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The NAIRU-Phillips curve has zero scientific content.
It is a playground of neoliberal economists like
Samuelson, Solow, Friedman, Phelps, and the rest

The Phillips curve is an un-substantiated claim  named after empirical model by William Phillips.  If postulated an inverse relationship between rates of unemployment and corresponding rates of inflation that result within an economy. It is not applicable to neoliberal economy as wages are artificially suppressed by the power of neoliberal state and state supported anti-union policy, but is widely used for ideological reasons

Neoliberals typically subscribe to the notion that decreased unemployment correlates with higher rates of inflation despite fact to the contarary, especially affter 2008 crisis.

It is closly connected to another twp pseudoscientific notions popular among neoliberal economists:  rational expectations theory and the NAIRU (non-accelerating inflation rate of unemployment). The latter theory, also known as the "natural rate of unemployment", distinguished between the "short-term" Phillips curve and the "long-term" one.

Jason Smith — NAIRU and other connections between inflation and employment ~ Mike Norman Economics

Ralph Musgrave said...

I left the following comment there.

I'm thrilled to learn there is no connection between unemployment and inflation. As I've been saying to NAIRU bashers for 20 years and as Simon Wren-Lewis recently said: in that case why don't we have a massive increase in demand and reduce unemployment to near zero?

NAIRU bashers invariably go quiet when asked that question. And the reason is stark staring obvious: they know perfectly well that THERE IS a relationship between inflation and unemployment!!!

Auburn Parks said...

Ralph-

Nobody says there is no relationship between supply, employment, and inflation.

We are saying that the Orthodox concept of NAIRU, their estimates of Nairu, and most importantly how they use NAIRU to implement policy is all wrong and damaging to the economy.

AXEC / E.K-H said...

The fatal mistake of the discussion is to accept the NAIRU-Phillips curve (with the well-known disclaimers) and to focus on the economic policy implications with regard to the given situation in the US/UK/etc. But there is NO use to discuss policy if the underlying theory is defective.

The fact of the matter is that the Phillips curve is misspecified since Samuelson/Solow.* Because there is NO such thing as a NAIRU-Phillips curve all political discussion is vacuous.

Egmont Kakarot-Handtke

* For details see ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia’

Tom Hickey said...

Probably better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule, or if there is, a lot of smart people have failed to find it and establish it as either necessary logically (mathematically) or empirical based on tested performance of a rule.

The relationship between employment and inflation appears to be contingent and based on a number of factors, including institutional factors, that result in dynamic conditions involving uncertainty.

AXEC / E.K-H said...

Tom Hickey

You say: “The relationship between employment and inflation appears to be contingent and based on a number of factors, including institutional factors, that result in dynamic conditions involving uncertainty.”

This is entirely vacuous econ-waffle. Imagine, as a contrast, a physics teacher tells his students about gravitation: “The relationship between velocity and mass appears to be contingent and based on a number of factors, including history-specific factors, that result in dynamic conditions involving uncertainty.”

It is pretty obvious that [neoliberal] economists have NOTHING of substance to say. Why do they not simply shut up?

The elementary dependency between employment and inflation and a number of other factors is given with this objective systemic equation that is composed of MEASURABLE variables
https://commons.wikimedia.org/wiki/File:AXEC46.png

This equation is the economic equivalent to Galileo’s Law of Fall and thus the ultimate econ-waffle stopper.

Egmont Kakarot-Handtke
February 28, 2017 at 3:19 PM

Auburn Parks said...

Egmont-

Economics is not a natural science like physics or chemistry, so to complain that explaining economic concepts accurately doesnt sound the same way as a physics explanation is to confuse the fundamental nature of the two endeavors. There is a simple reason why physics like precision and predictability is inapplicable to economics, and its because of the reasons Tom provided.

Ralph Musgrave said... February 28, 2017 at 4:06 PM

Brian,

For the second time, you claimed "Nobody says there is no relationship between supply, employment, and inflation." My answer is the same as before: what does Brian Romanchuk mean by saying NAIRU should be "bashed, smashed and trashed". Seems a pretty outright condemnation of the whole idea to me.

Tom,

You say "Probably better to say that there is no necessary or constant relationship…". Quite agree. But whoever said there WAS a constant relationship? Certainly not the Fed. Anyone with a bit brain ought to realise that NAIRU will vary with a whole host of variables: standards of education, recent unemployment levels (hystersis) and so on.

EK-H,

You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefor it does not have a precise value. The amount of iron in the Moon has a very very precise value indeed. Ask God how much iron there is on and in the Moon and he'd tell you the figure to the nearest 0.00000001%. In contrast, astronomers might not know the quantity to better than plus or minus 10% for all I know. It is therefor perfectly permissible to write equations or get involved in discussions which assume a very very precise value for the amount of iron in the Moon. Same goes for NAIRU.

Much of the stuff I've written makes the latter assumption: it is helpful to make that assumption sometimes.

Auburn Parks said.. February 28, 2017 at 4:39 PM .

No Egmont, its not about scientific idiocy. Its about the nature of the subject. Economics is not different than social psychology in this regard.

Ralph-

NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct.

What is the unemployment rate that would correspond to accelearating inflation right now Ralph?

Auburn Parks said.. February 28, 2017 at 4:42 PM .
The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs.

There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on.

AXEC / E.K-H said.. February 28, 2017 at 4:43 PM .
Ralph Musgrave

You say: "You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefore it does not have a precise value."

You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.**

Egmont Kakarot-Handtke

* See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
** See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

AXEC / E.K-H said.. February 28, 2017 at 5:11 PM .
Auburn Parks

The moronic part of economists, i.e. the vast majority, maintains that economics is a social science. Time to wake up to the fact that economics is a system science.#1

Economics is NOT a science of individual/social/political behavior - this is the social science delusion - but of the behavior of the monetary economy . All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/ Darwinism, political science, social philosophy, history, etcetera) and are taken in from these by way of multi-disciplinary cooperation.#2

The economic system is subject to precise and measurable systemic laws.#3

Egmont Kakarot-Handtke

#1 See 'Lawson's fundamental methodological error and the failure of Heterodoxy'
http://axecorg.blogspot.de/2016/03/lawsons-fundamental-methodological.html
#2 See 'Economics and the social science delusion'
http://axecorg.blogspot.de/2016/03/economics-and-social-science-delusion.html
#3 See 'The three fundamental economic laws'
http://axecorg.blogspot.de/2016/03/the-three-fundamental-economic-laws.html

Tom Hickey said.. February 28, 2017 at 6:19 PM .
But whoever said there WAS a constant relationship? Certainly not the Fed.

Not now. They had to learn this by first the NAIRU model that assumed a natural rate and cet. par., and then the difficulty of writing a rule that could be applied across time.

Too many confounding factors involved that are not directly related to employment or the interest rate.

And there are still people calling for a rule.

Noah Way said.. February 28, 2017 at 7:30 PM .
"Economic science" is an oxymoron.
AXEC / E.K-H said.. March 1, 2017 at 5:39 AM .
Noah Way

You say: "'Economic science' is an oxymoron."

It is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. The four majors approaches - Walrasianism, Keynesianism, Marxianism, Austrianism - are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics (= science) had been hijacked from the very beginning by the agenda pushers of political economics. These folks never rose above the level of vacuous econ-waffle. The whole discussion from Samuelson/Solow's unemployment-inflation trade-off to Friedman/Phelps's natural rate to the rational expectation NAIRU is a case in point.

The NAIRU-Phillips curve has zero scientific content. It is a plaything of retarded political economists. Samuelson, Solow, Friedman, Phelps, and the rest of participants in the NAIRU discussion up to Wren-Lewis are fake scientists.*

Egmont Kakarot-Handtke

* See also 'Modern macro moronism'
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html

Matthew Franko said.. March 1, 2017 at 8:13 AM .
"better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule,"

Good line here Tom... they don't have a function...

But I would point out that with the employment issue, we have had an unregulated system interface (open borders) for decades which is ofc going to result in chaos..

Ralph Musgrave said.. March 1, 2017 at 10:20 AM .
EK-H,

I see: so you're saying the "underlying employment theory" of NAIRU "is false": i.e. you're saying there is no relationship between inflation and unemployment.

Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!

Reason you don't advocate that is that, like all the other NAIRU deniers, you know perfectly well that THERE IS a relationship between inflation and unemployment.!!

AXEC / E.K-H said.. March 1, 2017 at 1:43 PM .
Ralph Musgrave

It would be fine if you could first learn to read and to think and to do your economics homework.

The point at issue is the labor market theory and the remarkable fact of the matter is that economists have after 200+ years NO valid labor market theory. The proof is in the NAIRU-Phillips curve. So what these failures are in effect doing is giving policy advice without sound theoretical foundation. Scientists don't do this.

What is known since the founding fathers about the separation of politics and science is this: "A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision." (J. S. Mill)

The first point is that economists violate the separation of politics and science on a daily basis.#1 The second point is that their unwarranted advice is utter rubbish because they have NO idea how the economy works. The problem society has with economists is that it would be much better off without these clowns.

You ask me: "Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!"

Answer: The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians. In addition, an economist who understands how the price and profit mechanism works does not make such a silly proposal, only brain-dead political agenda pushers do.#2

What I am indeed advocating is that retarded econ-wafflers are thrown out of economics and that economics gets finally out of what Feynman aptly called cargo cult science.#3

Economists claim since more that 200 years that they are doing science and this is celebrated each year with the 'Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel'. Time to make this claim come true.

The only thing economist like you can actively do to contribute to the progress of economics is switching on TV and watching 24/365.

Egmont Kakarot-Handtke

#1 See 'Scientific suicide in the revolving door'
http://axecorg.blogspot.de/2016/11/scientific-suicide-in-revolving-door.html
#2 See 'Rethinking deficit spending'
http://axecorg.blogspot.de/2016/12/rethinking-deficit-spending.html
#3 See 'Economists and the destructive power of stupidity'
http://axecorg.blogspot.de/2017/02/economists-and-destructive-power-of.html

Ralph Musgrave said.. March 1, 2017 at 2:14 PM .
EKH,

"The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians."

"The business of the economist" is not just "true theory": it is also to give the best economic advice they can even where the theory is clearly defective. In the case of the relationship between inflation and unemployment, the EXACT nature of that relationship is not known with much accuracy, but governments just have to take a judgement on what level of unemployment results in too much inflation. Ergo economics have a duty to give the best advice they can in the circumstances.

Re social problems, your above quote also doesn't alter the fact that economists are in a position to solve HUGE social problems if they promote an increase in demand where that is possible. So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious.

Like all the other NAIRU deniers, you know perfectly well there is a relationship between inflation and unemployment!!

David Swan said.. March 1, 2017 at 3:23 PM .
To say that there is "a" relationship between inflation and unemployment does not even remotely support the claims inherent in the NAIRU, nor does it justify its use to guide the macroeconomic framework. NAIRU does not claim that there is "a" relationship between inflation and unemployment (that lesser claim is covered adequately by the Phillips Curve). NAIRU claims that low levels of unemployment generate ACCELERATING inflation (i.e. "hyperinflation"), a claim based on pure sophistry and nothing else. If you would like to support the NAIRU's utterly fallacious claim that low unemployment generates ACCELERATING inflation, then please provide data to support that claim.

Furthermore, "a" relationship between unemployment and inflation in no way justifies the central bank intervention of choking off economic growth to prevent "too many jobs". Is the inflation harmful or benign? With the historical perspective available to us from nearly 5 decades of NAIRU, all that is required is to look at the chart of hourly wage growth vs productivity and observe that real wages growth took a sharp right turn at the very time NAIRU was implemented worldwide. There has not been one iota of real wage growth since the 70's (despite low inflation), whereas the real wage grew steadily prior to that (despite moderate inflation). If that is the price of "protecting" us from inflation, then in what way is it beneficial to do so?

Brian Romanchuk said.. March 1, 2017 at 3:38 PM .
I see Ralph Musgrave referred to my article again.

Good Lord, how can I make what I wrote simpler to understand?

The DEFINITION of NAIRU is the level of the unemployment rate at which the price level starts to accelerate. Sure, there's usually another variable in there mucking up the works, but it's going to be a second order effect in the current environment.

AXEC / E.K-H said.. March 1, 2017 at 4:42 PM .
Ralph Musgrave

You say: "Ergo economics have a duty to give the best advice they can in the circumstances."

The only duty of scientifically incompetent economists is to throw themselves under the bus. Economists are a menace to their fellow citizens as Napoleon already knew: "Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust." (Viner)

Economists do NOT solve social problems they ARE a social problem.

You repeat your silly question: "So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious."

Yes it is blindingly obvious that deficit spending does NOT solve social problems but CREATES the social problem of an insanely unequal distribution (see the references above).

This follows from the true labor market theory which is given with the systemic employment equation.#1 "The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the current situation to rise faster than the average price. THIS opens the way out of mass unemployment, deflation, and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox agenda pushers."#2

Right policy depends on true theory: "In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion." (Stigum)

Economists do not have the true theory. They have NOTHING to offer. The NAIRU-Phillips curve is provable false. Because of this ALL economic policy conclusions drawn from it are counterproductive, that is, they WORSEN the situation. So, Samuelson, Solow, Friedman, Phelps and the other NAIRU-Phillips curve proponents bear the responsibility for mass unemployment and the social devastation that comes with it.

From the fact that the NAIRU labor market theory is false follows that economists are incompetent scientists and that ALL their economic policy proposals are scientifically worthless.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
#2 See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

John said.. March 2, 2017 at 9:53 AM .
I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it.
AXEC / E.K-H said.. March 5, 2017 at 5:29 AM .
NAIRU and economists' lethal swampiness.

Comment on David Glasner on 'Richard Lipsey and the Phillips Curve Redux'

David Glasner contributes to the NAIRU discussion#1 by reproducing essential content of his 2013 paper. Back then he propagated Lipsey's concept of multiple equilibria or band of unemployment (NAIBU) which is consistent with a stable rate of inflation. The NAIBU concept is a fine example of the tendency of economists to soften, relativize, qualify, and semantically dilute every concept until it is senseless and useless.

It is the very characteristic of economics that there are no well-defined concepts and this begins with the pivotal economic concepts profit and income. The habit of swampification keeps the discourse safely in the no man's land where "nothing is clear and everything is possible" (Keynes) and where anything goes.

Swampification is what Popper called an immunizing strategy. The beauty of vagueness and ambiguity is that it cannot be falsified: "Another thing I must point out is that you cannot prove a vague theory wrong." (Feynman)#2

David Glasner applies the concept of evolution in order to swampify the NAIRU: "The current behavior of economies … is consistent with evolutionary theory in which the economy is constantly evolving in the face of path-dependent, endogenously generated, technological change, and has a wide range of unemployment and GDP over which the inflation rate is stable."

In other words, presumably there is a relationship between unemployment and inflation but nobody knows what it is. While science is known to strive for uniqueness, economics is known to strive for ambiguity and obfuscation. This swampiness is rationalized as realism. After all, reality is messy, isn't it?

To recall, the Phillips curve started as a simple and remarkably stable EMPIRICAL relationship between wage rate changes and the rate of unemployment. The original Phillips curve was reinterpreted and thereby messed up by Samuelson and Solow who introduced the economic policy trade-off between inflation and unemployment which was finally thrown out again with the NAIRU.

A conceptional error/mistake/blunder slipped in with the bastardization of the original Phillips curve that was never rectified but in effect buried under a huge heap of inconclusive economic shop talk. This means that until this very day economics has no valid theory of the labor market.

See part 2

AXEC / E.K-H said.. March 5, 2017 at 5:34 AM .
Part 2

So, the microfounded NAIRU-Phillips curve has first of all to be rectified.#3 The macrofounded SYSTEM-Phillips curve is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L. The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases, that is, THREE types of inflation.
(i) If the rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is, NO amount of inflation or deflation has any effect on employment. Inflation is neutral, there is no trade-off between unemployment and inflation.
(ii) If the rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES. There is a POSITIVE effect of inflation on employment.
(iii) If the rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES. There is a NEGATIVE effect of inflation on employment.

So, it is the DIFFERENCE in the rates of change of wage rate and price and not the absolute magnitude of change that is decisive. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment remains indefinitely where it actually is. The neutral inflation can start at ANY point between full and zero employment. The crucial fact to notice is that there is no such thing as "inflation", there are THREE types of inflation.

The systemic employment equation defines the causal relationship of "inflation" on employment. However, there is the inverse causality of employment on "inflation".

Common sense suggests that positive inflation (ii) is more probable the closer actual employment is at full employment and negative inflation (iii) is more probable the farther away actual employment is from full employment. In other words: the market economy is inherently unstable. The feed-back loop between employment and "inflation" is the very antithesis to the idea of equilibrium. To recall, the NAIRU is DEFINED as an equilibrium. Standard economics has built equilibrium right into the premises, i.e. into the axiomatic foundations. All of economics starts with the idea that the market economy is an equilibrium system. It turns out that this premise is false, just the opposite is the case.

Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
#2 "By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, 'When you are dealing with psychological matters things can't be defined so precisely'. Yes, but then you cannot claim to know anything about it."
#3 See 'Keynes' Employment Function and the Gratuitous Phillips Curve Disaster'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421


 


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Old News ;-)

[Jul 05, 2017] NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false

Notable quotes:
"... NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct. ..."
"... The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs. ..."
"... There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on. ..."
"... You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.** ..."
"... "better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule," ..."
"... Good line here Tom... they don't have a function... ..."
"... I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it. ..."
"... Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false. ..."
Jul 05, 2017 | mikenormaneconomics.blogspot.com

Ralph Musgrave said... February 28, 2017 at 4:06 PM

Brian,

For the second time, you claimed "Nobody says there is no relationship between supply, employment, and inflation." My answer is the same as before: what does Brian Romanchuk mean by saying NAIRU should be "bashed, smashed and trashed". Seems a pretty outright condemnation of the whole idea to me.

Tom,

You say "Probably better to say that there is no necessary or constant relationship…". Quite agree. But whoever said there WAS a constant relationship? Certainly not the Fed. Anyone with a bit brain ought to realise that NAIRU will vary with a whole host of variables: standards of education, recent unemployment levels (hystersis) and so on.

EK-H,

You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefor it does not have a precise value. The amount of iron in the Moon has a very very precise value indeed. Ask God how much iron there is on and in the Moon and he'd tell you the figure to the nearest 0.00000001%. In contrast, astronomers might not know the quantity to better than plus or minus 10% for all I know. It is therefor perfectly permissible to write equations or get involved in discussions which assume a very very precise value for the amount of iron in the Moon. Same goes for NAIRU.

Much of the stuff I've written makes the latter assumption: it is helpful to make that assumption sometimes.

Auburn Parks said.. February 28, 2017 at 4:39 PM .

No Egmont, its not about scientific idiocy. Its about the nature of the subject. Economics is not different than social psychology in this regard.

Ralph-

NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct.

What is the unemployment rate that would correspond to accelearating inflation right now Ralph?

Auburn Parks said.. February 28, 2017 at 4:42 PM .
The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs.

There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on.

AXEC / E.K-H said.. February 28, 2017 at 4:43 PM .
Ralph Musgrave

You say: "You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefore it does not have a precise value."

You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.**

Egmont Kakarot-Handtke

* See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
** See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

AXEC / E.K-H said.. February 28, 2017 at 5:11 PM .
Auburn Parks

The moronic part of economists, i.e. the vast majority, maintains that economics is a social science. Time to wake up to the fact that economics is a system science.#1

Economics is NOT a science of individual/social/political behavior - this is the social science delusion - but of the behavior of the monetary economy . All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/ Darwinism, political science, social philosophy, history, etcetera) and are taken in from these by way of multi-disciplinary cooperation.#2

The economic system is subject to precise and measurable systemic laws.#3

Egmont Kakarot-Handtke

#1 See 'Lawson's fundamental methodological error and the failure of Heterodoxy'
http://axecorg.blogspot.de/2016/03/lawsons-fundamental-methodological.html
#2 See 'Economics and the social science delusion'
http://axecorg.blogspot.de/2016/03/economics-and-social-science-delusion.html
#3 See 'The three fundamental economic laws'
http://axecorg.blogspot.de/2016/03/the-three-fundamental-economic-laws.html

Tom Hickey said.. February 28, 2017 at 6:19 PM .
But whoever said there WAS a constant relationship? Certainly not the Fed.

Not now. They had to learn this by first the NAIRU model that assumed a natural rate and cet. par., and then the difficulty of writing a rule that could be applied across time.

Too many confounding factors involved that are not directly related to employment or the interest rate.

And there are still people calling for a rule.

Noah Way said.. February 28, 2017 at 7:30 PM .
"Economic science" is an oxymoron.
AXEC / E.K-H said.. March 1, 2017 at 5:39 AM .
Noah Way

You say: "'Economic science' is an oxymoron."

It is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. The four majors approaches - Walrasianism, Keynesianism, Marxianism, Austrianism - are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics (= science) had been hijacked from the very beginning by the agenda pushers of political economics. These folks never rose above the level of vacuous econ-waffle. The whole discussion from Samuelson/Solow's unemployment-inflation trade-off to Friedman/Phelps's natural rate to the rational expectation NAIRU is a case in point.

The NAIRU-Phillips curve has zero scientific content. It is a plaything of retarded political economists. Samuelson, Solow, Friedman, Phelps, and the rest of participants in the NAIRU discussion up to Wren-Lewis are fake scientists.*

Egmont Kakarot-Handtke

* See also 'Modern macro moronism'
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html

Matthew Franko said.. March 1, 2017 at 8:13 AM .
"better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule,"

Good line here Tom... they don't have a function...

But I would point out that with the employment issue, we have had an unregulated system interface (open borders) for decades which is ofc going to result in chaos..

Ralph Musgrave said.. March 1, 2017 at 10:20 AM .
EK-H,

I see: so you're saying the "underlying employment theory" of NAIRU "is false": i.e. you're saying there is no relationship between inflation and unemployment.

Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!

Reason you don't advocate that is that, like all the other NAIRU deniers, you know perfectly well that THERE IS a relationship between inflation and unemployment.!!

AXEC / E.K-H said.. March 1, 2017 at 1:43 PM .
Ralph Musgrave

It would be fine if you could first learn to read and to think and to do your economics homework.

The point at issue is the labor market theory and the remarkable fact of the matter is that economists have after 200+ years NO valid labor market theory. The proof is in the NAIRU-Phillips curve. So what these failures are in effect doing is giving policy advice without sound theoretical foundation. Scientists don't do this.

What is known since the founding fathers about the separation of politics and science is this: "A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision." (J. S. Mill)

The first point is that economists violate the separation of politics and science on a daily basis.#1 The second point is that their unwarranted advice is utter rubbish because they have NO idea how the economy works. The problem society has with economists is that it would be much better off without these clowns.

You ask me: "Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!"

Answer: The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians. In addition, an economist who understands how the price and profit mechanism works does not make such a silly proposal, only brain-dead political agenda pushers do.#2

What I am indeed advocating is that retarded econ-wafflers are thrown out of economics and that economics gets finally out of what Feynman aptly called cargo cult science.#3

Economists claim since more that 200 years that they are doing science and this is celebrated each year with the 'Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel'. Time to make this claim come true.

The only thing economist like you can actively do to contribute to the progress of economics is switching on TV and watching 24/365.

Egmont Kakarot-Handtke

#1 See 'Scientific suicide in the revolving door'
http://axecorg.blogspot.de/2016/11/scientific-suicide-in-revolving-door.html
#2 See 'Rethinking deficit spending'
http://axecorg.blogspot.de/2016/12/rethinking-deficit-spending.html
#3 See 'Economists and the destructive power of stupidity'
http://axecorg.blogspot.de/2017/02/economists-and-destructive-power-of.html

Ralph Musgrave said.. March 1, 2017 at 2:14 PM .
EKH,

"The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians."

"The business of the economist" is not just "true theory": it is also to give the best economic advice they can even where the theory is clearly defective. In the case of the relationship between inflation and unemployment, the EXACT nature of that relationship is not known with much accuracy, but governments just have to take a judgement on what level of unemployment results in too much inflation. Ergo economics have a duty to give the best advice they can in the circumstances.

Re social problems, your above quote also doesn't alter the fact that economists are in a position to solve HUGE social problems if they promote an increase in demand where that is possible. So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious.

Like all the other NAIRU deniers, you know perfectly well there is a relationship between inflation and unemployment!!

David Swan said.. March 1, 2017 at 3:23 PM .
To say that there is "a" relationship between inflation and unemployment does not even remotely support the claims inherent in the NAIRU, nor does it justify its use to guide the macroeconomic framework. NAIRU does not claim that there is "a" relationship between inflation and unemployment (that lesser claim is covered adequately by the Phillips Curve). NAIRU claims that low levels of unemployment generate ACCELERATING inflation (i.e. "hyperinflation"), a claim based on pure sophistry and nothing else. If you would like to support the NAIRU's utterly fallacious claim that low unemployment generates ACCELERATING inflation, then please provide data to support that claim.

Furthermore, "a" relationship between unemployment and inflation in no way justifies the central bank intervention of choking off economic growth to prevent "too many jobs". Is the inflation harmful or benign? With the historical perspective available to us from nearly 5 decades of NAIRU, all that is required is to look at the chart of hourly wage growth vs productivity and observe that real wages growth took a sharp right turn at the very time NAIRU was implemented worldwide. There has not been one iota of real wage growth since the 70's (despite low inflation), whereas the real wage grew steadily prior to that (despite moderate inflation). If that is the price of "protecting" us from inflation, then in what way is it beneficial to do so?

Brian Romanchuk said.. March 1, 2017 at 3:38 PM .
I see Ralph Musgrave referred to my article again.

Good Lord, how can I make what I wrote simpler to understand?

The DEFINITION of NAIRU is the level of the unemployment rate at which the price level starts to accelerate. Sure, there's usually another variable in there mucking up the works, but it's going to be a second order effect in the current environment.

AXEC / E.K-H said.. March 1, 2017 at 4:42 PM .
Ralph Musgrave

You say: "Ergo economics have a duty to give the best advice they can in the circumstances."

The only duty of scientifically incompetent economists is to throw themselves under the bus. Economists are a menace to their fellow citizens as Napoleon already knew: "Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust." (Viner)

Economists do NOT solve social problems they ARE a social problem.

You repeat your silly question: "So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious."

Yes it is blindingly obvious that deficit spending does NOT solve social problems but CREATES the social problem of an insanely unequal distribution (see the references above).

This follows from the true labor market theory which is given with the systemic employment equation.#1 "The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the current situation to rise faster than the average price. THIS opens the way out of mass unemployment, deflation, and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox agenda pushers."#2

Right policy depends on true theory: "In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion." (Stigum)

Economists do not have the true theory. They have NOTHING to offer. The NAIRU-Phillips curve is provable false. Because of this ALL economic policy conclusions drawn from it are counterproductive, that is, they WORSEN the situation. So, Samuelson, Solow, Friedman, Phelps and the other NAIRU-Phillips curve proponents bear the responsibility for mass unemployment and the social devastation that comes with it.

From the fact that the NAIRU labor market theory is false follows that economists are incompetent scientists and that ALL their economic policy proposals are scientifically worthless.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
#2 See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

John said.. March 2, 2017 at 9:53 AM .
I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it.
AXEC / E.K-H said.. March 5, 2017 at 5:29 AM .
NAIRU and economists' lethal swampiness.

Comment on David Glasner on 'Richard Lipsey and the Phillips Curve Redux'

David Glasner contributes to the NAIRU discussion#1 by reproducing essential content of his 2013 paper. Back then he propagated Lipsey's concept of multiple equilibria or band of unemployment (NAIBU) which is consistent with a stable rate of inflation. The NAIBU concept is a fine example of the tendency of economists to soften, relativize, qualify, and semantically dilute every concept until it is senseless and useless.

It is the very characteristic of economics that there are no well-defined concepts and this begins with the pivotal economic concepts profit and income. The habit of swampification keeps the discourse safely in the no man's land where "nothing is clear and everything is possible" (Keynes) and where anything goes.

Swampification is what Popper called an immunizing strategy. The beauty of vagueness and ambiguity is that it cannot be falsified: "Another thing I must point out is that you cannot prove a vague theory wrong." (Feynman)#2

David Glasner applies the concept of evolution in order to swampify the NAIRU: "The current behavior of economies … is consistent with evolutionary theory in which the economy is constantly evolving in the face of path-dependent, endogenously generated, technological change, and has a wide range of unemployment and GDP over which the inflation rate is stable."

In other words, presumably there is a relationship between unemployment and inflation but nobody knows what it is. While science is known to strive for uniqueness, economics is known to strive for ambiguity and obfuscation. This swampiness is rationalized as realism. After all, reality is messy, isn't it?

To recall, the Phillips curve started as a simple and remarkably stable EMPIRICAL relationship between wage rate changes and the rate of unemployment. The original Phillips curve was reinterpreted and thereby messed up by Samuelson and Solow who introduced the economic policy trade-off between inflation and unemployment which was finally thrown out again with the NAIRU.

A conceptional error/mistake/blunder slipped in with the bastardization of the original Phillips curve that was never rectified but in effect buried under a huge heap of inconclusive economic shop talk. This means that until this very day economics has no valid theory of the labor market.

See part 2

AXEC / E.K-H said.. March 5, 2017 at 5:34 AM .
Part 2

So, the microfounded NAIRU-Phillips curve has first of all to be rectified.#3 The macrofounded SYSTEM-Phillips curve is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L. The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases, that is, THREE types of inflation.
(i) If the rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is, NO amount of inflation or deflation has any effect on employment. Inflation is neutral, there is no trade-off between unemployment and inflation.
(ii) If the rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES. There is a POSITIVE effect of inflation on employment.
(iii) If the rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES. There is a NEGATIVE effect of inflation on employment.

So, it is the DIFFERENCE in the rates of change of wage rate and price and not the absolute magnitude of change that is decisive. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment remains indefinitely where it actually is. The neutral inflation can start at ANY point between full and zero employment. The crucial fact to notice is that there is no such thing as "inflation", there are THREE types of inflation.

The systemic employment equation defines the causal relationship of "inflation" on employment. However, there is the inverse causality of employment on "inflation".

Common sense suggests that positive inflation (ii) is more probable the closer actual employment is at full employment and negative inflation (iii) is more probable the farther away actual employment is from full employment. In other words: the market economy is inherently unstable. The feed-back loop between employment and "inflation" is the very antithesis to the idea of equilibrium. To recall, the NAIRU is DEFINED as an equilibrium. Standard economics has built equilibrium right into the premises, i.e. into the axiomatic foundations. All of economics starts with the idea that the market economy is an equilibrium system. It turns out that this premise is false, just the opposite is the case.

Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
#2 "By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, 'When you are dealing with psychological matters things can't be defined so precisely'. Yes, but then you cannot claim to know anything about it."
#3 See 'Keynes' Employment Function and the Gratuitous Phillips Curve Disaster'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421

[Jul 05, 2017] Robert's Stochastic thoughts

I think this quote makes it clear that the rational expectations revolution was based on fraudulent intellectual history. I don't think it shows that the fresh water and new Keynesian schools of macroeconomics have made no useful advances during my lifetime (that is since 1960). I'm sure they have made useful advances, although their claim to have improved on the thought of Samuelson and Solow is based entirely on critiquing the legend of one figure quoted out of context. It is the legend to their figure 2 which shows a stylized Phillips curve. The following paragraph basically explains what a graph is.

I quote the immediately following three paragraphs as published in May 1960 before I was born.
(update: emphasis mine)

Aside from the usual warning that these are simply our best guesses we must give another caution. All of our discussion has been phrased in short-run terms, dealing with what might happen in hte next few years. It would be wrong, though, to think that our Figure 2 menu that related obtainable price an unemployment behavior will maintain its same shape in the longer run. What we do in a policy way during the next few years might cause it to shift in a definite way.
Thus, it is conceivable that after they ha produced a low-pressure economy, the believers in demand-pull might be disappointed in the short run; i.e., prices might continue to rise although unemployment was considerable. Nevertheless, it might be that the low-pressure demand would so act upon wage and other expectations as to shift the curve downward in the longer run -- so that over a decade, the economy ight enjoy higher employment with price stability than our present day estimate would indicate.
But also the opposite is conceivable. A low-pressure economy might build within itself over the years larger and nd larger amounts of structural unemployment (the reverseof what happene from 1941 to 1953 as a result of strong war and postwar demands). The result would be an upward shift of our menu of choice, with more and more unemployment being needed just to keep prices stable.

"Analytical Aspects of Anti-Inflation Policy" Paul H. Samuelson; Robert M. Solow American Economic Reivew Vol. 50, No. 2, Papers and Procedings of the Seventy-second Annual Meeting of the American Economic Association (May, 1960), 177-194.

I don't think that Milton Friedman had anything useful to add.

In 1960 Samuelson and Solow did not at all write what Friedman insinuated that they wrote. In fact, in 1960 they said the Phillips curve showed a short term but *not* a long term tradeoff. They explained that it would shift for two reasons. First, they predicted that it would shift up and down with expected inflation. In other words, Friedman is guilty not only of distorting the claims of Samuelson and Solow but of presenting their clearly stated prediction as his own. Not to put to fine a point on it, he plagiarized them when pretending to critique them. But wait, there's more.

In the next paragraph they went on to note that the Phillips curve will shift out as cyclical unemployment becomes structural. Samuelson's nephew (and OJ Blanchard) presented this insight as original 25 years later and called it "hysteresis". In standard watererd down for the public histories of macro thought it is fairly common to present the progression Samuelson and Solow claimed the Phillips curve was a stable long term tradeoff. Friedman and Phelps achieved a scientific revolution by noting that the Phillips curve depended on expected inflation. Further research suggests it is even more complicated that Friedman knew as the NAIRU can shift due to hysteresis (this is still so brand new that it hasn't been incorporated into standard macro models after an alleged 28 but actual 52 years). In fact, it is all there in Samuelson and Solow 1960.

Student

In principle, there are two separate questions, and one is logically prior to the other: first, is there an expectations term that shifts the Phillps curve? second, is the coefficient on that term equal to 1? I'm not familiar with the detailed intellectual history here, but I'm pretty sure that the critical question for Friedman and Phelps was the second rather than the first. So I presume the answer to the first was already fairly well established by the time the "accelerationist" debate came to prominence.

Now it happens that Phelps and Friedman were wrong. At least at very low inflation rates, we can now say with reasonable confidence that the long-run Phillips curve is downward-sloping. Nonetheless, there's something to be said for the idea that the vertical approximation was an advance over the vagueness that previously prevailed with respect to the long-run Philips curve.

[Mar 26, 2017] There is no such thing as a natural rate of interest

Mar 26, 2017 | economistsview.typepad.com
RGC, March 26, 2017 at 07:06 AM
In short, there is no such thing as a "natural rate of interest".

........................

What then? It is difficult to say, exactly, whether the prevalent confusions are the result of sloppy thinking, an incoherent textbook pedagogy, or a deliberate desire to cover for the Federal Reserve and to obstruct potential criticism of the independent central bank. As a next step, let us ask: is there a better theory of interest rates out there, somewhere in the great work of the economists?

In the CEA paper, as in most of this so-called literature, the 20th century British economist John Maynard Keynes is not cited. Yet it is a fact that Keynes did write an influential book with the word "Interest" in the title. It was called The General Theory of Employment Interest and Money, published in 1936. In which Keynes states, of the classical theory of interest – that theory of loanable funds overlying a natural rate – that his own analysis "will have made it plain that this account of the matter must be erroneous" (p. 177). Perhaps it is worthwhile to seek Keynes's counsel at this point?

Keynes's theory of interest does not rest on the capital stock. And in Keynes as in the real world, there is no "capital market" that equates household saving with business investment.

Instead, Keynes's theory of interest is about the market for money – a market that definitely does exist in the real world. He wrote: "The rate of interest is not the 'price' which brings into equilibrium the demand for resources to invest with the readiness to abstain from consumption. It is the 'price' which equilibrates the desire to hold wealth in the form of cash with the available quantity of cash" (p. 167). In other words, interest rates are a portfolio issue. They are determined in the money markets, by how – in what form – people with wealth choose, at any given time, to hold that wealth. You pay interest, in order to get people to hold their wealth in less-liquid forms, such as bonds – and this is what provides firms with a secure source of financing, which then permits them to invest.

Keynes's theory of interest is the pure common sense of how financial markets work. So why is it treated, by our leading liberal economists, as though it didn't exist? Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages. Thomas Piketty's recent book is a nice instance of this point, with its argument that the great inequalities of capitalism are due to interest rates higher than the rate of economic growth. If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain.

http://www.paecon.net/PAEReview/issue78/Galbraith78.pdf

RGC -> RGC... , March 26, 2017 at 07:39 AM
"Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages..........If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain."

[Is that clear enough?......Galbraith is accusing mainstream economists of acting as apologists for rentiers.]

[Aug 03, 2015] Freshwater's Wrong Turn

"... This reminds me of the "we create reality" stuff from the neo-cons. Maybe it's just more infection of Straussian "ethics" at UofC (see Shadia Drury).
Aug 2, 2015 | Economist's View

Paul Krugman follows up on Paul Romer's latest attack on "mathiness":

Freshwater's Wrong Turn (Wonkish): Paul Romer has been writing a series of posts on the problem he calls "mathiness", in which economists write down fairly hard-to-understand mathematical models accompanied by verbal claims that don't actually match what's going on in the math. Most recently, he has been recounting the pushback he's getting from freshwater macro types, who seem him as allying himself with evil people like me - whereas he sees them as having turned away from science toward a legalistic, adversarial form of pleading.
You can guess where I stand on this. But in his latest, he notes some of the freshwater types appealing to their glorious past, claiming that Robert Lucas in particular has a record of intellectual transparency that should insulate him from criticism now. PR replies that Lucas once was like that, but no longer, and asks what happened.
Well, I'm pretty sure I know the answer. ...

It's hard to do an extract capturing all the points, so you'll likely want to read the full post, but in summary:

So what happened to freshwater, I'd argue, is that a movement that started by doing interesting work was corrupted by its early hubris; the braggadocio and trash-talking of the 1970s left its leaders unable to confront their intellectual problems, and sent them off on the path Paul now finds so troubling.

Recent tweets, email, etc. in response to posts I've done on mathiness reinforce just how unwilling many are to confront their tribalism. In the past, I've blamed the problems in macro on, in part, the sociology within the profession (leading to a less than scientific approach to problems as each side plays the advocacy game) and nothing that has happened lately has altered that view.

Posted by Mark Thoma on Sunday, August 2, 2015 at 11:54 AM in Economics, Macroeconomics, Methodology | Permalink Comments (20)

pgl said...
When I first heard this Lucas island - also known as Friedman-Phelps - story about business cycles being driven by unanticipated inflation, it initially stuck me as interested. Then I thought about the fact that the Rational Expectations version would have trouble explaining why nominal shocks affect real events for more than a few months.

No - it did not take long to realize that this nice neat model could not explain the real world. But what we usually got back then is a large parade of statistical techniques that just confused matters even more.

At which I began to wonder what I was interested in macroeconomics in the first place.

eightnine2718281828mu5 said in reply to pgl...
---
the braggadocio and trash-talking of the 1970s left its leaders unable to confront their intellectual problems
---

iow, assigning a higher value to their accumulated research (reputation?) than it was actually worth.

sticky prices indeed.

RC AKA Darryl, Ron said in reply to eightnine2718281828mu5...
:<)

[For most of us then:]

"...Freedom's just another word for nothing left to lose
Nothing don't mean nothing honey, if it ain't free
Feeling good was easy, Lord, when he sang the blues
You know, feeling good was good enough for me
Good enough for me and my Bobby McGee..."
ARTIST: Kris Kristofferson
TITLE: Me and Bobby McGee

*

[For most of them then freedom is just a matter of low-regulation low-tax supply side economic policy. TO which end their statistics demand many degrees of "freedom" and they have taken increasingly more extensive "freedoms" with their theories ever since Uncle Milty taught us about "Capitalism and Freedom," why the initial conclusions reached by Keynes were all wrong, and why monetarism was sacred. (barf)

I remember the 1970's well. The terminal punctuation was Reagan's election in 1980. When I was drafted in 1969 I still retained some hope, although much diminished since MLK was murdered a year earlier. By the time I returned from Viet Nam it was just one slap in the face after another. All our (the social movement that happened alongside the hippies) hopes from the 60's were dashed. Blacks were to be "locked" into ghettos by public policy and the working class was to be sacrificed on the alter of corporatism one merger or outsource at a time. ]

anne said...

https://en.wikipedia.org/wiki/Real_business_cycle_theory

Real business cycle theory models (RBC theory) are a class of New classical macroeconomics models in which business cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks. Unlike other leading theories of the business cycle, RBC theory sees business cycle fluctuations as the efficient response to exogenous changes in the real economic environment. That is, the level of national output necessarily maximizes expected utility, and governments should therefore concentrate on long-run structural policy changes and not intervene through discretionary fiscal or monetary policy designed to actively smooth out economic short-term fluctuations.

anne said in reply to anne...
http://krugman.blogs.nytimes.com/2014/02/17/the-trouble-with-being-abstruse-slightly-wonkish/

February 17, 2014

The Trouble With Being Abstruse (Slightly Wonkish)
By Paul Krugman

Political scientists who write clearly for a broader audience are upset * with Nick Kristof ** for saying that political scientists no longer write for a broader audience. I'm not going to get into that fight. I do want to register one point, however: In my field there is indeed a problem with abstruseness, with the many academics who never even try to put their thoughts in plain language.

And what is the nature of that problem? It's not that laypeople don't understand what the academics are saying. It is, instead, that the academics themselves don't understand what they're saying.

Don't get me wrong: I like mathematical modeling. Mathematical modeling is a friend of mine. Math can be a powerful clarifying tool. So, in some cases, can jargon, which used right can both save time and add clarity to the discussion. If I talk about Dixit-Stiglitz preferences, or for that matter the zero lower bound, technically trained economists immediately know whereof I speak, where plain English would both take longer and leave room for misunderstanding.

But it's really important to step away from the math and drop the jargon every once in a while, and not just as a public service. Trying to explain what you're doing intuitively isn't just for the proles; it's an important way to check on yourself, to be sure that your story is at least halfway plausible.

Take real business cycle theory – I know it's a horse I beat a lot, but it's not dead, and it's a prime example within economics of what I have in mind. I still want to spend at least some time explaining that theory to my undergrads, so I've been looking for a simple, intuitive explanation by an RBC theorist of what's going on. And I haven't been able to find one!

I mean, I could do it myself. Strip the story down to basics – make it a steady-state model, not a growth model, and drop the capital accumulation; what you're left with is fluctuations in the marginal productivity of labor, which have a magnified impact on output because workers choose to work less when the technology is bad and more when the technology is good. As I've written before someplace, it's the story of a farmer who stays inside when it's raining and puts in extra hours when the sun is shining.

But the RBC theorists never seem to go there; it's right into calibration and statistical moments, with never a break for intuition. And because they never do the simple version, they don't realize (or at any rate don't admit to themselves) how fundamentally silly the whole thing sounds, how much it's at odds with lived experience.

I once talked to a theorist (not RBC, micro) who said that his criterion for serious economics was stuff that you can't explain to your mother. I would say that if you can't explain it to your mother, or at least to your non-economist friends, there's a good chance that you yourself don't really know what you're doing.

Math is good. Sometimes jargon is good, too. But plain language and simple intuition are important to keep you grounded.

* http://crookedtimber.org/2014/02/16/look-who-nick-kristofs-saving-now/

** http://www.nytimes.com/2014/02/16/opinion/sunday/kristof-professors-we-need-you.html

mulp said in reply to anne...
Freshwater economists, free lunch economists, speak very clearly.

Its too good to be true which makes everyone who wants a free lunch to believe it.

For example, free lunch economists say lower prices are achieved by lower wages, fewer workers, tax cuts, and higher profits, which creates wealth, and the unemployed and working poor spend more using money the will never pay back because of the wealth effect, with mathiness to backup their claims.

What they never do is put them all together like I have done so the words are revealed as nonsense and the math is 1+2-3 = 10 and thus obviously bogus.

Note fresh water economists NEVER state that consumer spending is driven by wage income, as in real wage income, not the income from capital gains which sorta lots like wages but is really rent seeking aka private tax on the savings of workers.

How can lower wages to get lower prices ever result in higher GDP without lots of debt that can never be repaid?

Lafayette said in reply to anne...
TO APE ONE ANOTHER

{PK: with the many academics who never even try to put their thoughts in plain language.}

Ha! I like that!

Tis True. How many times do we see the word "exogenous". Many. How often, "endogenous"? Never.

Anybody for a hard look at the "endogenous" factors causing economic cyclicity? How about the human ability to "ape" one another's consumer habits that builds patterns increasing in intensity - until the "bubble" bursts? ("Cyclicity"? Wow! Nice word? Hardly used! Here we go again!!!;^)

Like lemmings falling off a cliff - cyclic in nature but deadly in consequence.

DeDude said...
When your math is incompatible with the observations from the real world - its the math that's wrong. I don't have a 3 page formula, but just trust me on this one.
GeorgeK said...
You will find the answers to all your questions in this book
http://www.amazon.com/Wiser-Getting-Beyond-Groupthink-Smarter/dp/1422122999/ref=sr_1_1?s=books&ie=UTF8&qid=1438554831&sr=1-1&keywords=Group+think+getting+beyond

bakho said...

Science advances one funeral at a time. - Max Planck

They are too invested in their mistakes to accept criticism.
The next generation of economists will accept that they were wrong.

likbez said...
Before becoming columnist Krugman was mathiness practioner ;-)

reason said...

Anne
"That is, the level of national output necessarily maximizes expected utility"

We could stop right there. Clear nonsense. (You can always INCREASE utility by redistributing from rich to poor - at least with any sensible definition of utility.

See this discussion
http://crookedtimber.org/2015/07/24/utilitarianism-with-the-potentially-left-wing-bits-stripped-out/comment-page-2/

Egmont Kakarot-Handtke said...

Here it comes: the sexit
Comment on 'Freshwater's Wrong Turn'

There is political economics and theoretical economics. In political economics it suffices to tell a plausible story, in theoretical economics scientific standards are observed. Because economists since Adam Smith pursued these two hares simultaneously, coherence got eventually lost. As a result, economists never developed a theory about how the market economy works that satisfies the scientific criteria of material and formal consistency (Klant, 1994, p. 31).

Economics is a failed science. Therefore, Paul Romer is in for a second big surprise. Until now he thought: "As you would expect from an economist, the normative assertion in 'X is wrong because it undermines the scientific method' is based on what I thought would be a shared premise ..."

Now he learns: "In conversations with economists who are sympathetic to the freshwater economists ... it has become clear that freshwater economists do not share this premise. What I did not anticipate was their assertion that economists do not follow the scientific method, so it is not realistic or relevant to make normative statements of the form 'we ought to behave like scientists'."

What is the difference between political and theoretical economics?

"A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent." (Haack, 1997, p. 1)

The fact of the matter is that theoretical economics has from the very beginning been hijacked by the agenda pushers of political economics. Smith and Mill were agenda pushers against feudalism. Marx and Keynes were agenda pushers and so were Hayek and Friedman. However, all these economists insisted that they were doing science. This has changed now: "... the evidence ... suggests that freshwater economists differ sharply from other economists."

The freshwater economists simply state the obvious, that is, that they are committed to politics and not to science. This marks the beginning of a voluntary scientific exit (sexit for short). What Romer has not yet realized is that most saltwater economists have to leave through the same door.

Egmont Kakarot-Handtke

References
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL http://www.csicop.org/si/show/science_scientism_and_anti-science_in_the_age_of_preposterism.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

lagarita said...

This reminds me of the "we create reality" stuff from the neo-cons. Maybe it's just more infection of Straussian "ethics" at UofC (see Shadia Drury).

Lafayette said in reply to lagarita...

APART FROM BERNIE

{"we create reality"}

Their entire existence revolves around such vapid, empty simplisms because they have no theoretical substance to their politics. It is either their lack of intelligence or their selfish perfidy that reduces their theoretical foundation of political views.

They are hooked on the fallacy of wealth-creation as the sole credible goal/consequence of an economy. Piketty put that thought to shame in his work on Income Disparity, as did Domhoff on Wealth Disparity. The statistical facts (ie., the "numbers") could not be more clear.

What should bother us most is not only the generation of enormous wealth, and the influence it has on a moneyed electoral system, but the dynastic tendency of such riches. The Koch Bros are already the first generation - will we be contending with the political antics of second, or third, or fourth generations?

The last time historically that happened in Europe, called Inheritance Aristocracy, it all came apart in bloodshed.

And yet the better notion of Social Justice, which supposes that all humans are created with the equal right to fairness and equitability, has taken decades upon decades to come to the fore.

It is still no where near dominating political thought in America. Apart from Bernie, that is ...

Lafayette said...
LOOK IN THE MIRROR

{the braggadocio and trash-talking of the 1970s}

Of the 1970s?

This type is still the mainstay of American parlance, whether political or business or just blogging. The aggressiveness of the language employed knows no bounds.

The intent in commentary, whether verbal or written, whether political or otherwise, is overly combative and largely "ad hominem". The real subject of controversy is lost in the personalization of the rebuttals. The issues that largely determine the political consensus thus become secondary and confused.

Really 'n truly puerile ... like the children they were and they remain, particularly in politics. Propelled by one and only one goal - to win, win, win.

And without politics or politicians, what is a democracy? It's an autocracy. With them, its a manifested willfulness by a moneyed few to dominate electoral outcomes - and we are pawns in the game.

My point? As an electorate, the people we chose to represent us personify as well the kind of people we are. So, complaining about the politicos in LaLaLand on the Potomac is useless.

Seeking someone to blame? Look in the mirror ...

Junk Conferences by Tim Kovacs.

This an interesting new phenomenon when clueless researchers present bogus papers on junk conferences.
October 2008.

This page outlines the differences between good conferences, bad conferences and academic scams.

The purpose of conferences

Why would anyone organise a conference?

Why attend a conference?

Most of the motivations above are generally altruistic, but the last two in each list are not. Promoting the organisers' reputations and adding to your CV are not necessarily bad; this is how academia works. However, these four motivations result in a lot of low-quality work being published.

Quality

If your motivation for attending a confernce is to have a holiday or to add (uncritically) to your CV the quality of the conference won't matter much. In contrast, if you attend for the other reasons quality is a major concern. Imagine attending a conference and not making any useful contacts or coming across any good ideas: you would not have not gained much!

You might still consider this conference worthwhile because you got a publication out of it. After all, having publications may help impress your supervisor or thesis examiners or potential employers. Publications will also help your career as a scientist: you will be more likely to get funding, to be promoted, to attract students, to be invited to give talks and so on. However, quality is vital and there is a huge range in the quality of conferences and journals. These days it's possible to get anything published. In fact, in the famous SCIgen affair a computer-generated nonsense paper was accepted by a conference. As a result, publications in themselves mean little; what matters is their quality. In fact, if you publish in low-quality conferences, or, worse, junk conferences, you will find this hurts your reputation more that it helps.

Spam and junk conferences

A spam conference (or spamference) is one which is advertised with junk mail (spam). It is genuinely difficult to reach a large number of researchers in a particular area to advertise a conference, and some organisers of legitimate conferences are tempted into using junk mail. These conferences tend, however, to be lower quality ones, or new (or one-off) events which need to boost their attendence in this way. Well-established, high-quality conferences are well-known in their area and don't need to resort to junk mail. These are the conferences which count most on your CV.

The conferences which send the most junk mail tend to be junk conferences, which have little or no academic value and are only run to make a profit for the oraganisers. Some researchers participate to get a free holiday and a publication but others participate in good faith, not realising the nature of the event. The point of this page is to ensure that you are not one of hem.

Where the money goes

Most conferences charge a fee for attendance which is put toward the cost of running the event. Some events also raise money for a non-profit organisation with which they are affiliated. The Association for the Advancement of Artificial Intelligence is an example of such an organisation, and it is a legitimate one, although I don't know whether fees from their conferences contribute to the association.

Some conferences, especially larger ones, subcontract some of the non-academic organisational work. Many conferences, however, are organised entirely by volunteers, although there may be concessions to the main organisers such as free registration. Invited speakers generally get free registration, a contribution toward travel costs, and possibly an honorarium (a small payment). The details of these arrangements are not usually publicised and there is the potential for dubious use of funds, but as each incarnation of a particular conference series is generally organised by different people each year it is difficult for misuse of funds to persist.

Although I see no reason why for-profit conferences cannot be of good quality there are a number of junk conferences which are run solely for profit, and where the quality of work is given little or no consideration.

Warning signs

Here are some warning signs but note that bona fide conferences may show some of these warning signs; in particular many reputable conferences are held in nice places.

Open access journal scams

Recently open-access journals have begun to appear. These journals provide free access to readers on the web and charge authors to publish. This is a big improvement over the traditional model of subscribing to journals since it makes results freely available to all. However, it allows for a new type of scam.

In August 2008 I was invited to join the editorial board of a journal, which is normally quite an honour. I work in the area of the journal but didn't recognise the editor and decided to check him out on the web before replying. It soon turned out this was an open access journal scam, which was new to me. The "publisher" was in fact a single individual at a private address who was attempting to recruit academics to serve on his various editorial boards in an attempt to make them look legitimate and so attract others to the editorial boards and to submit papers. This is what a major publisher does when setting up a new journal, but a major publisher has the resources to do this properly (remember the section on quality!). This individual appeared to be working on his own and apparently is not affiliated with any insitution and doesn't even have a degree. This is something like trying to pass yourself off as a doctor without having gone to medical school.

See also

[Jun 2, 2008] Supply-Side Fairy Tales by Steve Waldman

Supply side economic (aka "voodoo economics") is a classic example of cargo cult science. Steve Waldman insightful comments on Greg Mankiw's proposal to cut corporate taxes... (hat hit to Mark Thoma)

Supply side fairy tales, by Steve Waldman: Greg Mankiw offers a strong endorsement of a proposal to cut the corporate income tax from 35 to 25 percent, claiming "It is perhaps the best simple recipe for promoting long-run growth in American living standards." ... A good case can be made for cutting or even eliminating the corporate income tax. But Mankiw's argument does not cohere.

Let's start positive. Mankiw is right to point out that the "incidence" of the corporate income tax might not in fact be as progressive as its proponents would wish. He quotes studies suggesting that workers end up paying 70% to 92% of the taxes in the form of lower wages. I'm skeptical of those numbers, but it is surely true that some fraction, perhaps even a large fraction, of the corporate tax burden falls on workers and customers rather than presumptively wealthier investors. Mankiw does us all a service by reminding us of this.

Then he tells us a fairy tale ...

... ... ...

Supply side economics is a nice story, a hopeful story. It offers a clean, plausible policy framework: encourage investment, always and everywhere, and prosperity is sure to follow. But this decade has been about a pure a test of that idea as we could hope for. Capital in the United States was incredibly cheap, and what did we do? We destroyed a lot of wealth. We don't need more capital (although we might soon, if our foreign backers get skittish). We need more discriminating capital. In the meantime, the only thing I'm sure "works" about the supply side story is that it shifts the tax burden from richer to poorer. I'd rather that stop working so well.

See also discussion Economist's View Supply-Side Fairy Tales

back to amateur science?

ben goertzel has some thoughts on how academic papers are stuffed with irrelevant filling, and how this impedes real progress:

what strikes me is how much pomp, circumstance and apparatus academia requires in order to frame even a very small and simple point. References to everything in the literature ever said on any vaguely related topic, detailed comparisons of your work to whatever it is the average journal referee is likely to find important -- blah, blah, blah, blah, blah.... A point that I would more naturally get across in five pages of clear and simple text winds up being a thirty page paper!

I'm writing some books describing the Novamente AI system -- one of them, 600 pages of text, was just submitted to a publisher. The other two, about 300 and 200 pages respectively, should be submitted later this year. Writing these books took a really long time but they are only semi-technical books, and they don't follow all the rules of academic writing -- for instance, the whole 600 page book has a reference list no longer than I've seen on many 50-page academic papers, which is because I only referenced the works I actually used in writing the book, rather than every relevant book or paper ever written. I estimate that to turn these books into academic papers would require me to write about 60 papers. To sculpt a paper out of text from the book would probably take me 2-7 days of writing work, depending on the particular case. So it would be at least a full year of work, probably two full years of work, to write publishable academic papers on the material in these books!

the lack of risk-taking is particularly evident in computer science:
Furthermore, if as a computer scientist you develop a new algorithm intended to solve real problems that you have identified as important for some purpose (say, AI), you will probably have trouble publishing this algorithm unless you spend time comparing it to other algorithms in terms of its performance on very easy "toy problems" that other researchers have used in their papers. Never mind if the performance of an algorithm on toy problems bears no resemblance to its performance on real problems. Solving a unique problem that no one has thought of before is much less impressive to academic referees than getting a 2% better solution to some standard "toy problem." As a result, the whole computer science literature (and the academic AI literature in particular) is full of algorithms that are entirely useless except for their good performance on the simple "toy" test problems that are popular with journal referees....
his first scenario makes me wonder if amateur scientists could again make meaningful contributions to research, combined with a wiki-like process that (hopefully) would identify promising directions better than today's peer reviews:
And so, those of us who want to advance knowledge rapidly are stuck in a bind. Either generate new knowledge quickly and don't bother to ram it through the publication mill ... or, generate new knowledge at the rate that's acceptable in academia, and spend half your time wording things politically and looking up references and doing comparative analyzes rather than doing truly productive creative research.



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