Real-World Economics Review Blog

from Lars Syll

Back in 1991, when yours truly earned his first PhD​ with a dissertation on decision making and rationality in social choice theory and game theory, I concluded that “repeatedly it seems as though mathematical tractability and elegance — rather than realism and relevance — have been the most applied guidelines for the behavioural assumptions being made. On a political and social level, ​it is doubtful if the methodological individualism, ahistoricity and formalism is building on is especially valid.”

This, of course, was like swearing in church. My mainstream colleagues were — to say the least — not exactly überjoyed.

For those of you who are not familiar with game theory, but are eager to learn something relevant about it, I have three suggestions:

Start with the best introduction there is

then go on to read more on the objections that can be raised against game theory and its underlying assumptions, e.g. ‘rationality,’ ‘backward induction’ and ‘common knowledge’ in Read more…

from Dean Baker

The news has been filled with stories in recent days about Republicans desperately hunting for $2.0-$2.5 trillion (2-3 percent of the budget) in budget cuts over the next decade to cover the cost of extending tax cuts to the rich. While Elon Musk and his DOGE team have been screaming about corruption all through the government, they actually have found little that can be helpful here.

They appear to have found virtually nothing by way of actual corruption. Most of what they have been screaming about are small-budget allocations having to do with race, gender, or sexual orientation that they don’t like. Individually these programs are nickel and dime stuff, and even collectively they won’t come close to covering the cost of the tax cuts that Elon Musk and his billionaire friends need so badly.

Instead, the committees in the House and Senate working on designing a budget have focused on cutting Medicaid and SNAP, two programs that largely serve low and moderate-income families. The cuts being debated, if implemented, would deny tens of millions of people access to health care and reduce nutritional support that has meant a huge difference for millions of low-income children.

The cuts to Medicaid would also have a devastating impact on rural hospitals since it is a major source of revenue. Many would probably have to close.

But if the Republicans really want to find savings by eliminating government corruption, there is an obvious place to look. We pay twice as much for our drugs and other pharmaceutical products as people in other wealthy countries.

The reason is that the government grants them patent monopolies. While other governments also grant patent monopolies, they also negotiate drug prices or have some other mechanism that limits the ability of pharmaceutical companies to exploit these monopolies. The United States is alone in granting drug companies monopolies and then telling them to charge whatever they feel like. Read more…

from Nat Dyer

Readers of this blog will be well aware of the myriad problems with the mainstream economics that has dominated university and political life for the past few decades.

As Lars Syll wrote here last month, too much of the profession “has since long given up on the real world” and is happy to investigate the “thought-up worlds” of unrealistic economic models. Too much attention is focused on how the parts of the model fit together, rather than on how well the models fit with reality.

But how can critics communicate these problems effectively? Especially to those who will be intimidated or turned off by a phrase like ‘ontological foundations’?

In my new book Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray I unpack the problem and suggest an answer. One that uses a 2,000-year-old story of a lonely sculptor from Greek myth.

Pygmalion   Read more…

from Dean Baker

One outcome of the Donald Trump clown show is that we can safely say the period of U.S. hegemony in the world has come to an end. His erratic policies and bizarre statements have undoubtedly convinced almost everyone that the United States cannot be viewed as a reliable ally, if not actually an enemy.

In the case of Europe, Trump is threatening military force against a longstanding ally and threatening to tax imports (tariffs) from the continent for reasons that don’t make sense to anyone but him. The same is true for our immediate neighbors, Canada and Mexico.

Trump has shown Latin America that he wants to act like a 19th century imperialist towards them. The U.S. allies in East Asia surely recognize that they cannot look to the U.S. for support and will reach accommodations with China.

And Africa now recognizes the intense racism with which Trump regards the continent after he suspended PEPFAR, a program that cost less than 0.1 percent of the federal budget and has saved tens of millions of lives.

Now that China has an economy that is already one-third larger than the U.S. economy, and well ahead of us in many key areas, like electric vehicles, solar panels, energy storage, and now AI, there is no reason for countries to rely on a country whose economy is run like a TV game show.

In the years ahead we can expect that China will be the world’s leading country in most areas and the U.S. will be racing towards autarky.