Economics sometimes changes its mind?
All around ortho macro – de facto, debate, diverse (self)critiques, defense, delusion, denial + disagreement –
featured – updates below
see also > history of economics, economics as social science
> Economy, Economics, DSGE, mainstream, orthodox, macro, equilibrium, Neoliberalism, Politics, Rethinking Political Economy
economist.com 6-8-2020 Economics-sometimes changes its mind
Economics is a “disgrace”, according to Claudia Sahm, a former Federal Reserve researcher, who has chosen to “no longer identify” as an economist. Among several flaws, the profession fails to nurture the young, she argues, or listen to outsiders. A survey by the American Economic Association (aea) found that only 31% of economists under the age of 44 felt valued within the discipline.
All this must be off-putting to youngsters beginning the long (and lengthening) journey into the profession (see article). They may wonder if there is room for their ideas in a discipline that can seem hidebound, hierarchical and homogenous. Will they invigorate economics or will it indoctrinate them?
Budding economists can draw comfort from our series of six economics briefs that begins this week. Each looks at an issue (competition policy, minimum wages, inflation, the dollar, culture and public debt) that has prompted economists to revisit their field’s presumptions. Over the past decade or two, the profession has become more relaxed about minimum wages, inflation and public debt; less relaxed about monopoly power; less enamoured of flexible exchange rates; and more open to deep, institutional explanations of wealth and poverty.
What does it take to change economists’ minds? New ideas are not enough. The theory of monopsony, which explains why a minimum wage may help employment, not hurt it, had been around for at least 60 years before mainstream economics accepted its use in many low-wage labour markets. Recent nonchalance about high levels of public debt may seem new and mould-breaking. But the fresh thinking rests on theories set out in the 1950s and 1960s.
New facts are more compelling. The persistence of low interest rates despite high public debt has left an impression, as has the pre-pandemic combination of low inflation and low unemployment. The dollar’s rally in the global financial crisis showcased its peculiar role in the international financial system, as have various emerging-market tantrums since. Fresh evidence also matters in microeconomics. New Jersey’s decision to raise its wage floor in 1992 by more than neighbouring states (despite tipping into a recession) provided the natural experiment required to change economists’ minds about minimum wages.
New facts, then, are more persuasive than new ideas. But although an alternative theory is not a sufficient condition for a change of heart, it is often necessary. It takes a model to beat a model, as economists like to say. They sometimes cling to propositions in defiance of the facts simply because they have nothing better to replace them with.
That raises a third condition for persuasiveness. To convert economists to your cause, it is not enough to give them something new to believe. You must also offer them something fruitful to do. Appeal to their hands as well as their heads. Economists will jump on a revolution that gives them new toys or techniques to play with. This may explain why they have become more enthusiastic about institutional explanations of the wealth and poverty of nations. They cannot rerun history or sprinkle institutions randomly across countries to test their long-term effects. But they have found ingenious proxies for this kind of random variation. Economists, like many others, relish the chance to display their cleverness.
New facts and clever techniques help shift economic opinion. Does this also require new economists? Not necessarily. Some big names have changed their minds, or at least their tone. Olivier Blanchard is less fiscally cautious today than he was ten years ago as imf chief economist, and Narayana Kocherlakota is much more doveish about monetary policy than when he was first appointed to head a Federal Reserve bank. The heretical tribes on the fringes of economics yearn to sack Rome. But it is more efficient to convert the emperor.
It is nonetheless striking that, in several of the areas covered by our series, vital work was done by economists who were in their 30s at the time (although all of them were already at elite institutions). According to the aea’s survey, only 5% of economists aged under 44 feel they have a great deal of power within the discipline. But the young may have one power denied to their elders: the freedom to imagine a future economics, unencumbered by too heavy an intellectual stake in its past. ■
>ortho econ blogs
eonlib.com – marginalrevolution.com – themoneyillusion.com
updates 5-2023
>unemployment, interest rates, market power
economicsfromthetopdown.com 6-5-2023 Unemployment and the Maturity of Capitalism – by Blair Fix
In my last post, I discussed the underwhelming relation between interest rates and unemployment. In this post, I’ll look at a better way to connect unemployment to interest income. It turns out that if you take US net interest and divide it by corporate profit, you get a ratio that closely tracks unemployment. It’s a measure that Jonathan Nitzan and Shimshon Bichler call the ‘maturity of capitalism’. If this language sounds odd, that’s because Nitzan and Bichler see capitalism differently than your average economists. So before we get to the data, let’s review some of their thinking.
>economists
ft.com 6-5-2023 Padma Desai – industrial policy economist – Obituary by Shruti Rajagapolan
>money, happiness
newscientist.com 7-3-2023 Money actually does buy happiness, says Nobel prize-winning economist – After reanalysing earlier studies, Daniel Kahneman and his colleagues have found that happiness continues to increase with incomes higher than $75,000, contradicting the widely reported idea of a happiness plateau – By Jason Arunn Murugesu
For most people in the US, more money does seem to increase their happiness – even at incomes above $75,000 a year. This finding contradicts a widely publicised study from 2010 by Nobel prize-winning economists Daniel Kahneman and Angus Deaton at Princeton University. Their research was based on survey data from 1000 people in the US who had been surveyed daily between 2008 and 2009 about their levels of happiness. It found that the more money someone makes, the happier …
phys.org 6-3-2023 Does more money correlate with greater happiness? – Are people who earn more money happier in daily life? Though it seems like a straightforward question, research had previously returned contradictory findings, leaving uncertainty about its answer – by Michele W. Berger
Foundational work published in 2010 from Princeton University’s Daniel Kahneman and Angus Deaton had found that day-to-day happiness rose as annual income increased, but above $75,000 it leveled off and happiness plateaued. In contrast, work published in 2021 from the University of Pennsylvania’s Matthew Killingsworth found that happiness rose steadily with income well beyond $75,000, without evidence of a plateau…
…A breakthrough in the new partnership came early on when the researchers realized that the 2010 data, which had revealed the happiness plateau, had actually been measuring unhappiness in particular rather than happiness in general. “It’s easiest to understand with an example,” Killingsworth says. Imagine a cognitive test for dementia that most healthy people pass easily. While such a test could detect the presence and severity of cognitive dysfunction, it wouldn’t reveal much about general intelligence since most healthy people would receive the same perfect score.
“In the same way, the 2010 data showing a plateau in happiness had mostly perfect scores, so it tells us about the trend in the unhappy end of the happiness distribution, rather than the trend of happiness in general. Once you recognize that, the two seemingly contradictory findings aren’t necessarily incompatible,” Killingsworth says. “And what we found bore out that possibility in an incredibly beautiful way. When we looked at the happiness trend for unhappy people in the 2021 data, we found exactly the same pattern as was found in 2010; happiness rises relatively steeply with income and then plateaus.”
“The two findings that seemed utterly contradictory actually result from data that are amazingly consistent,” he says.
Drawing these conclusions would have been challenging had the two research teams not come together, says Mellers, who suggests there’s no better way than adversarial collaborations to resolve scientific conflict.
“This kind of collaboration requires far greater self-discipline and precision in thought than the standard procedure,” she says. “Collaborating with an adversary—or even a non-adversary—is not easy, but both parties are likelier to recognize the limits of their claims.” Indeed, that’s what happened, leading to a better understanding of the relationship between money and happiness.
And these findings have real-world implications, according to Killingsworth. For one, they could inform thinking about tax rates or how to compensate employees. And, of course, they matter to individuals as they navigate career choices or weigh a larger income against other priorities in life, Killingsworth says. However, he adds that for emotional well-being money isn’t the be all end all. “Money is just one of the many determinants of happiness,” he says. “Money is not the secret to happiness, but it can probably help a bit.”
Matthew A. Killingsworth et al, Income and emotional well-being: A conflict resolved, Proceedings of the National Academy of Sciences (2023). DOI: 10.1073/pnas.2208661120 – Journal information: Proceedings of the National Academy of Sciences
>economists
bigthink.com 1-2023 7 great economists and how their ideas still affect us today – by Scotty Hendricks
>Austerity, Climate policy, Economic History, Monetary Policy, Ortho Macro
13-11-2022 Highs & lows of economics: Kilkenny, crypto, and inflation – by Eric Lonergan
…”…Let’s put this in context. The depressing truth is that central banks across most of the developed world are simply raising interest rates until they cause a recession – which is best described as a significant increase in unemployment and widespread business failure. The human cost of recessions of this sort, is truly awful. For central banks armed only with an interest rate and targeted lending programmes, this may be the best of a bad set of options, but however one views it, this is a damning reflection on macroeconomics. Probably the most constructive thing a central bank can do is instruct all research staff to focus their thought on alternative policies to bringing down prices. Surely we have a wider option set than recession or price controls? And if we pursue the latter, how best to do it?
Re-purposing targeted lending programmes to rapidly accelerate investment in cheap renewables was an obvious choice, which practical and creative economists suggested. We should all know that central banks can affect energy prices, through the effects of monetary policy on both supply and demand. The shale oil boom from 2011-14 and the related fall in oil prices, was probably the main economically-significant effect of latter-stage QE in the US – proof that easy money can be disinflationary. At the same, we know that recession will collapse demand for oil.
The policy learning from these observations is that dual interest rates, which Megan Greene, Mark Blyth and others have advocated, is not just an enlightened way around the zero bound, but should be part of the ongoing armoury. Tinbergen was right: two levers are better than one. It is not too late to deploy these policies, but they have barely been discussed in the prevailing policy debate (researchers at Positive Money Europe and the New Economics Foundation are notable exceptions).
We are now either in recession (the UK) or soon to be there (the United States). Let us at least prepare the right contingency policies. It is a reasonable bet that inflation, when it properly turns, could fall very substantially, and the regime of the last ten to twenty years will come back now that it is being abandoned by many grave thinkers. Despite the price inelasticity of demand and supply of fossil fuels, their price volatility is symmetric, and we now have increasingly-competitive substitutes. The great irony, is that transitioning electricity from fossil fuels to the technologies of wind, solar and batteries favours anticipating an important positive secular stimulus to productivity, and therefore trend disinflation.
Noah Smith has expressed similar frustration with Macroeconomics, arguing that micro economics has had more flattering achievements. I’m not so sure. The examples he cites are helpful, but hardly earth-shattering. My research over the last five years with Corinne Sawers, into the economics of climate change, suggests a more dismal contribution from micro. Economists in this field have diverted everyone to the chapter on externalities. Thankfully, policy makers in the largest economies have ignored the advice. But the cost is still great. The focus of effective economic policies on climate change should be on how to accelerate investment by regulated utilities (derisk the electricity price, collapse the cost of capital, and regulate accelerated investment), and how to alter the price elasticity of demand for carbon intensive activities (create near-perfect substitutes through aggressive subsidies). And if economists know one thing about human behaviour it is the power of incentives. Where we face perfect substitutes we always go for the cheaper option. “Make the green option cheaper”, should be the slogan of Extinction Rebellion. (EPICs are even better). …”…
>reform capitalism, neoliberalism, markets
ft.com/ 18-9-2022 The market is not an end in itself – by Larry Kramer
>real exist neoliberalism, inflation, tax
ukandeu.ac.uk/ 2-9-2022 Trussononomics and the Deficit – by Jonathan Portes
…”….we do indeed have overwhelming evidence, both empirical and theoretical, that in countries (like the UK) which are at the zero lower bound for interest rates and which borrow in their own (floating rate) currency, more government borrowing doesn’t push up interest rates.
But while this was indeed the case in 2015, with the Bank of England base rate having been stuck at 0.5% for some years, it very much is not now. UK interest rates are well off their floor and are headed up. Inflation, of course, is running at about 10 per cent.
Under these circumstances, the impact – and wisdom – of extra borrowing is very different indeed. None of this would surprise Keynes, of course, who was always clear about the flipside to his prescription of fiscal expansion in circumstances when savings were too high and demand and investment too low: ‘The boom, not the slump, is the right time for austerity at the Treasury.’
Paradoxically, this analysis emphasises just how misguided the austerity of the 2010s was. We had a decade when the government could borrow essentially with no limits at very low interest rates. Doing so would have stimulated the economy overall; it would also have avoided the hollowing out of the welfare state that left us so vulnerable to the wider social consequences of Covid and its aftermath and helped repair and improve Britain’s creaking infrastructure. The government chose not to, with deeply depressing (in all senses) results.
ow, however, as the UK faces significant inflationary pressures, interest rates are rising globally and in the UK, and Brexit and various other economic policy mistakes have reduced market confidence.
It is just at this moment when the incoming administration looks as if it plans to increase borrowing significantly both in the short and medium term. The legitimate (in my opinion) criticism of Keynesian theory in the Treasury and elsewhere was always less about the theory than the practice: that for political or bureaucratic reasons, the government would always get the timing of when to expand or contract (very) wrong. The Conservatives seem determined to prove this correct.”
bostonreview.net 3-2022 Bad Economics – How microeconomic reasoning took over the very institutions of American governance – by Simon Torracinta
ft.com 12-2-2022 Economics should never waste a good crisis
aeon.co 2-2022 A softer economics – Financial markets are entangled and uncertain. When will economists let go of physics envy to embrace the quantum revolution? by David Orrell
In her book Mother of Invention: How Good Ideas Get Ignored in an Economy Built for Men (2021), the writer Katrine Marçal argues that many useful innovations have failed to catch on because they are deemed ‘too feminine’ by marketers. A classic example is the wheeled suitcase. The wheel was invented in ancient Mesopotamia, however the possibility of attaching it to a case went against the whole idea of men showing off their strength by lugging heavy objects around, which is why wheeled suitcases weren’t a thing until 1972. As Marçal wrote in The Guardian: ‘Gender answers the riddle of why it took 5,000 years for us to put wheels on suitcases.’ Quantum is the scientific equivalent of suitcase wheels. The reason this useful innovation hasn’t caught on, or been rolled out, more generally in areas such as economics isn’t because it’s impractical or too hard – it’s because it’s too feminine. Or rather, too Female, in a sense to be defined below. Now, that assertion will seem ridiculous to many readers for a number of reasons…”…
livemint.com/ 8-2021 Economics has a diversity deficit that goes far beyond the obvious – The discipline is in soul-searching mode over gender and racial imbalances but geographical diversity is highly critical too by Dani Rodrik
…”… As I suspected, their data show an extreme geographic concentration of authorship in leading economic journals. Nearly 90% of authors in the top eight journals are based in the United States and Western Europe. Moreover, the situation seems similar with these publications’ editorial board membership. … Economics is going through a period of soul searching with respect to its gender and racial imbalances. Many new initiatives are underway in North America and Western Europe to address these problems. But geographic diversity remains largely absent from the discussion. Economics won’t be a truly global discipline until we have addressed this deficit too. “
aeon.co 1-2022 The worldly turn – After generations of ‘blackboard economics’, Berkeley and MIT are leading a return to economics that studies the real world – by Tom Bergin
…”…Until the early 1990s, the accepted orthodoxy among liberal and conservative economists was that the minimum wage killed jobs. It simply had to, because the laws of supply and demand said the measure pushed the price of labour above the so-called ‘equilibrium wage ‘or clearing wage at which supply and demand were matched. Card and his colleague Alan Krueger conducted studies that found, in a number of cases, that meaningful increases in the minimum wage had not led to lower employment in fast-food restaurants – the type of business commonly affected by the measure. The research received a lot of publicity, and near total rejection by some of the most eminent economists, for example Gary Becker, Robert Barro and James Buchanan, who likened colleagues who accepted Card’s work to ‘camp-following whores’. History, however, has been on Card’s side. Study after study (140 in the UK alone) has found that even large increases in the minimum wage have failed to lift unemployment. Labour and product markets don’t respond, as neoclassical theory claims, to the sudden hike in wage rates…”…
link.springer.com 11/2021 Hayek, Hicks, Radner, and Four Equilibrium Concepts: Intertemporal, Sequential, Temporary, and Rational-Expectations
AbstractnL: Hayek was among the first to realize that, in intertemporal equilibrium, all agents must have correct expectations of future prices. Before comparing four categories of intertemporal equilibrium—(1) Perfect-foresight equilibrium, (2) Radner’s sequential equilibrium with incomplete markets, (3) Hicks’s temporary equilibrium, as extended by Bliss; (4) the Muth rational-expectations equilibrium, as extended by Lucas into macroeconomics—the chapter explores the distinction between correct and perfect foresight. While Hayek’s understanding closely resembles Radner’s sequential equilibrium, described by Radner as an equilibrium of plans, prices, and price expectations, Hicks’s temporary equilibrium seems to have also been a natural extension of Hayek’s approach. The now dominant Lucas rational-expectations equilibrium misconceives intertemporal equilibrium, suppressing Hayek’s insights and retreating to a sterile perfect-foresight equilibrium.
Keywords: intertemporal equilibrium Temporary equilibrium Perfect foresight; correct foresight Rational expectations Sequential equilibrium Incomplete markets
academia.edu 2021 Fake Economics: How Friedman mistook Walras for Marshall by Victor Beker
…”…Friedman considered that the monetary chapter was the weakest one in Keynesian argu-ment and decided to center his attack on it.With this purpose, he started by restating the quantity theory of money. He emphasizedthe distinction between the nominal and the real quantity of money. For the holders of money–he argued– it is the real and not the nominal quantity of money what matters. He argued that Keynes´s assumption of short-run price rigidity removed this distinction that he considered tobe at the heart of the quantity theory. Misleadingly, heattributed to Marshall the Walrasian adjustment process. He maintainedthat Marshallassumed that“prices adjust more rapidly thanquantities”(Friedman1970: 207),turning upside down Marshall´s view. In fact, the issue is what variable is in charge of themarket adjustment process in the Marshallian analysis.Friedman went on then asserting that Keynes deviated from Marshall, reversing the rolesthe latter assigned to price and quantity (Friedman 1970: 209). How could Friedman mis-take the Walrasian adjustment process for the Marshallian one? How could he ignore thatKeynes strictly followed his teacher´s supply and demand analysis? How could he includesuch mistakes in a peer refereed journal? We know what fake news is, but fake economictheory?…”…
americancompass.org gmcopy 5/11/2021 Marginal Prophets – The anthropology of magic explains economists better than economists explain the economy – Matthew Walther
…”Once upon a time, two learned men lived in a city of legends hard by an ancient river. The first of these was a magician of sorts, whose incantations have been passed down through the ages more or less unchanged: “supply and demand functions,” “marginalism,” “utility,” the “costs of production.” Even at the remove of more than a century, the hocus pocus of Alfred Marshall is enchanting.
Marshall, a professor at the University of Cambridge, published his Principles of Economics in 1890. It would go through eight editions over the next three decades and served for generations as the dominant textbook on the topic. Before his assembled totems and fetish-objects (revered, if only half-understood, by his present disciples) we are helplessly spellbound; the testimony of our senses retreats before the formulas and mystic mummery of neoclassical economics.
In the same year, Sir James Frazer produced an even longer work; one that was met, in its day, with scarcely less acclaim. The Golden Bough: A Study in Comparative Religion, catalogued and classified the superstitious traditions of the human race, revealing the universality of certain beliefs, which we would now call “non-empirical,” around which societies had been formed. Frazer and his masterpiece are today the exclusive province of literary scholars, consigned to footnotes in the history of high modernist verse. But while Frazer was indeed a gifted prose stylist, and both Eliot and Yeats pilfered endlessly from his great study of magic, it is, I think, a mistake to dismiss him as a dilettante or, worse, an anthropologist whose conclusions merely betray the unfortunate influence of his age.
Which of the two Cantabrigians has aged better, the Clapham prophet of margins or the Scotch debunker of the Wotjobaluk superstitions? …”… gmcopy here
>>> economics equilibrium mainstream – crit of, as religion, Alfred Marshall vs James Frazer, Homo oeconomicus’, magical thinking
citeseerx.ist.psu.edu/pdf 2011 Behavioral Economics: Toward a New Paradigm by Amitai Etzioni
Abstract: This article discusses the challenges behavioral economics poses for neoclassical economics and the ways in which the young field may move forward. After reviewing some of behavioral economics’ accomplishments and the responses to these accomplishments, the article asks whether its findings can be incorporated into the neoclassical paradigm and suggests additional steps behavioral economics may consider undertaking in order to expand its reach. – KW behavioral economics, neoclassical economics, economics
aier.org 14/11/2021 Mises’s Regression Theorem, Bitcoin, and Subjective Value Theory by Emile Phaneuf III
…”…The regression theorem was an attempt to solve a problem which puzzled the economists of his day – something they saw as illogical: how to “explain the purchasing power of money by reference to the demand for money, and the demand for money by reference to its purchasing power. …
One interpretation highlighted by Laura Davidson and Walter Block proposes that Mises’s regression theorem “is relevant only when a new medium of exchange arises out of a pure barter economy.”
However, despite the present author’s careful rereading through Mises’s classic works The Theory of Money and Credit and Human Action for any statement from Mises’s own words establishing this barter limitation for his regression theorem, it seems there is no evidence for it. Further, Davidson and Block both concede in a podcast that they are also unaware of any such limitation from Mises himself. What we do have from Mises are his sweeping claims, quoted above, which (in this author’s view) seem, if anything, to clearly apply broadly – with no such barter limitation of scope. …
To emphasize the central point to this article’s thesis, we can still consider the regression theorem useful without accepting the logical contradiction that, on one hand, a good can be subjectively valued for any reason, and on the other hand, that a good could not possibly be valued for a specific purpose (as a medium of exchange) unless it was first valued for some purpose other than that purpose. Empirical evidence that bitcoins were first valued for direct use value does not refute this. Bitcoin may indeed have emerged with perfect accordance to the theorem. There are, as of the time of this writing, roughly 12,000 digital assets listed on CoinMarketCap.com. Do we really cling tightly to subjective value theory (as we should) whilst simultaneously clinging to a belief that not one of these could have been valued as a medium of exchange before some other purpose? Value is either subjective, or it is not.”
caw gm: 2021 Read this article for stunningly sophisticated armchair abstractions on the the commodity “theory” of money. No worries about zero evidence for the bartering myth. This is one of those deductively axiomatic truths emerging from divine revelation: “A most important truth about money now emerges from our discussion: money is a commodity.” Who was Rothbard having discussion with? Himself or the invisible hand, perhaps? Menger&Mises – the dumbest duo ever? Hayek might have agreed? >See Zarlenga on von Mises
drodrik.scholar.harvard.ed 10/2021 A Note on the Global Distribution of Authorship in Economics Journals – by J Greenspon J, D Rodrik
Abstract: Using Fontana et al.’s (2019) database, we analyze levels and trends in the global distribution of authorship in economics journals, disaggregating by country/region, quality of journal, and fields of specialization. We document striking imbalances. While Western and Northern European authors have made substantial gains, the representation of authors based in low-income countries remains extremely low — an order of magnitude lower than the weight of their countries or regions in the global economy. Developing country representation has risen fastest at journals rated 100th or lower, while it has barely increased in journals rated 25th or higher. Fields such as international or development where global diversification may have been expected have not experienced much increase in developing country authorship. These results are consistent with a general increase in the relative supply of research in the rest of the world. But they also indicate authors from developing countries remain excluded from the profession’s top-rated journals.
wsj.com/ 1-2021 How Economics Lost Itself in Data – Today’s researchers have tossed out price theory and don’t realize they’ve been politically compromised – by Alexander William Salter
fnlondon.com 2019 Why it is time to question the role of economists – Conventional economics has not done well in helping society cope with the digital revolution and the retreat of democracy – by Kaushik Basu
“The unexpected financial crash of 2008, the persistence of the slowdown that occurred in its wake, the failure of conventional monetary and fiscal policies to revive economies, and the cracks in global trade that we are witnessing now have all given rise to a widespread disquiet about conventional economics. As David Graeber wrote in a recent review of Robert Skidelsky’s new book Money and Government: The Past and Future of Economics, “There is a growing feeling … that the discipline of economics is no longer fit for purpose.” …”…
economistsview 2016 Do DSGE Models Have a Future? by Olivier Blanchard
Do DSGE Models Have a Future?: DSGE models have come to play a dominant role in macroeconomic research. Some see them as the sign that macroeconomics has become a mature science, organized around a microfounded common core. Others see them as a dangerous dead end.
I believe the first claim is exaggerated and the second is wrong. I see the current DSGE models as seriously flawed, but they are eminently improvable and central to the future of macroeconomics. To improve, however, they have to become less insular, by drawing on a much broader body of economic research. They also have to become less imperialistic and accept to share the scene with other approaches to modelization.
For those who are not macroeconomists, or for those macroeconomists who lived on a desert island for the last 20 years, here is a brief refresher. DSGE stands for “dynamic stochastic general equilibrium.” The models are indeed dynamic, stochastic, and characterize the general equilibrium of the economy. They make three strategic modeling choices: First, the behavior of consumers, firms, and financial intermediaries, when present, is formally derived from microfoundations. Second, the underlying economic environment is that of a competitive economy, but with a number of essential distortions added, from nominal rigidities to monopoly power to information problems. Third, the model is estimated as a system, rather than equation by equation in the previous generations of macroeconomic models. The earliest DSGE model, representing an economy without distortions, was the Real Business Cycle model developed by Edward C. Prescott and focused on the effects of productivity shocks. In later incarnations, a wider set of distortions, and a wider set of shocks, has come to play a larger role, and current DSGE models are best seen as large- scale versions of the New Keynesian model, which empha- sizes nominal rigidities and a role for aggregate demand.
There are many reasons to dislike current DSGE models. …
Posted by Mark Thoma
gm/voxeu.org 2016 German macroeconomics: The long shadow of Walter Eucken Peter Bofinger
At first sight, it is difficult to explain why the macroeconomic debate and macroeconomic policy in Germany differ considerably from other countries, despite the same academic textbooks and models being used as elsewhere. This column explains how a specific paradigm of macroeconomics, developed by Walter Eucken and diametrically opposed to Keynesian economics, is behind the German formal theoretical apparatus. The success of German macroeconomic policy can be attributed to the openness of the German economy, which allows it to benefit from macroeconomic policies pursued in other major countries.
ravenmagazine.org 10/2021 The Epistemic Seduction of Markets – Studying economics at the end of the Cold War instilled an appreciation for the efficiency of free markets. Philosophy led me to take a second look. Lisa Herzog
…”…I picked up this message about the epistemic mechanisms of markets step by step, when I turned to studying economics, alongside philosophy, in the early 2000s. But my education rarely considered actually existing economic phenomena (or, for that matter, texts from the history of economic thought). Instead, I studied models, models, models. Our homework consisted of mathematical exercises proving theorems and solving equations. Focusing on mathematics was what made economics rigorous, our professors told us, with barely hidden contempt for fields such as sociology or history that used narrative or qualitative approaches. We were drilled in calculations without any critical discussion of their assumptions, and without learning anything about the historical contexts from which the models derived. The only exceptions included a few classes in behavioral economics and economic history that were more critical—but the possibility of different assumptions was not integrated into the mantra my undergraduate education repeated about the epistemic benefits of markets. The central model, which was meant to convey the glad tidings about markets’ leading to overall efficiency, was the General Equilibrium Model, a mathematic version of the epistemic argument. Every other course started with it; I was taught it six or seven times….
I eventually came to realize that it was because of these models, and the way in which they paint a picture of reality that makes you see some things and neglect others, that I absorbed, without questioning or even realizing, the three assumptions of the epistemic argument: that economic theorizing starts from given preferences, that consumers know what they want, and that prices reflect all costs.
Of course, models can never fully capture reality, just as maps cannot be as large and detailed as the areas they depict—but how do we know whether they even correspond to something out there in reality? I read around in the philosophy of economics, the history of economic thought, economic sociology, and “heterodox approaches” in economics. Years later, when I came across Peter Spiegler’s wonderful 2015 book Behind the Model, the pieces finally fell into place…
In no way do I wish to suggest that the epistemic argument is never correct, or that one could never find instances in real life that nicely illustrate how supply and demand function because the price mechanism coordinates behavior. But often, these explanations capture a surface phenomenon and hide the deeper questions that come up when we drill down into the assumptions of the argument. Doing so changes the message of the argument and often runs counter to what its popularized version is taken to show: that markets are best left with as little regulation as possible.
Preference Satisfaction
Defenders of markets have long emphasized as one of their attractive features that they allow for individual choice; they enable individuals to satisfy their preferences …
The information about “preferences” that are not “effectual” in this way simply does not figure in the epistemic apparatus of the market. The allegedly egalitarian picture, of everyone contributing information to this big machine, is, in this respect, fundamentally wrong: those with less money count for less in the market’s information processing….
What is it, then, that this wonderful epistemic machinery is meant to achieve? It seems only partly about satisfying basic needs and preferences that people have independently of markets. That seems to be the starting point of the models, but can we even know what such “preferences” would be, beyond basic needs such as those for food or shelter? Many preferences are shaped by market processes that include such maneuvers as PR, advertising, and product placement. The question of which of these goods and services is worth having, from an independent perspective, is left wide open. And if some might not be worth having, this also raises the question whether the machinery for providing them—the market—is worth having. The question is no longer whether it is worth having markets in order to satisfy independently given preferences. Rather, it becomes whether it is worth having markets in order to satisfy preferences many of which they themselves create. The epistemic argument simply does not speak to the question of where human preferences come from, and whether fulfilling them is valuable according to some market-independent standard. Moreover, the watered-down versions one finds in public and political discourse often wrongly assume something that is obviously not true, namely, that everyone’s preferences are equally backed up by purchasing power, and that markets are therefore equally good for everyone…
Here the epistemic argument for markets, and in particular its popularized versions, blinds us to the full picture. If one believes in markets’ being self-regulating (or if one thinks that government regulation, while in principle justifiable, tends to make everything worse), epistemic questions that arise with regard to market regulation are simply outside the picture. But many markets function reasonably well only if such regulation is in place. And if the scientific fields that are relevant for such regulation are captured by industry money, regulation often ends up being insufficient, leaving customers vulnerable to products and services that can seriously harm them…
But the epistemic argument in favor of markets has been fundamentally misunderstood as an unqualified endorsement of free markets, without the disclaimer that markets without regulation and without support by other institutions often fail to provide the epistemic benefits sought. At most, it justifies the claim that some markets can, under certain conditions, be designed and regulated so that they can have beneficial epistemic features. Going beyond the model, we can say that other epistemic institutions in a society need to work well to enable the epistemically beneficial design and functioning of markets. If there is no free press that can reveal abuses of power or breaches of regulations, or if there are no independent experts who can verify or reject claims made by corporations, or if whistleblowers need to fear for their lives, then we cannot expect market regulation and oversight to function well and remain stable in the long term.
The epistemic dimension of markets is, in the end, not the only one that matters for deciding whether a certain market, for certain goods and services, is worth having, all things considered. There are also questions about rights and liberties, and about other kinds of effects, including indirect ones on social mores and practices. And we should not expect a one-size-fits-all answer; depending on the goods and services at stake, very different kinds of market or non-market solutions might be optimal. Philosophers, economists, sociologists, and law scholars have these discussions, time and again, with regard to different kinds of markets. But in these discussions, one thing needs to change: the epistemic argument, all too often operating as a background assumption and taken for granted, needs to be carefully scrutinized as well. We need an honest reckoning of what markets can really do for us, epistemically speaking.
When I think of the ideal market, what comes to my mind is the friendly, cheerful picture of a farmers’ market on a sunny summer morning: stands full of fruits and vegetables, fresh flowers, maybe the smell of freshly brewed coffee from an organic coffee van. It is easy to forget about the food inspections that go on behind the scenes to ensure that the produce is organic and identified truthfully, and that many people don’t have enough money to buy the basket of strawberries or bag of little gems. The greatest irony is that these markets continue to exist only because many consumers are willing to behave differently from homo oeconomicus. They are probably rather “inefficient” if one considers only the provision of goods and services at the lowest possible price. But human beings value not only the sheer consumption value of goods. They might also value the fact that their food is regionally sourced, or that they can have a friendly chat with the vendor and enjoy the experience of strolling through the aisles of such a market. Farmers’ markets are hardly objectionable (though I prefer them with hygiene control rather than without, and I wish every member of society could enjoy them). But that’s because they are embedded in a whole set of non-market norms, preferences, and institutions. Maybe that should be our model for thinking about other markets as well.
Lisa Herzog is a professor of philosophy at the University of Groningen and director of the Center for Philosophy, Politics, and Economics.
voxeu.org 7/9/2021 What’s worth knowing in economics? A global survey among economists
Peter Andre, Armin Falk
Research shapes policy. But what we choose to study is subjective. This column uses a global survey of almost 10,000 academic economists to find their opinions on what economic research should look like. Many economists think that economic research should become more policy-relevant, multidisciplinary, and disruptive, and should pursue more diverse research topics.
Economists’ views are heterogenous : Weber’s insight that any answer to the question of what is worth knowing is subjective and value-driven is empirically reflected in the substantial heterogeneity of views among economists. Importantly, this dissent cannot simply be attributed to a generic inability of economic experts to agree on certain issues. Past research shows that economists agree on many policy issues (Dahl and Gordon 2013), Hence, consensus among economic experts is possible, yet the question of which research objectives economics should pursue remains fundamentally disputed. Moreover, by far the strongest predictor of the importance a scholar assigns to a topic is the extent to which their own work is within that field. Thus, economists tend to value their own fields most. We believe that this is an important insight to keep in mind when evaluating other researchers’ work, whether as seminar participants, referees, or editors. Our own views about ‘what is interesting’ are valuable and irreplaceable, but also subjective.
Dissatisfaction with the current state of economics : Despite the large disagreement, economists are unified in their dissatisfaction. Across the ten research objective questions, only 13% to 31% of respondents reply that the current practice in economics is “about right”. Moreover, a majority of economists agree on the direction of change. Economists want more policy-relevant and risky research with a broader scope and stronger multidisciplinary orientation. Moreover, they put less weight on the most popular JEL topics and would prefer a more diverse set of research topics. The findings reveal a systematic dissatisfaction with the current state of economics. As a field, we do not appreciate and work on what we collectively prefer. …
The data also show that female scholars disagree more with the objectives and topics of economic research. …
… sustained change is needed to reduce the mismatch noticeably. For example, multidisciplinarity is still the research objective for which we document the highest degree of dissatisfaction today, with almost 80% supporting a continued shift towards more multidisciplinary research.
joshuagans.substack.com 6/2021 The Triumph of Economists – Macroeconomists in government came to the right answer, without a playbook, and saved us Joshua Gans
It has been a while since I posted which is something you should take as good news. It means things are calming down even if they are far from over. But two pieces — one by Marc Andreessen and another by Noah Smith — appeared this week that motivated me to write about something good that happened that has received little to no attention thusfar: economists in government did their job in March and April 2020 and, in so doing, demonstrated economics’ greatest triumph: avoiding what could easily have been an economic and societal collapse. And what’s more, they did it based on skill rather than utilising some existing playbook.
economist.com 2020 When the facts change – Economics sometimes changes its mind – The science may be dismal but it is flexible, too
…”What does it take to change economists’ minds? New ideas are not enough. The theory of monopsony, which explains why a minimum wage may help employment, not hurt it, had been around for at least 60 years before mainstream economics accepted its use in many low-wage labour markets. Recent nonchalance about high levels of public debt may seem new and mould-breaking. But the fresh thinking rests on theories set out in the 1950s and 1960s…”…
news.mit.edu `12/2021 The power of economics to explain and shape the world – In 14.009, a first-year class taught by Nobel laureates, MIT students discover how economics helps solve major societal problems- Esther Duflo sympathizes with students who have no interest in her field. She was such a student herself — until an undergraduate research post gave her the chance to learn first-hand that economists address many of the major issues facing human and planetary well-being.
- Class 14.009 (Economics and Society’s Greatest Problems)
- Esther Duflo
- Abhijit Banerjee
- Abdul Latif Jameel Poverty Action Lab
- Department of Economics
- School of Humanities, Arts, and Social Sciences
- Video: “Lighting the Path”
mpg.de 2020 harry-potter-and-deliberate-ignorance-in-welfare-economics Felix Bierbrauer
…”As these vignettes have shown, deliberate ignorance can serve a useful purpose in welfare analysis. Dumbledore should not place too much weight on Harry’s and Draco’s social dispositions, for example; rather, he should split the cake fairly. So does this mean that ignorance is generally bliss? Not quite. More knowledge often leads to better decisions. But in some situations, additional information can stand in the way of justice, liberty, or social mobility. And that information is better ignored.
This article is a revised and shortened version of the chapter “Harry Potter and the welfare of the willfully blinded” from the book Hertwig, R., & Engel, C. (Eds.). (2020). Deliberate ignorance: Choosing not to know. MIT Press. The original chapter is available in PDF format.
globalpolicyjournal.com/blog 3/0/2021/ On Eurocentrism in Economics
Branko Milanovic explores alternatives to the problem of eurocentrism in economics.
Sebastian Conrad’s book “What is global history?” is in many ways important for economists and economic historians. This is not only because Conrad illustrates the way in which global studies differ from other ways to look at the world (modernization theory, world-systems theory, post-colonial studies), but also because he takes many examples from economics. …
The approach we should avoid is to pay lip-service to non-Western thinkers by including one or two sentences from their work without any analysis or contextualization. I have seen this done in recent histories of economic phenomena: it is now de rigueur to quote a couple of non-Western authors, mostly (I would guess) by grabbing a few sentences from a Wikipedia entry. It makes a mockery of the entire idea, but it does (formally) satisfy the thought-police who look at the “diversity” requirement as a purely quantitative target: are there quotes from a sufficiently diverse crowd of authors? (On the other hand, a good example of real substantive engagement with non-Western thinkers is Pankaj Mishra’s “From the Ruins of Empire” that I reviewed here.) …”…
theguardian 1/8/2021 What really counts? How the patriarchy of economics finally tore me apart – After 10 years of writing about capitalism I saw that the erasure of women is not only palpable, it’s bound to my own flesh and blood by Jane Gleeson-White
“Is the economics profession a functionary and tool of patriarchy – or is patriarchy a functionary and tool of economics?”– Marilyn Waring
“Economically, the rupture of 2020 showed us two things: that our lives depend on care work, especially the unpaid care work still mostly done by women; and that another way is possible. … The subject of women and economics is vast and ancient – but as a scholarly enquiry, it’s relatively recent, dating to the landmark 1988 book Counting for Nothing: What Men Value and What Women Are Worth, by Marilyn Waring, former New Zealand politician and founder of feminist economics. Waring has said of her research into the UNSNA: “As a feminist in the 1970s, discipline by discipline, we were uncovering the ways in which male experience spoke for all. I suspected economics would be the same, and yes it was.” When she finally read the UNSNA’s many volumes, what she found made her weep: a passage that “casually dismissed all the unpaid labour traditionally done by women as ‘of little or no importance’”. This value judgement was used to justify its exclusion.
If this begins to suggest the systemic magnitude of the problem, here are three more facts that bring it home. First, in Australia in 2020, women were paid an average of $242.90 per week less than men – women are still undervalued and underpaid, and our work is generally more precarious than men’s. Second, one in every 130 women and girls on the planet – 29 million people – lives in modern slavery, a term that includes forced labour, forced marriage, debt bondage, domestic servitude and human trafficking. And finally, men own over 80% of arable land on Earth. This shocking statistic was calculated by Oxford economist Linda Scott, author of The Double X Economy: The Epic Potential of Empowering Women. By cornering humanity’s main source of material wealth, men have been able to retain power over the world’s capital for hundreds, even thousands, of years.
Given this, it’s not surprising to learn that economics is still the most male-dominated discipline in universities across the globe – even more so than science, technology, engineering and mathematics. …
Just as my own lived experience inside the language and matter of economics has taught me that women and the Earth do count, it’s also taught me that relationships of care, not quanta of capital, are the things that we must maximise. Urgently. Now.
This is an edited extract from Griffith Review 73: Hey, Utopia! edited by Ashley Hay
economist.com/ 24/6/2021 Economics needs to evolve – There has been too much focus on equilibrium
… The economy has evolved, in other words. Strangely, most economic models do not treat the economy as an evolving thing, undergoing constant change. They instead describe it in terms of its equilibrium: a stable state in which prices balance supply and demand, or the path the economy follows back to stability when a shock disturbs its rest. Though such strategies have sometimes proved useful, economics is the poorer for its neglect of the economy’s evolutionary nature.
arnoldkling.com 2015 Raj Chetty on Empiricism Without Theory Arnold Kling
“Broadly speaking, Chetty makes two points. One is that behavioral economics has inspired empirical analysis that can be useful for policy. The other is that we do not have to care about theory. Although theory might guide us to try certain empirical studies and might explain why a policy will work, all we need is the empiricism to know that a policy will work. I found this view at best shallow and at worst not persuasive. …” …
taxresearch.org.uk 4-2018 Macroeconomics fails because it does not follow the money
Howard Reed has argued that we need to rebuild economics, and I agree. He calls the process deconomics beause it requires a deconstruction and rebuidling of all that subject thinks it knows. Again, he is right.
As is John Hope when arguing on this blog today that if we are to do so we have to follow the money. He quotes Steve Keen saying:
Fundamentally we do not live in a barter economy. Everybody except economists realise that . Economists model the world as if it’s a barter system. They leave money out of their thinking entirely. No banks whatsoever. No money is necessary. Everything’s barter. And then they start giving guidance about how much money you should create. In their theory the only thing money creation can cause is inflation. They completely ignore the actual process of creating money. [And yet] if you live in the real world ….it uses money.
Precisely. And quite staggeringly true of macroeconomics, with which I have a little familiarity.
But this also means something else: it means that macro almost ignores tax as well. Not quite, I agree, because it is in one formulation of GDP, but that’s seen as the residual form of that calculation and all the focus in that form is given to savings whenever it seems to be discussed.
And this is not surprising. Because macro, most especially in its general equilibrium form, does not ‘do money’ not can it ‘do tax’ because as modern money monetary theory argues, they are the flip side of each other. Tax exists to cancel government created money. All its other functions, important as they might be, are ancillary to that.
What does this mean? I’d suggest that an analysis as straightforward as this is makes it very clear that if deconomics is to work then it has to start where any good investigation does, by following the money.
Macroeconomics does not do that. It fails as a result. Deconomics will succeed where macro has failed if that is what it does. And on the way tax will, necessarily, have to be built into the equation.
The result would be radically different, and for one simple reason. It would be based on the economics that the real world can observe. That may be too radical for many macroeconomists, but it is exactly what we need.
qz.com/ 9/2019 In defense of economics By Allison Schrager
For once in its famously fractious history, the field of economics has united everyone around a single issue: anger at economists. The profession has faced a lot of criticism lately … Economics has a great deal of influence compared with other academic disciplines. … But lately there is more criticism and skepticism of experts, and it appears to be having an effect when it comes to economic policymaking. The most salient and indisputable lessons from economics are being ignored, as mainstream politicians endorse trade and currency wars, and national rent controls. The two main criticisms of economics are:
(1) Economists are slaves to groupthink that fetishizes free markets without recognizing their downsides. This caused the financial crisis. (2) Economists don’t know anything, they can’t agree on much, and they fail to spot the big, important economic trends.
They ignore inequality, oversell the benefits of global trade, and did not foresee the financial crisis. There is a grain of truth to each of these arguments, but mostly they misunderstand what economics offers and how it applies its tools. Economics never promised good predictions Bill Gates recently said that macroeconomists (the target of most criticism) “don’t actually understand” their field. This is a fair point: they don’t. But that is not necessarily a critique of macroeconomics, which is the study of the whole economy. … “
edweek.org 4/2021 s It Time to Overhaul the ‘Classic’ Economics Course? This Researcher Thinks So. By Sarah D. Sparks
washingtonpost.com 2019 It’s time we tear up our economics textbooks and start over by Robert J. Samuelson
Harvard professor N. Gregory Mankiw is one of the most influential economists in the United States. But the 61-year-old’s authority does not stem from advancing an arcane scholarly finding. Nor has Mankiw coined some catchy phrase that captured the popular imagination (see, for example, “The Affluent Society” by John Kenneth Galbraith). Instead, Mankiw’s power derives from his position as the author of one of the most widely used introductory college economics textbooks.
Chances are that if you decided to study college economics today, you’d start with Mankiw’s “Principles of Economics.” He has been writing and revising it for more than two decades. It’s now in its eighth edition, and the ninth is expected in about six months. Mankiw estimates that there are roughly 4 million copies of the book circulating in the world, with about 2 million in the United States. He figures that his book has from 20 to 25 percent of the market for starter economics books.
It’s a great time to be writing these texts, because the economy is in constant flux, and there is an undeniable hunger to understand how it works. Economists Samuel Bowles and Wendy Carlin, who have created an introductory e-book, estimate that about 40 percent of college students take at least one economics course. A long essay on introductory economics by Bowles and Carlin is to appear in the Journal of Economic Literature along with a similar overview by Mankiw.
Mankiw is fond of quoting the most famous of earlier authors of introductory U.S. texts, the late Nobel Prize-winning economist Paul Samuelson, who once said:
“I don’t care who writes the nation’s laws — or crafts its advanced treaties — if I can write its economic textbooks.” (Note: I am an economic journalist with no known relation to Paul Samuelson.)
The obvious point is that you don’t get a second chance to make a first impression. There’s the rub. Mankiw’s introductory text, and surely some others, has been overtaken by events.
To be sure, in a book of roughly 800 pages, there’s a huge amount of useful, clearly presented information on many subjects: supply and demand; global trade; competition or its absence; wages; government regulation, spending and borrowing — and much more. When there are disagreements among economists, Mankiw does his best to summarize conflicting views.
But as a teaching device, “Principles of Economics” has fallen behind. There’s little analysis of the impact of the Internet and digitalization on competition and markets. I couldn’t find either Apple or Facebook in the index; Google gets a few mentions.
Likewise, little attention is paid to the 2007-2009 Great Recession, the worst business downturn since the Great Depression, which also receives scant coverage relative to its significance. (Together, the two recessions receive about three pages, from 725 to 727.)
There’s some misleading information about the Great Recession and parallel financial crisis. On Page 691, we have this: “Today, bank runs are not a major problem for the U.S. banking system or the Fed.” This would surely surprise the Fed, which poured trillions of dollars into the economy to prevent financial collapse.
Mankiw’s assertion can be defended on narrow, technical grounds. There was no run by retail depositors (people like you and me) against commercial banks. We were protected by deposit insurance. But there was a huge run — a panic — by institutional investors (pension funds, hedge funds, insurance companies, endowments) that withdrew funds from traditional banks, investment banks and the commercial paper market.
The modern era in economics textbooks began in 1948 with the publication of Samuelson’s first introductory edition. We now are at a similar moment. We need to tear up the existing texts and start over, adding what is relevant and discarding what is outdated or unimportant. Mankiw’s textbook needs more than a touch-up; it needs a major overhaul. It has very little history: for example, the industrialization of the 19th century. Nor is there much about the expansion of the global economy. China gets a few mentions.
We should also examine other models, whether the Bowles-Carlin project or a recent text by John Komlos, professor emeritus at the University of Munich. (Some cynical readers may think I’m looking for a personal sponsor for such a book myself. Let me assure you: I am not. Aside from not wanting to do it, I am manifestly unqualified.)
The role of introductory textbooks is not to educate the next generation of economists. They will take many courses. For most of us, the purpose of studying economics is more modest. It is to make the world a little more understandable and, with luck, to force us to acknowledge what’s realistic and what’s not. But to play this constructive role, the textbooks must be up to date.
Read more from Robert Samuelson’s archive.
Read more:
Robert J. Samuelson: Economists often don’t know what they’re talking about
Jennifer Rubin: A sober look at the economy
Robert J. Samuelson: If you think you understand the economy, you’re not paying attention
Catherine Rampell: Happy 10th birthday to the economic expansion. Don’t count on an 11th.
Lawrence H. Summers: The right policy as recession looms
www.econlib.org 6/2020 How Should Econ 101 Be Taught? By Donald J. BoudreauxHarvard Economics wunderkindRaj Chetty hopes to change the way students are introduced to economics. Chetty wants there to be more analysis of data and less attention to economic theory. As described by Dylan Matthews writing for Vox, “If Chetty is an advocate for anything, it’s for the notion that economics is an empirical discipline, a science just as much as, say, medicine is.”1
Chetty does not say that mainstream economic theory is irrelevant and, hence, dispensable. Yet he clearly believes that this theory is overrated, overemphasized, and overused relative to analyses of empirical data. To help remedy this perceived problem, Chetty developed and teaches a new undergraduate course at Harvard: “Economics 1152: Using Big Data to Solve Economic and Social Problems.”
amp.theatlantic.com 2019 How Economists’ Faith in Markets Broke America And what it means for our future by Sebastian Mallaby reviewTransaction Man: The Rise of the Deal and the Decline of the American Dream By Nicholas LemannThe Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society By Binyamin Appelbaum
A little more than a generation ago, a stealthy revolution swept America. It was a dual changing of the guard: Two tribes, two attitudes, two approaches to a good society were simultaneously displaced by upstart rivals. In the world of business, the manufacturing bosses gave way to Wall Street dealmakers, bent on breaking up their empires. “Organization Man,” as the journalist William H. Whyte had christened the corporate archetype in his 1956 book, was ousted by “Transaction Man,” to cite Nicholas Lemann’s latest work of social history. In the world of public policy, lawyers who counted on large institutions to deliver prosperity and social harmony lost influence. In their place rose quantitative thinkers who put their faith in markets. It was The Economists’ Hour, as the title of the New York Times editorial writer Binyamin Appelbaum’s debut book has it.
Together, Lemann and Appelbaum contribute to the second wave of post-2008 commentary. The first postmortems focused narrowly on the global financial crisis, dissecting the distorted incentives, regulatory frailty, and groupthink that caused bankers to blow up the world economy. The new round of analysis broadens the lens, searching out larger political and intellectual wrong turns, an expansion that reflects the morphing of the 2008 crash into a general populist surge. By excavating history, Lemann and Appelbaum remind us that Transaction Man and his economist allies were not always ascendant, and that they won’t necessarily remain so. This frees both writers to ask whether an alternative social contract might be imaginable, or preferable.
ineteconomics.org 3/2021 The Standard Economic Paradigm is Based on Bad Modeling By Servaas Storm
The New Keynesian Dynamic Stochastic General Equilibrium (DSGE) is a straightjacket for macroeconomics
Mainstream macroeconomics finds itself in a deeply unsatisfactory state, unable to make correct predictions and incapable of providing meaningful longer-term analyses and advice. It clearly needs a major rethink. Regrettably, the dominant response of mainstream macroeconomists so far has been to defend the accepted paradigm: some version of the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. People generally laugh when they hear that “after 1968 the restored communist regime required all Czech rock musicians to sit a written exam in Marxism Leninism” (Ferguson 2012, p. 248). But what they don’t know is that, in 2021, the Politburo of Correct Macroeconomic Thinking requires all Respectable Macroeconomists to frame their argument within the straightjacket of a DSGE model. Those who don’t, cannot be a member of the club.
Recognizing this deeply unsatisfactory state of mainstream macroeconomics, David Vines and Samuel Wills brought together a group of critical mainstream macroeconomists to explore the limitations and problems inherent in DSGE models and to consider future pathways for a more relevant macroeconomics. Professors Vines and Wills call their effort the ‘Rebuilding Macroeconomic Theory” project, with a second collection of papers coming out of this project recently published in the Oxford Review of Economic Policy 2020, volume 36 (3).
theguardian.com 2019 If economics is a science, why isn’t it being more helpful? Economists know the price of everything and the value of nothing. Values are up to us Richard Denniss
taxresearch.org.uk 2019 The economic mainstream is biased: who’d have thought it? Richard Murphy
… “… Mohsen Javdani, who is Associate Professor of Economics at the University of British Columbia, and Ha-Joon Chang is Professor of Economics at the University of Cambridge have a fabulous article on Brave New Europe. I strongly recommend it. The summary is as follows:
Mainstream (neoclassical) economics has always put a strong emphasis on the positivist conception of the discipline, characterizing economists and their views as objective, unbiased, and non-ideological. This is still true today, even after the 2008 economic crisis exposed the discipline to criticisms for lack of open debate, intolerance for pluralism, and narrow pedagogy. Even mainstream scholars who do not blatantly refuse to acknowledge the profession’s shortcomings still resist identifying ideological bias as one of the main culprits. They often favor other “micro” explanations, such as individual incentives related to academic power, career advancement, and personal and editorial networks. Economists of different traditions do not agree with this diagnosis, but their claims have been largely ignored and the debate suppressed.
Acknowledging that ideology resides quite comfortably in our economics departments would have huge intellectual implications, both theoretical and practical. In spite (or because?) of that, the matter has never been directly subjected to empirical scrutiny.
In a recent study, we do just that. Using a well-known experimental “deception” technique embedded in an online survey that involves just over 2400 economists from 19 countries, we fictitiously attribute the source of 15 quotations to famous economists of different leanings. In other words, all participants received identical statements to agree or disagree with, but source attribution was randomly changed without the participants’ knowledge. The experiment provides clear evidence that ideological bias strongly influences the ideas and judgements of economists. More specifically, we find that changing source attributions from mainstream to less-/non-mainstream figures significantly reduces the respondents’ reported agreement with statements. Interestingly, this contradicts the image economists have of themselves, with 82% of participants reporting that in evaluating a statement one should only pay attention to its content and not to the views of its author.
Moreover, we find that our estimated ideological bias varies significantly by the personal characteristics of economists in our sample. For example, economists’ self-reported political orientation strongly influences their ideological bias, with estimated bias going up as respondents’ political views move to the right. The estimated bias is also stronger among mainstream than among heterodox economists, with macroeconomists exhibiting the strongest bias. Men also display more bias than women. Geographical differences also play a major role, with less bias among economists in Africa, South America, and Mediterranean countries like Italy, Portugal, and Spain. In addition, economists with undergraduate degrees in economics or business/management tend to show stronger ideological biases.
I strongly recommend the whole article, but there are a number of important things to note.
The first is that, as the authors note, this outstanding and original research has not been published by an academic journal. …” …
youtube 2014 Pluralismus in der Ökonomie – Eine wissenschaftstheoretische Perspektive Jakob Kapeller – über den erkenntnistheoretischen Monismus in der Volkswirtschaftslehre und die Notwendigkeit von Pluralität
ineteconomics.org 2019 Ideology is Dead! Long Live Ideology! By Mohsen Javdani and Ha-Joon Chang
“Once you admit the existence of ideological bias, the widely-held view that “positive economics is, or can be, an ‘objective’ science, in precisely the same sense as any of the physical sciences” (Friedman 1953) must be rejected.”
theguardian.com 2019 Economics is a failing discipline doing great harm – so let’s rethink it Andrew Simms – Our global economy should serve rather than dominate people – and that includes factoring in the climate crisis, too – Andrew Simms is co-author with David Boyle of Economics: A Crash Course
Bill Gates: “Economists don’t actually understand macroeconomics”
By Kevin J. Delaney & Allison Schrager
Bill Gates takes a dim view of economists’ ability to know what’s going on in the economy.
“Too bad economists don’t actually understand macroeconomics,” the Microsoft co-founder noted during a recent interview with Quartz. Asked what he meant by that, Gates continued:
“It’s not like physics where you take certain inputs and you predict certain outputs. Will interest rates ever return to normal, and why aren’t they returning to normal? You won’t get a consensus between economists quite the way that if you dropped a ball out your window and called up physicists and asked, ‘What the hell happened?’ There’s so many factors including what [economist John Maynard] Keynes called ‘animal spirits’ in the economic equation that we don’t have predictability. Even today, people are still arguing about what happened in 2008. So it’s even harder to look forward. [Look at] the role of the bond rating agencies in 2008, which is completely unreformed. Why would that be? Well, there must be a lack of consensus.”
Gates is right, in a way: Economists don’t understand much about the macroeconomy. No one does. Any responsible economist is the first to admit that.
As opposed to microeconomics, which looks at the economy at the level of individual businesses and consumers, macroeconomics aims to explain the interaction of different factors that affect the economy as a whole, such as how interest rates impact macro variables like unemployment, inflation, and economic growth.
As Gates points out, the economy is complex and ever changing. Economists try to make sense of it by developing mathematical models that describe how the different factors relate to each other, and test the accuracy of those models using past data. But the macroeconomy has millions of moving parts that affect each other. Knowing what to include or exclude, and if the economy has changed from when data were collected, is never straightforward—which is why economists tend to disagree on almost everything.
Economic models are always incomplete, but it’s hard to argue that we’d be better off without them. Economists’ research has contributed to fewer people living in poverty, low predictable inflation, and less risk and uncertainty. Macroeconomic models offer a logical, consistent framework to help policymakers understand how people and different factors may respond to a new tax, benefit, or regulation.
Gates’s critique of economists follows several decades of rapid expansion in the field’s influence on policymaking and popular culture. His comment came during the interview as he discussed concerns about a global recession:
“The idea of negative 10-year rates, or now in Germany’s case, negative 30-year rates, this is macroeconomically uncharted territory. As Warren Buffett says, go through any economics textbook and find a reference to negative interest rates—you won’t find it. And yet, almost half the government debt in the world today, if you take out US debt, the majority of government debt bears negative interest rates. And there are certain reasons why that should not be the case, but it is the case. There’s always the risk of an economic recession, and trade wars increase that risk, and the [recent] macroeconomic figures increase that risk quite a bit. But I’m not in control of that. I get to pick which HIV scientists to fund and I get to pitch which malaria drugs to go after, or new ways of killing mosquitos. I don’t have some global economic levers up here in my foundation office.”
investopedia.com 2019 Why Can’t Economists Agree? By MARC DAVIS
Celebrated playwright, George Bernard Shaw, once famously quipped: “If all economists were laid end to end, they would not reach a conclusion.” So, how is it that two experienced, knowledgeable economists study and analyze the same data, and each comes up with a different forecast for the nation’s economy? Why do these experts so often disagree with one another? As we will see, there’s no simple answer; there are many reasons for economists’ differing opinions.
Two Competing Schools of Thought – The principal disagreement among economists is a matter of economic philosophy. There are two major schools of economic thought: Keynesian economics and free-market, or laissez-faire, economics.
Keynesian economists, named after John Maynard Keynes, who first formulated these ideas into an all-encompassing economic theory in the 1930s, believe that a well-functioning and flourishing economy may be created with a combination of the private sector and government help.
By government help, Keynes meant an active monetary and fiscal policy, which works to control the money supply and adjust Federal Reserve interest rates in accordance with changing economic conditions.
By contrast, the free-market economists advocate a government “hands-off” policy, rejecting the theory that government intervention in the economy is beneficial. Free-market economists—and there are many distinguished advocates of this theory, including Nobel Memorial Prize winner Milton Friedman—prefer to let the marketplace sort out any economic problems. That would mean no government bailouts, no government subsidies of business, no government spending explicitly designed to stimulate the economy, and no other efforts by the government to help what the economists believe is the ability of a free economy to regulate itself.
Both economic philosophies have merit and flaws. But these strongly advocated and conflicting beliefs are a major cause of disagreement among economists. …
Although economics deals with numerical data and well-established formulas that work to solve various problems and provide insight into economic activity, it is not completely empirical science. As mentioned, too many x-factors occur in the complex world of economics, thus surprising the experts and defying their forecasts.
researchgate.net 1998 Why Economists Disagree The Role of the Alternative Schools of Thought by David L Prychitko
amazon.co.uk 1991 Why Economists Disagree: The Political Economy of Economics Hardcover by Ken Cole, John Cameron, Chris Edwards
In this revised and updated edition, the authors argue that there are several theoretical perspectives, each offering a plausible logical explanation to economic phenomena. The three theories discussed are: subjective preference theory; cost-of-production theory; and abstract labour theory. The theories are subject to non-mathematical analysis, and the authors show the links between economic theory and political practice for each. The book aims to provide a broad understanding of a wide range of economic theory and new material has been added, including the economic experiences of Chile and the global economic situation. Flow diagrams illustrate the text, and notes on further reading give additional guidance.
journals.sagepub review by S H Heap
jstor.org/ review by L. A. Duhs
Pluto 1995 UNDERSTANDING ECONOMICS Ken Cole
‘This is an economics book with a difference. It is highly distilled logic. Students at all first degree levels can gain an enormous amount from this book. Even the most dedicated proponent of economic orthodoxy will find value in its ability to present mainstream arguments clearly and concisely’ Paul Ormerod, Times Higher Education Supplement
‘I have no hesitation in recommending [it] for its original style and format … Students and lecturers alike will find it both amusing and informative’ Capital & Class
routledge.com 1999 Economy-Environment-Development-Knowledge by Ken Cole
As we approach the end of the second millennium, we find ourselves in times of radical social change. Orthodox explanations of the economy, the environment and the development process are unable to provide coherent policies for such issues as employment creation, environmental degradation and social progress.
Economy-Environment-Development-Knowledge provides alternative perspectives on these fundamental aspects of human existence. Economists, environmentalists, and development theorists have so far been unable to agree on the most successful prescriptions to address problems. To understand, contrast and compare alternative understandings of economic, environmental and development issues, we need to be aware why theorists conceptualise the process of social experience so differently.
Part 1 of Economy-Environment-Development-Knowledge addresses the subjective preference, cost-of-production and abstract labour theories of values in economics; Part 2 explains egocentrism, ecocentrism and socioecocentrism as competing theoretical perspectives in environmental theory; Part 3 highlights modernisation theory, structuralist theory and class struggle as ways to account for the process of development and Part 4 examines the generation of knowedge through positivism, paradigms and praxis, legitimating competing perspectives in economics, environmentalist and development. The book concludes by considering why different people find alternative explanations more or less plausible.
By addressing the disagreements between theorists, Economy-Environment-Development-Knowledge provides a unique basis to contrast and compare the plethora of theories of, and policies for, economic prosperity, environmental sustainability and social progress.
‘As a lecturer teaching Development Studies – I have been waiting for this book, there is nothing like it. It is an incredible analysis – quite brilliant.’ – Ian Yaxley, Queen Margaret University College
umass.edu 2021 ECON 306: History of Economic Thought E A Tonak
Click to access tonak_econ306-02-sp21.pdf
researchgate.net 2015 Refreshing Incoherence in Neoclassical Economic Theory Zahid Siddique
“Interestingly, despite all these criticisms, economic theory has not only been able to survive but also dominate the academic intellectual world. The concluding section will argue that the answer to this puzzle lies neither in the fact that there is ‘some deeper truth’ hidden behind economic theories nor that these theories have been shown to explain the empirical realities of capitalist order, rather major reasons for the sustainability of neoclassical economics rests on the facts that (i) it continues to provide a justification for the agenda of liberal capitalism against religious social order and (ii) there is no grand alternative competing theory to microeconomics.”
hetero
Evolutionary economics seeks to explain real-world phenomena as the outcome of a process of continuous change….
Fittingly, the habits of the economics profession today can be understood only by examining the field’s own history. In the 19th century the discipline that would become economics was an evolutionary science in several senses. Thinkers of diverse backgrounds vied to offer theories which best explained economic activity while, at the same time, its practitioners saw the object of their study as an extension of the biological sciences.
Indeed, social-science thinking informed the views of naturalists such as Charles Darwin. The Reverend Thomas Malthus, who explained how population growth must lead to a life-and-death competition for resources, influenced Darwin as he sketched out how natural selection might lead to the emergence of new species. And while Alfred Marshall—among the figures most responsible for setting economics on its modern, mathematised course—analysed economic behaviour using systems of equations which could be solved for an “equilibrium”, he did so as a necessary expedient. “Mechanical analogies” were useful, he reckoned, but, “[t]he Mecca of the economist lies in economic biology.”
As the 20th century began, an intellectual tug-of-war took place between more evolutionarily minded figures and their equilibrium-focused peers. Thorstein Veblen complained that economists wished to treat the individual like a mindless particle. He thought instead that people’s choices were informed by complex emotions, and the history and traditions of the communities around them. “An evolutionary economics must be the theory of a process of cultural growth,” he ventured. Joseph Schumpeter was perhaps the most famous exponent of an evolutionary worldview: an outlook shaped by his observations of entrepreneurial activity. He described creative destruction as a “process of industrial mutation—if I may use that biological term—that incessantly revolutionises the economic structure from within.”
In the post-war West, the neoclassical approach built around equilibrium models won out. Such models shared a mathematical rigour and elegance with high-prestige fields like physics, and lent themselves more readily to making the forecasts governments required. Milton Friedman argued that it did not matter if the models made unrealistic assumptions about the behaviour of people and institutions. So long as the economy looked, in aggregate, “as if” individuals made rational decisions, and models thus yielded accurate predictions, that was good enough.
Because they very often did not do so, an evolutionary approach crept back into the profession. One important contribution came in 1982, when Richard Nelson, now of Columbia University, and Sidney Winter, now of the University of Pennsylvania, published “An Evolutionary Theory of Economic Change”. Neoclassical models of economic growth failed to capture the forces—like Schumpeterian creative destruction—which played an essential role in generating technological change, they thought. Theories often supposed, for instance, that executives knew and would immediately adopt profit-maximising strategies. In reality, practices might differ widely across an industry, reflecting distinct beliefs and the persistence of firms’ unique cultures and habits. As these approaches competed, some ways of doing things became more widespread across an economy—until some other “industrial mutation” changed the competitive dynamic again.
Messrs Nelson and Winter inspired an entire literature on corporate structures and competition across industries. Empirical work across other parts of economics seems increasingly to reflect an evolutionary influence. Recent, influential studies of innovation, for example, focus on things like exposure to inventors in childhood or the beliefs imparted by academic mentors, as contributors to individuals’ creative output (in addition to factors which have previously received more attention, such as educational attainment and the financial incentive to innovate).
Modification with dissent
Perhaps most intriguing is recent work on culture’s role in shaping economic outcomes. To accept that culture influences behaviour is to allow that people are not foresighted utility calculators, but rather social creatures who rely on norms and traditions when taking decisions. But culture—which changes slowly and is often transmitted across generations—cannot be understood outside an evolutionary framework. Evolutionary economics, having got a foot in the door, may prove difficult to push back out.
This is all to the good. Theory built on unrealistic assumptions has proved less illuminating than economists a century ago might have hoped. Trying to understand the world as it is could yield insights and perhaps, eventually, better predictions. Economists still working with equilibrium models out of habit should consider the disruptive potential of a new, yet old, approach.
previous
By Kevin J. Delaney & Allison Schrager
Bill Gates takes a dim view of economists’ ability to know what’s going on in the economy.
“Too bad economists don’t actually understand macroeconomics,” the Microsoft co-founder noted during a recent interview with Quartz. Asked what he meant by that, Gates continued:
“It’s not like physics where you take certain inputs and you predict certain outputs. Will interest rates ever return to normal, and why aren’t they returning to normal? You won’t get a consensus between economists quite the way that if you dropped a ball out your window and called up physicists and asked, ‘What the hell happened?’ There’s so many factors including what [economist John Maynard] Keynes called ‘animal spirits’ in the economic equation that we don’t have predictability. Even today, people are still arguing about what happened in 2008. So it’s even harder to look forward. [Look at] the role of the bond rating agencies in 2008, which is completely unreformed. Why would that be? Well, there must be a lack of consensus.”
Gates is right, in a way: Economists don’t understand much about the macroeconomy. No one does. Any responsible economist is the first to admit that.
As opposed to microeconomics, which looks at the economy at the level of individual businesses and consumers, macroeconomics aims to explain the interaction of different factors that affect the economy as a whole, such as how interest rates impact macro variables like unemployment, inflation, and economic growth.
As Gates points out, the economy is complex and ever changing. Economists try to make sense of it by developing mathematical models that describe how the different factors relate to each other, and test the accuracy of those models using past data. But the macroeconomy has millions of moving parts that affect each other. Knowing what to include or exclude, and if the economy has changed from when data were collected, is never straightforward—which is why economists tend to disagree on almost everything.
Economic models are always incomplete, but it’s hard to argue that we’d be better off without them. Economists’ research has contributed to fewer people living in poverty, low predictable inflation, and less risk and uncertainty. Macroeconomic models offer a logical, consistent framework to help policymakers understand how people and different factors may respond to a new tax, benefit, or regulation.
Gates’s critique of economists follows several decades of rapid expansion in the field’s influence on policymaking and popular culture. His comment came during the interview as he discussed concerns about a global recession:
“The idea of negative 10-year rates, or now in Germany’s case, negative 30-year rates, this is macroeconomically uncharted territory. As Warren Buffett says, go through any economics textbook and find a reference to negative interest rates—you won’t find it. And yet, almost half the government debt in the world today, if you take out US debt, the majority of government debt bears negative interest rates. And there are certain reasons why that should not be the case, but it is the case. There’s always the risk of an economic recession, and trade wars increase that risk, and the [recent] macroeconomic figures increase that risk quite a bit. But I’m not in control of that. I get to pick which HIV scientists to fund and I get to pitch which malaria drugs to go after, or new ways of killing mosquitos. I don’t have some global economic levers up here in my foundation office.”
investopedia.com 2019 Why Can’t Economists Agree? By MARC DAVIS
Celebrated playwright, George Bernard Shaw, once famously quipped: “If all economists were laid end to end, they would not reach a conclusion.” So, how is it that two experienced, knowledgeable economists study and analyze the same data, and each comes up with a different forecast for the nation’s economy? Why do these experts so often disagree with one another? As we will see, there’s no simple answer; there are many reasons for economists’ differing opinions.
Two Competing Schools of Thought – The principal disagreement among economists is a matter of economic philosophy. There are two major schools of economic thought: Keynesian economics and free-market, or laissez-faire, economics.
Keynesian economists, named after John Maynard Keynes, who first formulated these ideas into an all-encompassing economic theory in the 1930s, believe that a well-functioning and flourishing economy may be created with a combination of the private sector and government help.
By government help, Keynes meant an active monetary and fiscal policy, which works to control the money supply and adjust Federal Reserve interest rates in accordance with changing economic conditions.
By contrast, the free-market economists advocate a government “hands-off” policy, rejecting the theory that government intervention in the economy is beneficial. Free-market economists—and there are many distinguished advocates of this theory, including Nobel Memorial Prize winner Milton Friedman—prefer to let the marketplace sort out any economic problems. That would mean no government bailouts, no government subsidies of business, no government spending explicitly designed to stimulate the economy, and no other efforts by the government to help what the economists believe is the ability of a free economy to regulate itself.
Both economic philosophies have merit and flaws. But these strongly advocated and conflicting beliefs are a major cause of disagreement among economists. …
amazon.co.uk 1991 Why Economists Disagree: The Political Economy of Economics Hardcover by Ken Cole, John Cameron, Chris Edwards