic conception of human nature.
GOP spending bill: how many people have to die?
from Dean Baker
That’s the question Republicans in Congress are debating as they struggle to put Donald Trump’s “Big Beautiful Bill (BBB)” in final form to pass and send to his desk in the next few days. The essence of the bill should be well known at this point. It extends Trump’s 2017 tax cuts past their scheduled expiration date at the end of the year.
This matters little to most of the country, who did not see much benefit from the 2017 tax cut. However, it is big bucks to the rich and very rich who got a large tax cut from the 2017 bill. The bill also includes some extra gravy for the rich and very rich.
For example, it has a provision that allows owners of businesses to have much or all of their income taxed at the lower capital gains rate of 20 percent, instead of the 37 percent rate that they would otherwise pay. Trump is also proposing to cut I.R.S. staffing in half. He has also eliminated the tax enforcement division at the Justice Department. This means Trump and Republicans are effectively putting up a huge neon sign saying “Taxes are Voluntary” for rich people across the country.
Just to be clear, average Joe and Jane types out there should not be confused and think this means they won’t have to pay their taxes. Most of us have our taxes deducted from our paychecks. That will still happen. Maybe some of these people get some small change in interest or dividend income they can hide, but for the vast majority of ordinary people, shutting down enforcement won’t reduce our tax bill even if we wanted to cheat. For the rich and very rich, it is a very big deal. Read more…
How capitalism shapes our world—And how we can reshape it
from Asad Zaman
Prologue: The North Star
Is it truly necessary for billions to live in poverty while a few enjoy unimaginable wealth? Could the world be different—and could we help make it so?
Utopians dream of a better world but lack a route map. Pragmatists move with precision but forget to ask where they’re headed. The North Star offers a way out of this dilemma. Though forever out of reach, it helps us navigate.
To make progress, we must begin with a clear pragmatic view of where we stand and what is possible. But our direction must still be set by the ideal—even if we know we’ll never reach it.
Every attempt to chart a better future relies on social theories—maps to guide us to a better future. But social theories are not neutral. They often reflect the interests of those who create them, directing us toward preferred outcomes while hiding viable alternatives. Read more…
Econometrics — a severe case of mock empiricism
from Lars Syll
According to Guy Routh, econometrics is nothing but “mock empiricism, with statistics subjected to econometric torture until they admit to effects of which they are innocent.” Similarly, Mark Blaug in his The Methodology of Economics argued that econometric testing is like “playing tennis with the net down.”
Although these are rather harsh judgments, I believe they are, on the whole, justified.
Econometrics can be a useful tool in economic research. However, when its practitioners fail to investigate or justify the credibility of the assumptions on which their models are built, the method ultimately falls short of its aims. A significant gap remains between its aspirations and its accomplishments. Without more compelling evidence to support its claims, econometrics risks being dismissed as a mix of metaphors and metaphysics. Maintaining that economics should strive toward “true knowledge,” I remain sceptical of econometrics’ pretensions and ambitions. So far, I have seen little evidence that it has produced much in the way of relevant or enlightening economic insight. Read more…
The world is facing a looming crisis of inequality
Dear World Leaders,
There is a crisis in multilateral cooperation and in the financing of global public goods and development aid — one that is compounding the already worsening challenges of poverty, ill health, illiteracy, and environmental breakdown. From surging droughts and floods to raging fires, the evidence of our planetary emergency is clear. Unfortunately, at this critical moment, support for humanitarian action and sustainable development is faltering. We must come together to ensure that such support is not only sustained but strengthened.
We write as former Heads of State and Government from every continent with an urgent appeal to leaders today. 2025 sees era-defining disruption, but also a chance to begin to remake our world in response – beginning in Sevilla.
We come from differing backgrounds and politics, but all of us are committed to human dignity and to the promise of democracy.
Volatility orders our world today. Inequality spirals across nations. Trillionaires could emerge this decade, while near half of humanity lives in poverty. 3.3 billion people live in countries that spend more on interest to pay sovereign debt than on education or health. Climate breakdown outpaces green transitions. Across too many places, children are being buried under states’ belligerence as any sense of a rules-based order is violently displaced by a power-based one. The multilateralism to solve global problems that grew out of two World Wars is in disarray. Global problems that need global solutions and cannot be solved by nation states on their own remain unaddressed.
Unchecked concentration of wealth is eroding US democracy
As the world watches Donald Trump and Elon Musk publicly fight over the sweeping legislation moving through Congress, we should not let the drama distract us. There is something deeper afoot: unprecedented wealth concentration – and the unbridled power that comes with such wealth – has distorted our democracy and is driving societal and economic tensions.
Musk, the world’s richest man, wields power no one person should have. He has used this power to elect candidates that will enact policies to protect his interests and he even bought his way into government. While at the helm of Doge, Musk dramatically reshaped the government in ways that benefit him – for instance, slashing regulatory agencies investigating his businesses – and hollowed out spending to make way for tax cuts that would enrich him.
Musk is just one example of the ways in which unchecked concentration of wealth is eroding US democracy and economic equality. Just 800 families in the US are collectively worth almost $7tn – a record-breaking figure that exceeds the wealth of the bottom half of the US combined. While most of us earn money through labor, these ultra-wealthy individuals let the tax code and their investments do the work for them. Under the current federal income tax system, over half of the real-world income available to the top 0.1% of wealth-holders (those with $62m or more) goes totally untaxed. As a result, billionaires like Elon Musk and Jeff Bezos have gotten away with paying zero dollars in federal income taxes in some years, even when their real sources of income were soaring.
On the other side, millions of hard-working Americans are struggling to make ends meet. Their anxiety is growing as tariffs threaten to explode already rising costs.
A broken tax code means unchecked wealth-hoarding. The numbers are staggering: $1tn of wealth was created for the 19 richest US households just last year (to put that number into perspective, that is more than the output of the entire Swiss economy). That was the largest one-year increase in wealth ever recorded. I have studied this rapidly ballooning wealth concentration, and like my colleagues who focus on democracy and governance, I am alarmed by the increasingly aggressive power wielded by a small number of ultra-wealthy individuals.
Behavioural economics — devoted to ideas it is supposedly attacking
from Lars Syll
Behavioral economics is still ‘in a relationship’ with orthodox economics and, in a relationship, one makes compromises …
We all know how stubborn the other side in this relationship is: standard economics will always ‘rationalize’ behavior wherever it can and will only recognize ‘irrationality’ when there is clear and convincing evidence of it. Understandably, behavioral economics devoted itself to finding this evidence – the “anomalies”, in the words of Thaler (1988), which are “difficult to “rationalize”. And surely, it has done an impressive job in finding them.
However, accepting this burden of proof remains problematic, for several reasons. Firstly, it will lead to false positives; ‘rationalizing’ behavior where rationality might, in reality, be absent. What’s more, in doing this, the field will repeatedly lend credence to the flawed concept of the homo economicus. Secondly, it will lead to false negatives; failing to observe ‘irrationality’ (like altruism) when clear and convincing evidence of it is lacking, or perhaps even impossible to produce, thereby ignoring the complexity of human motives …
All of the above is not meant to downplay the achievements of behavioral economics … It is to argue that behavioral economics should not let its “symbiotic relationship” with standard economics limit its own ambitions. This relationship “works well as long as small changes to standard assumptions are made”. We should not fear bigger changes.
Although discounting empirical evidence cannot be the right way to solve economic issues, there are still, in my opinion, a couple of weighty reasons why we perhaps shouldn’t be too excited about the so-called ’empirical revolution’ that behavioural economics has brought about in mainstream economics. Read more…
China now projected to grow three times as fast as the United States
from Dean Baker
The World Bank came out with its updated projections for economic growth for 2025. They showed slower growth for pretty much the whole world. The main factor in the slowing is the tariffs that the Trump administration has imposed on most of our trading partners, as well as their retaliation.
Perhaps not surprisingly, the United States had the sharpest slowing with its growth for 2025 now projected at just 1.4 percent. This should perhaps be expected given that growth was actually a small negative in the first quarter of this year. Just to remind people: The economy grew 2.8 percent last year and was almost universally projected to grow at a comparable rate in 2025. This slowdown in growth really should be considered as Trump’s handiwork.
The other noteworthy item in these projections is that China’s growth is still projected to be 4.5 percent, the same as the World Bank’s prior projection. This means that, at least according to the World Bank, Trump’s tariffs have not done major harm to China’s economy. Read more…
Madmen in authority
from Lars Syll
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.
John Maynard Keynes
How monetary myths conceal power
from Assad Zaman
Modern economics rests on a dangerous illusion: that abstract, universal laws—derived primarily from the European experience—can be applied across all societies, times, and contexts. This false assumption has allowed economists to present their theories as objective and value-neutral, masking the deeply political and historical foundations of economic life. In an earlier post Reclaiming Lost Narratives: A New Approach to Social Science., I argued that we must reject this illusion and return to the original, historically grounded and morally engaged vision of economics. This post illustrates that argument by tracing how mainstream theories about money conceal its true nature as an instrument of power.
Prologue: Rethinking Finance from the Ground Up Read more…
The problem with equilibrium models
from Lars Syll
Economic theory is built on equilibrium assumptions. Perhaps this term once connoted the rest point of a dynamic process. But in modern parlance, an equilibrium assumption posits a relation
between the beliefs and behavior of different agents without explicitly describing a process which causes this relation to hold. Competitive equilibrium assumes prices clear markets, without specifying who sets prices, or how they find a market-clearing level …There have been various attempts to support these assumptions by showing that an explicit disequilibrium process converges to equilibrium, with fairly mixed results. But such concerns are marginal today; most economists are happy to assume equilibrium directly, and treat the question of stability, if at all, in a handwaving fashion …
Equilibrium models are not just hard to interpret causally; they also produce absurd predictions which could not arise from any plausible process. To illustrate this, I describe two paradoxes …
The key to both paradoxes is that the equilibrium assumption that an agent acts optimally does not, as one might think, describe a process through which her action is causally determined by her beliefs and the environment prior to her decision. Instead, it describes a non-causal, ‘simultaneous’ relation between various agents’ current and future beliefs and actions, which does not respect the arrow of time. There is no guarantee that any plausible process leads this relation to hold.
The problem with rational expectation equilibrium (REE) is not that it posits an unrealistic belief formation process; it is that it assumes a relation between different agents’ beliefs and behavior without describing any process causing this to hold …
Identifying the mechanisms through which causes produce their effects in the real world is a core goal of science. If equilibrium models do not represent this causal process, they are incomplete at best. At worst, they may generate predictions inconsistent with any plausible causal process.
A highly insightful (if ‘technically’ dense) critique of how mainstream economics constructs and employs equilibrium models today. Above all, it presents a strong argument about the inadequacy of merely conducting direct-indirect decompositions of causal model relations, emphasising instead the necessity of seriously engaging with the mechanisms behind variable causality. Without understanding how one variable determines the effect on another, it becomes nearly impossible to claim any degree of external validity. Read more…
So-called reforms reinforced underdevelopment
from Fidel Aroche Reyes and RWER #110
During the 20th century, many poorer countries adopted economic strategies for development. Europe experienced a rise in living standards; more recently, several Asian nations, such as China, Taiwan, and South Korea, have successfully overcome underdevelopment through focused economic policies, while most other Asian countries have made significant strides towards the same goal (. . . ).
The American continent witnessed the effective development of several countries until 1982 when the so-called “debt crisis’ burst. To address a financial issue, the International Financial Institutions (IFI) advocated for a set of reforms that would abruptly cease the industrialisation and development processes, undermining the productive capacities and depleting the resources accumulated over decades. Those included Read more…
Big guns on trade: Ricardo via Malkiel
from Peter Radford
Wheeling out the big guns at last!
It’s taken a while, but we’ve arrived. At long last we have an article in the Financial Times — our bastion of global financial goings-on — that explains David Ricardo to those who need to know.
Better late than never.
Even better: the article is authored by no lesser a hero of modern financial economics than Burton Malkiel. He delivers the brief lesson in magisterially simple language. He uses France and Britain as his hypothetical trading partners. The message is clear. So clear that even an idiot could grasp its essence which is summarized thus:
“Cutting ourselves off from the benefits of free trade will not make us richer in the long run. Permanent general tariffs will only make the US and foreign nations considerably poorer.”
Thus speaks Ricardo via Malkiel. Two hundred years of experience in the interim and the message remains the same. Score another one for the clarity of thought and insight of economics.
Except.
It gets a bit more complicated than that in the real world. How awful of me to introduce reality. I apologize. It can do real harm to the simplicity of economics. Read more…
Neoliberal economics — fiction based on absurd assumptions
from Lars Syll
‘Rigorous’ and ‘precise’ economic models cannot be considered anything else than unsubstantiated conjectures as long as they aren’t supported by evidence from outside the theory or model. To my knowledge, no in any way decisive empirical evidence has been presented.
No matter how precise and rigorous the analysis, and no matter how hard one tries to cast the argument in modern mathematical form, these models do not push economic science forward one single millimetre if they do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside these models are, they do not say anything about real-world economies.
Proving things ‘rigorously’ in a model is at most a starting point for doing an interesting and relevant economic analysis. Forgetting to supply export warrants to the real world makes the analysis an empty exercise in formalism without real scientific value.
The kind of knowledge and information we seek in science is something different from what we look for in fiction. Read more…
new issue of RWER
real-world economics review
issue no. 110, May 2025
download whole issue
The 2024 Nobel Prize for Economics:
an example of how conventional economics misrepresents reality
Ted Trainer 2
Why only innovations based on degrowth principles can stop
further ecological and social destruction
Felix van Hoften and Rob van der Rijt 10
Neoclassical economics drives environmental destruction
and social inequality
Mark Diesendorf 25
Absolute, global, authoritarian capitalism:
Approaching the last stop of the capitalist algorithm
Handy Hanappi 30
Underdevelopment: A forgotten concept
Fidel Aroche Reyes 46
Economics of Gaza
Junaid B. Jahangir 56
A heterodox commentary on the new cronavarius economy
Marc Pilkington 67
India: non-inclusive economic growth and a plague of rising inequality
Ahmad Seyf 86
Fostering critical inquiry:
Radical pedagogies in teaching the economics of the COVID-19 Pandemic
Ceyhun Elgin 98
End Matter 111
Please click here to support this open-access journal and the WEA
China adds more than $400 billion to GDP in Q1, Trump loses $25 billion
from Dean Baker
Donald Trump is not very good with arithmetic, but that is not a reason the rest of us should not use it. The US economy shrank at 0.3 percent annual rate in the first quarter. This figure needs the usual caveats. This is preliminary data that may be revised substantially in the next two months. It also was a very quirky report, with a huge surge in imports dwarfing everything else, as households and businesses stocked up in advance of Trump’s tariffs taking effect.
Meanwhile, it seems China’s economy remained on a healthy growth path in the first quarter, reportedly growing at a 5.4 percent annual pace. This number also needs some qualifications. China’s growth figures are always somewhat suspect.
Nonetheless, there is little doubt that the long-term story of Chinese growth is more or less accurate. They manufacture more electric vehicles than the rest of the world combined, the same holds true with solar panels and many other cutting-edge items. Read more…
The sorry state of economics
from Lars Syll
Page after page of professional economic journals are filled with mathematical formulas leading the reader from sets of more or less plausible but entirely arbitrary assumptions to precisely stated but irrelevant theoretical conclusions …
Year after year economic theorists continue to produce scores of mathematical models and to explore in great detail their formal properties; and the econometricians fit algebraic functions of all possible shapes to essentially the same sets of data without being able to advance, in any perceptible way, a systematic understanding of the structure and the operations of a real economic system.
As Leontief observed, mainstream economics has grown increasingly detached from reality and made it irrelevant to the understanding of the real world. This irrelevance stems primarily from economists’ failure to align their deductive-axiomatic methods with the complexities of their subject. Read more…
What Keynes meant by ‘We simply do not know’
from Lars Syll
With the words ‘We simply do not know,’ Keynes describes in his General Theory what he calls ‘objective uncertainty.’ There is simply no way in which one can foresee certain events or developments because they are objectively unknown. The past does not predict the future. This constitutes a fundamental break with the dominant neoclassical worldview …
My friend and colleague Paul Davidson drew exactly here the dividing line between Keynesian and orthodox economics … Davidson says, and he is right, that the assumption that all uncertainty can be reduced to a known and objective probability distribution constitutes the core of the ‘panglossian optimism,’ which makes the proponents of the neoclassical doctrine believe that free competition leads to socially optimal results.
Davidson criticizes also Paul Samuelson … because he wanted to build economic science on the the basis of what Davidson calls an ergodic statistical process or an ergodic axiom.
To accept the ergodic axiom is to make the claim that economics is just like the exact sciences. Economics should, in principle, be able to make completely correct predictions. Davidson uses the example of astronomy. Astronomer have no difficult in calculating the orbits of celestial bodies and they are capable of predicting the occurrence of an eclipse up to the exact second. ‘We simply do not know,’ on the contrary, means nothing else than that such economics and other social sciences are not capable of this. In economics and the other human sciences, we deal with processes that do not obey the ergodic principle. In all human action, there is always unpredictability.
To understand real-world ”non-routine” decisions and unforeseeable changes in behavior, ergodic probability distributions are of no avail. In a world full of genuine uncertainty — where real historical time rules the roost — the probabilities that ruled the past are not those that will rule the future. Read more…
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