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Fifth Column of Financial Oligarchy: Chicago School of Market Fundamentalism

News Recommended Books Recommended Links Economism and abuse of economic theory in American politics The efficient markets hypothesis Milton Friedman Monetarism Fiasko
Critique of neoclassical economics Supply Side or Trickle down economics Free Markets Newspeak The Idea of Dynamic Stochastic General Equlibrium Rational expectations scam Hyman Minsky Samuelson bastard Keynesianism
Invisible hand Robert Lucas  Thomas Sargent Gene Fama Freakonomist Levitt -- a one dimentional idiot Gary Becker Richard Posner
John Kenneth Galbraith Criminal negligence in financial regulation Cargo Cult Science Inflation vs Deflation Lysenkoism Humor Etc

Neoclassicism is the ideology of the plutocracy which still governs the USA

Lewis L. Smith

Neoclassical economics—and especially that derived from Milton Friedman’s pen—is mad, bad, and dangerous to know.

Steve Keen

"The only thing in common between noted [Chicago school] economists is sheer incompetence"

Willem Buiter

For those who buy into fairy tale about how markets operate independently of political power, and  state’s instruments of violence (the police and the military), I have a nice piece of oceanfront property in Arizona.

Chicago neoclassical economics school is a well known pseudo-science school, one of the pillars of Economic Lysenkoism (along with  Supply Side Economics).  This is an economic cult, an ideology of financial oligarchy. So it is more proper to this school not neoclassical, but as aptly suggested by Bill Black “theoclassical”   or  Chicago Ponzinomics.  It is a neoliberal phenomenon, not neoclassical. High level of support by financial oligarchy was crucial for it break into mainstream and even (despite compete absurdness of its postulates) make it dominant during 1980-2000. 

Like in Lysenkoism, and high demand sects anybody who strays from the cult is in danger of being ostracized. As Mark Thoma observed:

Some years ago, when I first presented an empirical paper questioning some of the conventional views on trade to a high profile economics conference, a member of the audience (a very prominent economist and a former co-author of mine) shocked me with the question "why are you doing this?

There is a useful part of neoclassical economy related to thinking about an aggregate social phenomena in terms of costs and benefits of individual participants, and that can be sometimes (but not always) as a useful supplementary approach. Bastartized version of this notion which tries to imply cost-benefit motives in all human interactions is called Freakonomics. Still you can view some choices people make as tradeoffs between desired goals and social constraints (which can interpreted as costs). 

Still neoclassical economics as practiced by Chicago school  is driven by ideology and financed by financial oligarchy.

And like  Trofim Lysenko and his followers those people are as close to criminals as one can get.  Like Rabbies and Catholic Priests can be criminals, the same is true about people in academic mantles. Corruption of academics is nothing new, but corruption of economists is a very dangerous mass form of  white-collar crime as close to Madoff  and his associates as one can get. This is the way we should look at the Chicago schools: kind of incarnation of Lysenko henchmen or, if you wish, Chicago mafia in a university environment. Actually similar way of thinking can be applied to Harvard (see Harvard Mafia, Andrei Shleifer and the economic rape of Russia ).

Is neoclassical economics a mafia? Sort of, says Christopher Hayes in a very well-written and very interesting piece in The Nation. He says orthodox economists are a close-knit group and are quick to penalize those among them or from outside who overstep the boundaries. Here is an excerpt:

So extreme is the marginalization of heterodox economists, most people don't even know they exist. Despite the fact that as many as one in five professional economists belongs to a professional association that might be described as heterodox, the phrase "heterodox economics" has appeared exactly once in the New York Times since 1981. During that same period "intelligent design," a theory endorsed by not a single published, peer-reviewed piece of scholarship, has appeared 367 times.

It doesn't take much to call forth an impressive amount of bile from heterodox economists toward their mainstream brethren. John Tiemstra, president of the Association for Social Economics and a professor at Calvin College, summed up his feelings this way: "I go to the cocktail parties for my old schools, MIT and Oberlin, and people are all excited about Freakonomics. I kind of wince and go off to another corner or have another drink." After the EPI gathering, Peter Dorman, an economist at Evergreen State College with a gentle, bearded air, related an e-mail exchange he once had with Hal Varian, a well-respected Berkeley economist who's moderately liberal but firmly committed to the neoclassical approach. Varian wrote to Dorman that there was no point in presenting "both sides" of the debate about trade, because one side--the view that benefits from unfettered trade are absolute--was like astronomy, while any other view was like astrology. "So I told him I didn't buy the traditional trade theory," Dorman said. "'Was I an astrologer?' And he said yes!"

Please note that some of the most close to Lysenkoism figures at Chicago, such as Cochrane and Fama, are in the business school rather than the econ department.   And they were key enablers of  Goldman Sacks and Co. looters. Deregulation wave was promoted by right wing extremists who recruited corrupted academicians like Milton Friedman to perform specific role of Trojan horse to undermine New Deal.  He managed to made the "invisible hand" a prefect pocket picker!  And the method of spreading influence was essentially borrowed from the Lysenko book: control the economic department and those who went to college and studied those theories in the 70’s and 80’s would then go to Wall St and Government and enact them. Control the key academic magazines and conferences and any aspiring economists need either to conform or leave the field.

Here is one telling comment about corruption of those modern day Lysenkoists in the blog Crooked Timber

ogmb 09.18.09 at 12:01 pm

...Cochrane is the AQR Capital Management Professor of Finance at the University of Chicago Booth [formerly Graduate] School of Business. Which incidentally also makes his whining that Krugman ‘accuses us literally of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks”’ a bit malnourished in the introspection department, coming from someone who holds a chair sponsored by a quantitative trading firm at a school sponsored by the founder of an EMH investment firm. (Nevermind that Krugman never, literally or otherwise, accused Cochrane and his peers of selling out to Wall Street…)

In this ideology Milton Friedman has playied the role of false prophet. Surrounded by "lesser giants" of neoclassical economics,  producing continued stream of detached from reality papers and speeches. It also includes several clown who as Krugman noted have some qualities of irritable adolescents, but actually are proper heirs of Academician Trofim Lysenko:

And that same adolescent quality was evident in the reactions to the Obama administration’s attempts to deal with the crisis — as Brad DeLong points out, people like Robert Lucas and John Cochrane (not to mention Richard Posner, who isn’t a macroeconomist but gets his take from his colleagues) didn’t say that when serious scholars like Christina Romer based policy recommendations on Keynesian economics, they were wrong; the freshwater crowd declared that anyone with Keynesian views was, by definition, either a fool or intellectually dishonest. So the freshwater outrage over finding their own point of view criticized is, you might think, a classic case of people who can dish it out but can’t take it.
But it’s actually even worse than that.
When freshwater macro came in, there was an active purge of competing views: students were not exposed, at all, to any alternatives. People like Prescott boasted that Keynes was never mentioned in their graduate programs. And what has become clear in the recent debate — for example, in the assertion that Ricardian equivalence rules out any effect from government spending changes, which is just wrong — is that the freshwater side not only turned Keynes into an unperson, but systematically ignored the work being done in the New Keynesian vein. Nobody who had read, say, Obstfeld and Rogoff would have been as clueless about the logic of temporary fiscal expansion as these guys have been. Freshwater macro became totally insular.And hence the most surprising thing in the debate over fiscal stimulus: the raw ignorance that has characterized so many of the freshwater comments. Above all, we’ve seen the phenomenon of well-known economists “rediscovering” Say’s Law and the Treasury view (the view that government cannot affect the overall level of demand), not because they’ve transcended the Keynesian refutation of these views, but because they were unaware that there had ever been such a debate.It’s a sad story. And the even sadder thing is that it’s very unlikely that anything will change: freshwater macro will get even more insular, and its devotees will wonder why nobody in the real world of policy and action pays any attention to what they say.

The proper label for neo-classical economics might be "theological voluntarism", the term which has some academic aura... There are several issues here:

  1. Excessive dependence or even open prostitution to the financial oligarchy. It's deplorable but probably unavoidable as the grip of financial community of economic profession does not requires any additional commentary. Also there are always exceptions to the rule.
  2. Mathematical masturbation instead of science (Mathiness). When, for example, a paper that propose even a linear equation (or God forbid differential equation) does not provide any estimate of errors of input data such a paper in a narrow sense can be called mathematical masturbation. Classic example here would be any paper that has inflation as an input variable. In a more broad sense this occurs when research paper contains results or mathematical model which rely on idealised, with little connections to reality postulates about the structure of economic activities. Many supply/demand models belong to this category as they rely on existence of equilibrium between supply and demand and/or are ignoring Minsky instability hypothesis. Most neo-classical economics can be called a theory in a desperate search for suitable reality.
  3. Relying on discredited and openly anti-scientific assumptions or hypothesis. Examples include, but not limited to "supply side voodoo", "monetarism", "Taylor rule", "permanent equilibrium fallacy", "invisible hand" (both as a postulate about absence of manipulation of the markets and the idea that "free markets lead to efficient outcomes" disregarding the role of government and almost permanent government intervention as well as issues of economic rent and taxation of participants to support an aristocracy or oligarchy).

Chicago (or as some called it freshwater) school specializes in deification of the market (often in the form of "invisible hand" deification, see The Invisible Hand, Trumped by Darwin - NYTimes.com). 

The Measured Version of My Screaming
John Quiggin finally makes explicit What Everyone Knows: that the clusterfuck that has been made of Macroeconomics is due largely to an attempt to leverage (insufficiently robust) Microeconomic Theory:
the search for a macroeconomic theory founded on (roughly) neoclassical micro, which has been the main direction of macro research for 40 years or so, was a wrong turning, forcing us to retrace our steps and look for another route.
Think Lucas and Prescott as Mirror-Moses, leading gullible Macroites further and further from the Promised Land, themselves evermore unable to ask for directions.* Couldn't have said it better, or with so few expletives, myself. But then, that's why he has a book contract.

Read the Whole Thing.

Here are some postulates of Chicago school as described in  Economics: A Clandestine Religion Masquarading As A Science ( The American Monetary Institute):

As Wikipedia noted

...Chicago School economists are associated with Washington Consensus,[12][13] which John Williamson says is "disappointing".[14]

The history of Chicago school is complex (THE CHICAGO SCHOOL):

The "Chicago School" is perhaps one of the better known American "schools" of economics.   In its strictest sense, the "Chicago School"  refers to the approach of the members of the Department of Economics at the University of Chicago over the past century.  In a looser sense, the term "Chicago School" is associated with a particular brand of economics which adheres strictly to Neoclassical price theory in its economic analysis, "free market" libertarianism in much of its policy work and a methodology which is relatively averse to too much mathematical formalism and willing to forego careful general equilibrium reasoning in favor of more results-oriented partial equilibrium analysis.  In recent years, the "Chicago School" has  been associated with "economic imperialism", i.e. the application of economic reasoning to areas traditionally considered the prerogative of other fields such as political science, legal theory, history and sociology.  

The "Chicago School" has had various phases with quite different characteristics.  Nonetheless, the main consistent factor seems to be that it has always held a unique,distinct and influential place in the realm of economics at any time.  In the modern day, under the "Chicago School" umbrella, we can count various further schools of thought which are discussed in more detail elsewhere:  e.g. Monetarism in the 1960s, New Classical/Real Business Cycle macroeconomics from the 1970s until today, and more recently, the New Institutionalism, New Economic History and Law-and-Economics movements.

The University of Chicago was founded in 1892 by oil magnate John D. Rockefeller.   Its initial economics department, under the leadership of the American apologist, J. Laurence Laughlin, counted radical American Institutionalists such as Thorstein Veblen, Wesley Mitchell and John Maurice Clark among its faculty.  In this period, the department was like any other in the United States.

The "Chicago School" really began in the 1920s with the diumvurate of Frank H. Knight and Jacob Viner.  They were, for the most part, theoreticians (Knight more in the Jevonian-Austrian tradition, Viner leaning towards the Marshallian).  In an age when empiricism ruled most of American economics, Knight and Viner set up the economics department at Chicago as a bastion of counter-institutionalism and, as such, the department soon acquired something of a "siege" mentality.    Also at Chicago during this time were the "Mathematical Trio" --   Oskar Lange, Henry Schultz and Paul H. Douglas -- economists with a particular bent for the theoretical approach of the Lausanne School.   Younger faculty included monetary theorists Henry C. Simons and Lloyd Mints.

The characteristics of the early Chicago School of 1920-1950 differ considerably from the later Chicago School.  They were highly suspicious of "positivistic" economic methodology and denounced economic imperialism, arguing for a confined role for economic analysis (esp. Knight).  They were suspicious of the efficiency claims of laissez-faire economics, arguing for it only on a "non-consequential" basis.  They welcomed active government policies to cure recessions (esp. Viner's recommendations on "reinflating" the economy, and Simons's  "Chicago Plan" for counter-cyclical monetary policy), and counted a fully-fledged  socialist in their ranks (Lange).   Furthermore, most of the faculty was not averse to rigorous, theoretical general equilibrium reasoning, but were leading practitioners of the art (Lange, Schultz, Douglas).

However, like the later Chicago School, the early Chicago School was hostile to "alternative" economic paradigms.  For the most part, they did not welcome the Keynesian Revolution in macroeconomics and denounced the Monopolistic Competition approach in microeconomic theory.  To a good extent, the issues these "alternative" paradigms purported to solve, they felt could be handled reasonably well within the confines of Neoclassical theory. 

The economics department underwent an upheaval during the 1940s.  Schultz died with tragic suddenness, Viner left for Princeton, Lange left for political life in Poland and Douglas became a U.S. Senator.  Knight, whose interests were moving away from economic theory, went into semi-retirement, handing the reigns of the department over to Simons, Mints and Director.

There was a new injection of blood during this period as the department tried to regain its bearings.  The first lurch was towards Walrasian economics.  Several students associated with the departed Lange and Schultz remained -- such as Yntema and Mosak -- and Chicago went on to welcome Jacob Marschak, Tjalling Koopmans and the the Cowles Commission right next door.  The Walrasian period lasted until 1955, when it moved (was hounded off?) to Yale.

The 1940s also saw the appointment of development theorists H. Gregg Lewis and Bert F. Hoselitz. These appointments were accompanied by a group of agricultural economists, Theodore W. Schultz, D. Gale Johnson and Walter Nicholls, who had been left Iowa State in protest over one of the most famous violations of academic freedom. Apparently, the powers-that-be of Iowa, home of the American dairy industry, had pressured the university to force a young economist to recant a study in which he had concluded that margarine was no less nutritious than butter.

In the 1960s, the department began to congeal into a new shape, led by George J. Stigler and Milton Friedman.   This is what became the "Second" Chicago School, which is perhaps the most famous and polemical one.  Stigler and Friedman were avowed Marshallians, and eschewed the methodology of the now-departed Walrasians of the Cowles Commission.  As the contemporary ditty went:

"I read my Marshall completely through
From beginning to end and backward too
I read my Marshall so carefully
That now I am Professor at U of C". 

The Stigler-Friedman period was characterized by faithful adherence to Neoclassical economics and maintained itself dead against the concept of market failures, reinforcing the Chicago School stance against  imperfect competition and Keynesian economics. Through their influential journals -- notably, the Journal of Political Economy and the Journal of Law and Economics -- the research programme of the Chicago School was advanced and diffused.  It was the Second Chicago School that is often accused of being the modern version of  Manchester School liberalism (or, as some maintain, the more conservative tradition of  American apologism).

In microeconomics, led by George Stigler, the guiding maxim in the Chicago approach was to preserve the Neoclassical paradigm whenever possible, never to doubt it. When there is no obvious solution to a particular problem, the recommended course was to extend the Neoclassical paradigm by incorporating new concepts into it that would make the subject matter amenable to economic analysis. Examples of extensions to the Neoclassical paradigm conceived by Chicago economists are search theory (due to George Stigler), human capital theory (due to Gary Becker and T.W. Schultz) and property rights/transaction cost theory (due to Ronald H. Coase).  

The Chicago School's impulse for extension of Neoclassical price theory is largely responsible for the "imperialist" character of which it is often accused.   Business and finance, previously the prerogative of practitioners and business schools, were brought into the economic spotlight by Chicago economists such as A.W. Wallis, Harry Markowitz, Merton H. Miller and Eugene F. Fama.  Further afield, political science and institutional theory were brought into Neoclassical economics by Chicago School economists such as G.J. Stigler, R.H. Coase, James Buchanan, Armen Alchian and Harold Demsetz.  Economic history were given a Neoclassical reading by Robert W. Fogel and Douglas C. North, while the Chicago Law School (esp. Richard Posner and William M. Landes) used economics to rethink swathes of legal theory.  Perhaps most famously, sociological issues like addiction, family and even marriage were given a thoroughly economic interpretation in the hands of Gary S. Becker and Jacob Mincer.

[Naturally, not all the "Chicago School" economists are at the University of Chicago, e.g. Alchian, Mincer, North, etc., but it is not unreasonable to argue that they are part of that school of thought.]

[George P. Shultz, better known as the Secretary of Labor and subsequently of the Treasury under Richard Nixon and later Secretary of State under Ronald Reagan, Shultz was also professor of industrial relations and later dean of the Business School at Chicago during the 1960s.]

[It is revealing that the adamantly anti-imperialist Friedrich A. von Hayek,  who was at Chicago during the 1950s, was confined to an appointment on an interdisciplinary "Committee on Social Thought", rather than the economics department proper.  Walrasian theory, which has tended to be of more limited scope, has also had very little presence at Chicago over the past half-century: the only theorist to have successfully infiltrated the Chicago citadel was Hugo Sonnenschein, but then he came as president of the university.  With the exception of the work of Lester Telser, the "alternative" paradigm of game theory has also been conspicuously absent until recently.]

In macroeconomics, the most renowned phase of the Chicago School has been that of "Monetarism" under the leadership of Milton Friedman, its best-known advocate. For the longest time, Chicago was the only school in America not swept by the Keynesian Revolution (the presence of Lloyd A. Metzler  for a brief period on the faculty was exceptional). This does not mean that the old Chicago School was opposed to government intervention - indeed, Viner's policy conclusions are at times hard to distinguish from Keynes'sBut in Friedman's Monetarism, it found a theoretical and empirical means by which to begin rolling back the Keynesian revolution. Although prominent in the 1960s, Friedman has always claimed that the main tenets of Monetarism can be found in the work of early Chicago School economists such as Henry Simons.  (see our  survey of Monetarism).

Monetarism has since given way to the more mathematically rigorous "New Classical" economics of Robert E. Lucas in the 1970s and 1980s.  The quantitatively-oriented "Walrasian" flavor of New Classicism meant that the appointments of Robert Lucas, Thomas Sargent, Michael Woodford and Robert Townsend at Chicago met with quite some opposition from the older hands.  Nonetheless, in its policy conclusions and rigorous adherence to Neoclassical theory, the New Classical school remains by most accounts the natural inheritor of the Chicago School mantle in modern macroeconomics.

Despite, or perhaps as a result of, its mischievous but always unique perspective, the University of Chicago has taken in a lion's share of Nobel Prizes in economics: Milton Friedman, T.W. Schultz, G.J.Stigler, R.H. Coase, G.S. Becker, M.H. Miller, R.W. Fogel and R.E.Lucas were all on the Chicago faculty when they received their awards.  If we were to add  Chicago-trained economists, the list of Nobelists would expand to include Hebert Simon, James Buchanan, Harry Markowitz and Myron Scholes.

Early Chicago of 1892 - 1920s

The First Chicago School of 1920-1945

Post-War Chicago of the 1945-1960

The Second Chicago School of the 1960s-1970s

The Third Chicago School (1970s-Today)

Chicago Business and Finance

Resources on the Chicago School


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[Dec 04, 2017] The Phillips Curve, Again

Dec 04, 2017 | everydayecon.wordpress.com

The Phillips Curve is back. In saying so, I do not mean to imply that being "back" refers to a sudden reappearance of a stable empirical relationship between unemployment (or the output gap) and inflation. The Phillips Curve is back in the same way that conspiracy theories about the assassination of JFK are back after the recent release of government documents. In other words, the Phillips Curve is something that people desperately want to believe in, despite the lack of evidence.

The Phillips Curve is all the rage among central bankers. Since the Federal Reserve embarked on quantitative easing, they have been ensuring the public that QE would not be inflationary because of the slack in the economy. Until labor market conditions tighten, there would be little threat of inflation. Then, as the labor market tightened, the Federal Reserve warned that they might have to start raising interest rates to prevent these tightening conditions from creating inflation.

What is remarkable about this period is that the Federal Reserve has undershot its target rate of inflation throughout this entire period -- and continues to do so today. So what does this tell us about the Phillips Curve and what can we learn about monetary policy?

If one looks at the data on unemployment and inflation (or even the output gap and inflation), you could more easily draw Orion the Hunter as you could a stable Phillips Curve. Fear not, sophisticated advocates of the Phillips Curve will say. This is simply the Lucas Critique at play here. If a Phillips Curve exists, and if the central bank tries to exploit it, then it will not be evident in the data. In fact, if you take a really basic 3-equation-version of the New Keynesian model, there is a New Keynesian Phillips Curve in the model. However, when you solve for the equilibrium conditions, you find that inflation is a function of demand shocks, technology shocks, and unexpected changes in interest rates. The output gap doesn't appear in the solution. But fear not, this simply means that monetary policy is working properly. The Phillips Curve is apparently like the observer effect in quantum mechanics in that when we try to observe the Phillips Curve, we change the actual result (this is a joke, please do not leave comments about why I've misunderstood the observer effect).

... ... ...

What all of this means is that even given the fact that the New Keynesian model features an equation that resembles the Phillips curve, this does not imply that there is some predictive power that comes from thinking about this equation in isolation. In addition, it certainly does not imply that changes in the output gap cause changes in the rate of inflation. There is no direction of causation implied by this one equilibrium condition.

[Nov 29, 2017] Economics is a Belief System - and We are Ruled by Fundamentalists

Highly recommended!
Notable quotes:
"... During the two decades following the neoliberal economists' take-over of Western governments in the 1980s, many felt that the almost mystical terms of economics - such as derivatives, hedging, leverage, contangos, etc - were beyond the understanding of most ordinary people. ..."
"... They pursued them as a matter of faith in the market and its processes, despite the apparent warning signs of their imminent failure. ..."
"... as within many custom or belief systems, what economics enshrines is a social order. One where a dominant minority are able to take a small quantity of wealth from each member of the majority in order to maintain their higher status. ..."
"... idea of economics as an exploitative mechanism is echoed in the cover picture of the book, Bosch's The Conjurer ..."
"... Within its exposition of economics as a quasi-religious theory, Brian Davey's book helps us to understand why economic theory is driving us toward a global system failure - and why politics and economics are incapable of responding to the pressing ecological crisis which the pursuit of economic growth has spawned. ..."
Nov 09, 2015 | resilience.org

by Paul Mobbs, originally published by The Ecologist |

Brian Davey's new book, Credo: Economic Beliefs in a World in Crisis, is an analysis of economic theory as if it were a system of religious belief.

It's a timely book. The simplistic, perhaps 'supernatural' assumptions which underpin key parts of economic theory demand far more attention. It's a debate we've failed to have as a society.

... ... ...

During the two decades following the neoliberal economists' take-over of Western governments in the 1980s, many felt that the almost mystical terms of economics - such as derivatives, hedging, leverage, contangos, etc - were beyond the understanding of most ordinary people.

And without understanding those terms, irrespective of our gut feeling that there was something wrong, how could we challenge the political lobby those theories had put into power? In the end it took the financial crash of 2007/8 to demonstrate that those in charge of this system didn't understand the complexity and risk of those practices either.

They pursued them as a matter of faith in the market and its processes, despite the apparent warning signs of their imminent failure. Those outside 'orthodox' economics could already see where the economy was heading in the longer-term.

Question is, did economists learn anything from that failure? Or, through austerity, have they once again committed us to their dogmatic belief system, unchanged by that experience?

... ... ...

However, through simple hubris or optimism bias, the political class has been convinced that 'fracking' is a solution to our economic woes - even though there is a paucity of verifiable evidence to demonstrate those claims, and it has already lost billions of investors money.

Economics is a reflection of power

Ultimately though, as within many custom or belief systems, what economics enshrines is a social order. One where a dominant minority are able to take a small quantity of wealth from each member of the majority in order to maintain their higher status.

This idea of economics as an exploitative mechanism is echoed in the cover picture of the book, Bosch's The Conjurer - where a magician distracts the public with a sleight of hand trick so that they can be more easily robbed by his associate.

Again, in a world where we're hitting the limits to human material growth, political models of well-being based upon wealth and consumption are damaging to human society in the long-term. The evidence that we're heading for a longer-term failure is there, as was the case with the warning signs before the 2007 crash. The problem is that those in positions of power do not wish to see it.

... ... ...

Within its exposition of economics as a quasi-religious theory, Brian Davey's book helps us to understand why economic theory is driving us toward a global system failure - and why politics and economics are incapable of responding to the pressing ecological crisis which the pursuit of economic growth has spawned.

Contrary to the economic hubris of many world leaders, set alongside the reality of ecological limits humanity is not 'too big to fail'.

[Nov 29, 2017] Michael Hudson: The Wall Street Economy is Draining the Real Economy

Highly recommended!
Notable quotes:
"... An interview by Gordon T. Long of the Financial Repression Authority. Originally published at his website ..."
"... One of the most important distinctions that investors have to understand is the difference between secular and cyclical trends Let us begin with definitions from the Encarta® World English Dictionary: ..."
"... Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period of time ..."
"... Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions of an event or phenomenon that occurs regularly ..."
"... Secular stagnation is when the predators of finance have eaten too many sheeple. ..."
"... Real estate rents in this latest asset bubble, whether commercial or residential, appear to have been going up in many markets even if the increases are slowing. That rent inflation will likely turn into rent deflation, but that doesn't appear to have happened yet consistently. ..."
"... Barter has always existed and always will. Debt money expands and contracts the middle class, acting as a feedback signal, which never works over the long term, because the so encapsulated system can only implode, when natural resource liquidation cannot be accelerated. The whole point is to eliminate the initial requirement for capital, work. Debt fails because both sides of the same coin assume that labor can be replaced. The machines driven by dc technology are not replacing labor; neither the elites nor the middle class can fix the machines, which is why they keep accelerating debt, to replace one failed technology only to be followed by the next, netting extortion by whoever currently controls the debt machine, which the majority is always fighting over, expending more energy to avoid work, like the objective is to avoid sweating, unless you are dumb enough to run on asphalt with Nike gear. ..."
"... . . . The whole argument for privatization, for instance, is the opposite of what was taught in American business schools in the 19th century. The first professor of economics at the Wharton School of Business, which was the first business school, was Simon Patten. He said that public infrastructure is a fourth factor of production. But its role isn't to make a profit . It's to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions . Obviously these financialized charges are factored into the price system and raise the cost of living and doing business . ..."
www.nakedcapitalism.com
April 29, 2016 by Yves Smith An interview by Gordon T. Long of the Financial Repression Authority. Originally published at his website

GORDON LONG: Thank you for joining us. I'm Gordon Long with the Financial Repression Authority. It's my pleasure to have with me today Dr. Michael Hudson Professor Hudson's very well known in terms of the FIRE economy to-I think, to a lot of our listeners, or at least he's recognized by many as fostering that concept. A well known author, he has published many, many books. Welcome, Professor Hudson.

MICHAEL HUDSON: Yes.

LONG: Let's just jump into the subject. I mentioned the FIRE economy cause I know that I have always heard it coming from yourself-or, indirectly, not directly, from yourself. Could you explain to our listeners what's meant by that terminology?

HUDSON: Well it's more than just people getting fired. FIRE is an acronym for Finance, Insurance and Real Estate. Basically that sector is about assets, not production and consumption. And most people think of the economy as being producers making goods and services and paying labor to produce them – and then, labour is going to buy these goods and services. But this production and consumption economy is surrounded by the asset economy: the web of Finance, Insurance, and Real Estate of who owns assets, and who owes the debts, and to whom.

LONG: How would you differentiate it (or would you) with what's often referred to as financialization, or the financialization of our economy? Are they one and the same?

HUDSON: Pretty much. The Finance, Insurance, and Real Estate sector is dominated by finance. 70 to 80% of bank loans in North America and Europe are mortgage loans against real estate. So instead of a landowner class owning property clean and clear, as they did in the 19 th century, now you have a democratization of real estate. 2/3 or more of the population owns their own home. But the only way to buy a home, or commercial real estate, is on credit. So the loan-to-value ratio goes up steadily. Banks lend more and more money to the real estate sector. A home or piece of real estate, or a stock or bond, is worth whatever banks are willing to lend against it

As banks loosen their credit terms, as they lower their interest rates, take lower down payments, and lower amortization rates – by making interest-only loans – they are going to lend more and more against property. So real estate is bid up on credit. All this rise in price is debt leverage. So a financialized economy is a debt-leveraged economy, whether it's real estate or insurance, or buying an education, or just living. And debt leveraging means that a larger proportion of assets are represented by debt. So debt equity ratios rise. But financialization also means that more and more of people's income and corporate and government tax revenue is paid to creditors. There's a flow of revenue from the production-and-consumption economy to the financial sector.

LONG: I don't know if you know Richard Duncan. He was with the IMF, etc, and lives in Thailand. He argues right now that capitalism is no longer functioning, and really what he refers to what we have now is "creditism." Because in capitalism we have savings that are reinvested into productive assets that create productivity, which leads to a higher level of living. We're not doing that. We have no savings and investments. Credit is high in the financial sector, but it's not being applied to productive assets. Is he valid in that thinking?

HUDSON: Not as in your statement. It's confused.

LONG: Okay.

HUDSON: There's an enormous amount of savings. Gross savings. The savings we have that are mounting up are just about as large as they've ever been – about, 18-19% of the US economy. They're counterpart is debt. Most savings are lent out to borrowers se debt. Basically, you have savers at the top of the pyramid, the 1% lending out their savings to the 99%. The overall net savings may be zero, and that's what your stupid person from the IMF meant. But gross savings are much higher. Now, the person, Mr. Duncan, obviously-I don't know what to say when I hear this nonsense. Every economy is a credit economy.

Let's start in Ancient Mesopotamia. The group that I organized out of Harvard has done a 20-study of the origins of economic structuring in the Bronze Age, even the Neolithic, and the Bronze Age economy – 3200 BC going back to about 1200 BC. Suppose you're a Babylonian in the time of Hammurabi, about 1750 BC, and you're a cultivator. How do you buy things during the year? Well, if you go to the bar, to an ale woman, what she'd do is write down the debt that you owe. It was to be paid on the threshing floor. The debts were basically paid basically once a year when the income was there, on the threshing floor when the harvest was in. If the palace or the temples would advance animals or inputs or other public services, this would be as a debt. It was all paid in grain, which was monetized for paying debts to the palace, temples and other creditors.

The IMF has this Austrian theory that pretends that money began as barter and that capitalism basically operates on barter. This always is a disinformation campaign. Nobody believed this in times past, and it is a very modern theory that basically is used to say, "Oh, debt is bad." What they really mean is that public debt is bad. The government shouldn't create money, the government shouldn't run budget deficits but should leave the economy to rely on the banks. So the banks should run and indebt the economy.

You're dealing with a public relations mythology that's used as a means of deception for most people. You can usually ignore just about everything the IMF says. If you understand money you're not going to be hired by the IMF. The precondition for being hired by the IMF is not to understand finance. If you do understand finance, you're fired and blacklisted. That's why they impose austerity programs that they call "stabilization programs" that actually are destabilization programs almost wherever they're imposed.

LONG: Is this a lack of understanding and adherence to the wrong philosophy, or how did we get into this trap?

HUDSON: We have an actively erroneous view, not just a lack of understanding. This is not by accident. When you have an error repeated year after year after year, decade after decade after decade, it's not really insanity doing the same thing thinking it'll be different. It's sanity. It's doing the same thing thinking the result will be the same again and again and again. The result will indeed be austerity programs, making budget deficits even worse, driving governments further into debt, further into reliance on the IMF. So then the IMF turns them to the knuckle breakers of the World Bank and says, "Oh, now you have to pay your debts by privatization". It's the success. The successful error of monetarism is to force countries to have such self-defeating policies that they end up having to privatize their natural resources, their public domain, their public enterprises, their communications and transportation, like you're seeing in Greece's selloffs. So when you find an error that is repeated, it's deliberate. It's not insane. It's part of the program, not a bug.

LONG: Where does this lead us? What's the roadmap ahead of us here?

HUDSON: A thousand years ago, if you were a marauding gang and you wanted to take over a country's land and its natural resources and public sector, you'd have to invade it with military troops. Now you use finance to take over countries. So it leads us into a realm where everything that the classical economists saw and argued for – public investment, bringing costs in line with the actual cost of production – that's all rejected in favor of a rentier class evolving into an oligarchy. Basically, financiers – the 1% – are going to pry away the public domain from the government. Pry away and privatize the public enterprises, land, natural resources, so that bondholders and privatizers get all of the revenue for themselves. It's all sucked up to the top of the pyramid, impoverishing the 99%.

LONG: Well I think most people, without understanding economics, would instinctively tell you they think that's what's happening right now, in some way.

HUDSON: Right. As long as you can avoid studying economics you know what's happened. Once you take an economics course you step into brainwashing. It's an Orwellian world.

LONG: I think you said it perfectly well there. Exactly. It gets you locked into the wrong way of thinking as opposed to just basic common sense. Your book is Killing the Host . What was the essence of its message? Was it describing exactly what we're talking about here?

HUDSON: Finance has taken over the industrial economy, so that instead of finance becoming what it was expected to be in the 19 th century, instead of the banks evolving from usurious organizations that leant to governments, mainly to wage war, finance was going to be industrialized. They were going to mobilize savings and recycle it to finance the means of production, starting with heavy industry. This was actually happening in Germany in the late 19 th century. You had the big banks working with government and industry in a triangular process. But that's not what's happening now. After WW1 and especially after WW2, finance reverted to its pre-industrial form. Instead of allying themselves with industry, as banks were expected to do, banks allied themselves with real estate and monopolies, realizing that they can make more money off real estate.

The bank spokesman David Ricardo argued against the landed interest in 1817, against land rent. Now the banks are all in favor of supporting land rent, knowing that today, when people buy and sell property, they need credit and pay interest for it. The banks are going to get all the rent. So you have the banks merge with real estate against industry, against the economy as a whole. The result is that they're part of the overhead process, not part of the production process.

LONG: There's a sense that there's a crisis lying ahead in the next year, two years, or three years. The mainstream economy's so disconnected from Wall Street economy. What's your view on that?

HUDSON: It's not disconnected at all. The Wall Street economy has taken over the economy and is draining it. Under what economics students are taught as Say's Law, the economy's workers are supposed to use their income to buy what they produce. That's why Henry Ford paid them $5 a day, so that they could afford to buy the automobiles they were producing.

LONG: Exactly.

HUDSON: But Wall Street is interjecting itself into the economy, so that instead of the circular flow between producers and consumers, you have more and more of the flow diverted to pay interest, insurance and rent. In other words, to pay the FIRE sector. It all ends up with the financial sector, most of which is owned by the 1%. So, their way of formulating it is to distract attention from today's debt quandary by saying it's just a cycle, or it's "secular stagnation." That removes the element of agency – active politicking by the financial interests and Wall Street lobbyists to obtain all the growth of income and wealth for themselves. That's what happened in America and Canada since the late 1970s.

LONG: What does an investor do today, or somebody who's looking for retirement, trying to save for the future, and they see some of these things occurring. What should they be thinking about? Or how should they be protecting themselves?

HUDSON: What all the billionaires and the heavy investors do is simply try to preserve their wealth. They're not trying to make money, they're not trying to speculate. If you're an investor, you're not going to outsmart Wall Street billionaires, because the markets are basically fixed. It's the George Soros principle. If you have so much money, billions of dollars, you can break the Bank of England. You don't follow the market, you don't anticipate it, you actually make the market and push it up, like the Plunge Protection Team is doing with the stock market these days. You have to be able to control the prices. Insiders make money, but small investors are not going to make money.

Since you're in Canada, I remember the beginning of the 1960s. I used to look at the Treasury Bulletin and Federal Reserve Bulletin figures on foreign investment in the US stock market. We all used to laugh at Canada especially. The Canadians don't buy stocks until they're up to the very top, and then they lose all the money by holding these stocks on the downturn. Finally, when the market's all the way at the bottom, Canadians decide to begin selling because they finally can see a trend. So they miss the upswing until they decide to buy at the top once again. It's hilarious to look at how Canada has performed in the US bond market, and they did the same in the silver market. I remember when silver was going up to $50. The Canadians said, "Yes, we can see the trend now!" and they began to buy it. They lost their shirts. So, basically, if you're a Canadian investor, move.

LONG: So the Canadian investors are a better contrarian indicator than the front page cover, you're saying.

HUDSON: I'd think so. Once they get in, you know the bubble's over.

LONG: Absolutely on that one. What are you currently writing? What is your current focus now?

HUDSON: Well, I just finished a book. You mentioned Killing the Host . My next book will be out in about three months: J is for Junk Economics . It began as a dictionary of terms, so I can provide people with a vocabulary. As we got in the argument at the beginning of your program today, our argument is about the vocabulary we're using and the words you're using. The vocabulary taught to students today in economics – and used by the mass media and by government spokesmen – is basically a set of euphemisms. If you look at the television reports on the market, they say that any loss in the stock market isn't a loss, it's "profit taking". And when they talk about money. the stock market rises – "Oh that's good news." But it's awful news for the short sellers it wipes out. Almost all the words we get are kind of euphemisms to conceal the actual dynamics that are happening. For instance, "secular stagnation" means it's all a cycle. Even the idea of "business cycles": Nobody in the 19 th century used the word "business cycle". They spoke about "crashes". They knew that things go up slowly and then they plunge very quickly. It was a crash. It's not the sine curve that you have in Josef Schumpeter's book on Business Cycles . It's a ratchet effect: slow up, quick down. A cycle is something that is automatic, and if it's a cycle and you have leading and lagging indicators as the National Bureau of Economic Research has. Then you'd think "Oh, okay, everything that goes up will come down, and everything that goes down will come up, just wait your turn." And that means governments should be passive.

Well, that is the opposite of everything that's said in classical economics and the Progressive Era, when they realized that economies don't recover by themselves. You need a-the government to step in, you need something "exogenous," as economist say. You need something from outside the system to revive it. The covert idea of this business cycle analysis is to leave out the role of government. If you look at neoliberal and Austrian theory, there's no role for government spending, and no role of public investment. The whole argument for privatization, for instance, is the opposite of what was taught in American business schools in the 19 th century. The first professor of economics at the Wharton School of Business, which was the first business school, was Simon Patten. He said that public infrastructure is a fourth factor of production. But its role isn't to make a profit. It's to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions. Obviously these financialized charges are factored into the price system and raise the cost of living and doing business.

LONG: Well, Michael, we're-I thank you for the time, and we're up against our hard line. I know we didn't have as much time as we always like, so we have to break. Any overall comments you'd like to leave with our listeners who might be interested this school of economics?

HUDSON: Regarding the downturn we're in, we're going into a debt deflation. The key of understanding the economy is to look at debt. The economy has to spend more and more money on debt service. The reason the economy is not recovering isn't simply because this is a normal cycle. And It's not because labour is paid too much. It's because people are diverting more and more of their income to paying their debts, so they can't afford to buy goods. Markets are shrinking – and if markets are shrinking, then real estate rents are shrinking, profits are shrinking. Instead of using their earnings to reinvest and hire more labour to increase production, companies are using their earnings for stock buybacks and dividend payouts to raise the share price so that the managers can take their revenue in the form of bonuses and stocks and live in the short run. They're leaving their companies as bankrupt shells, which is pretty much what hedge funds do when they take over companies.

So the financialization of companies is the reverse of everything Adam Smith, John Stuart Mill, and everyone you think of as a classical economist was saying. Banks wrap themselves in a cloak of classical economics by dropping history of economic thought from the curriculum, which is pretty much what's happened. And Canada-I know since you're from Canada, my experience there was that the banks have a huge lobbying power over government. In 1979, I wrote for the IRPP Institute there on Canada In the New Monetary Order . At that time the provinces of Canada were borrowing money from Switzerland and Germany because they could borrow it at much lower interest rates. I said that this was going to be a disaster, and one that was completely unnecessary. If Canadian provinces borrow in Francs or any other foreign currency, this money goes into the central bank, which then creates Canadian dollars to spend. Why not have the central bank simply create these dollars without having Swiss francs, without having German marks? It's unnecessary to have an intermediary. But the more thuggish banks, like the Bank of Nova Scotia, said, "Oh, that way's the road to serfdom." It's not. Following the banks and the Austrian School of the banks' philosophy, that's the road to serfdom. That's the road to debt serfdom. It should not be taken now. It lets universities and the government be run by neoliberals. They're a travesty of what real economics is all about.

LONG: Michael, thank you very much. I learned a lot, appreciate it; certainly appreciate how important it is for us to use the right words on the right subject when we're talking about economics. Absolutely agree with you. Talk to you again?

HUDSON: Going to be here.

LONG: Thank you for the time.

Donald , April 29, 2016 at 7:33 am

Interesting, but after insulting Duncan, Hudson says the banks stopped partnering with industry and went into real estate, which sounded like what Duncan said.

I mention this because for a non- expert like myself it is sometimes difficult to tell when an expert is disagreeing with someone for good reasons or just going off half- cocked. I followed what Hudson said about the evils of the IMF, but didn't see where Duncan had defended any of that, unless it was implicit in saying that capitalism used to function better.

Alejandro , April 29, 2016 at 9:06 am

Michael Hudson from the interview;

"As we got in the argument at the beginning of your program today, our argument is about the vocabulary we're using and the words you're using. The vocabulary taught to students today in economics – and used by the mass media and by government spokesmen – is basically a set of euphemisms ."Almost all the words we get are kind of euphemisms to conceal the actual dynamics that are happening."

May consider it's about recognizing and deciphering the "doublespeak", "newspeak", "fedspeak", "greenspeak" etc, whether willing or unwitting using words for understanding and clarifying as opposed to misleading and confusing dialectic as opposed to sophistry.

Michael Hudson , April 29, 2016 at 9:54 am

What I objected to was the characterization of today's situation as "financialization." I explained that financialization is the FIRST stage - when finance WORKS. We are now in the BREAKDOWN of financialization - toward the "barter" stage.
Treating "finance" as an end stage rather than as a beginning stage overlooks the dynamics of breakdown. It is debt deflation. First profits fall, and as that occurs, rents on commercial property decline. This is already widespread here in New York, from Manhattan (8th St. near NYU is half empty) to Queens (Austin St. in Forest Hills.).

Leonard C.Tekaat , April 29, 2016 at 12:19 pm

I wrote an article you might be interested in reading. It outlines a tax policy which would help prevent what you are discussing in your article. The abuse of credit to receive rents and long term capital gains.

The title is "Congress Financialized Our Economy And Created Financial Crisis & More Poverty" Go to http://www.taxpolicyusa.wordpress.com

SomeCallMeTim , April 29, 2016 at 5:23 pm

Thank you for another eye-opening exposition. My political economy education was negative (counting a year of Monetarism and Austrian Economics around 1980), so I appreciate your interviews as correctives.

From your interview answer to the question about what we, the 99+% should do,I gathered only that we should not try to beat the market. Anything more than that?

Skippy , April 29, 2016 at 8:33 pm

From my understanding, post Plaza banking lost most of its traditional market to the shadow sector, as a result, expanded off into C/RE and increasingly to Financialization of everything sundry.

Disheveled Marsupial interesting to note Mr. Hudson's statement about barter, risk factors – ?????

Eduardo Quince , April 29, 2016 at 7:41 am

"secular stagnation" means it's all a cycle

Actually not.

One of the most important distinctions that investors have to understand is the difference between secular and cyclical trends Let us begin with definitions from the Encarta® World English Dictionary:

Secular – occurring only once in the course of an age or century; taking place over an extremely or indefinitely long period of time

Cycle – a sequence of events that is repeated again and again, especially a causal sequence; a period of time between repetitions of an event or phenomenon that occurs regularly

Excerpted from: http://contrarianinvestorsjournal.com/?p=405#

cnchal , April 29, 2016 at 8:30 am

Secular stagnation from http://lexicon.ft.com/Term?term=secular-stagnation

Secular stagnation is a condition of negligible or no economic growth in a market-based economy . When per capita income stays at relatively high levels, the percentage of savings is likely to start exceeding the percentage of longer-term investments in, for example, infrastructure and education, that are necessary to sustain future economic growth. The absence of such investments (and consequently of the economic growth) leads to declining levels of per capita income (and consequently of per capita savings). With the reduced percentage savings rate converging with the reduced investment rate, economic growth comes to a standstill – ie, it stagnates. In a free economy, consumers anticipating secular stagnation, might transfer their savings to more attractive-looking foreign countries. This would lead to a devaluation of their domestic currency, which would potentially boost their exports, assuming that the country did have goods or services that could be exported.

Persistent low growth, especially in Europe, has been attributed by some to secular stagnation initiated by stronger European economies, such as Germany, in the past few years.

Words. What they mean depends on who's talking.

Secular stagnation is when the predators of finance have eaten too many sheeple.

MikeNY , April 29, 2016 at 9:57 am

Secular stagnation is when the predators of finance have eaten too many sheeple.

This.

digi_owl , April 29, 2016 at 7:44 am

Sad to see Hudson parroting the line about banks lending out savings

Alejandro , April 29, 2016 at 9:18 am

That's not what he said. Re-read or re-listen, please.

Enquiring Mind , April 29, 2016 at 9:02 am

Hudson says

Markets are shrinking – and if markets are shrinking, then real estate rents are shrinking, profits are shrinking.

Real estate rents in this latest asset bubble, whether commercial or residential, appear to have been going up in many markets even if the increases are slowing. That rent inflation will likely turn into rent deflation, but that doesn't appear to have happened yet consistently.

Perhaps he meant to say that markets are going to shrink as the debt deflation becomes more evident?

tegnost , April 29, 2016 at 9:52 am

I think what it means is it's getting harder to squeeze the blood out of the turnip

Synoia , April 29, 2016 at 10:06 am

What Turnip? Its become a stone, fossilized..

rfdawn , April 29, 2016 at 10:52 am

Yes, I think we are into turnip country now. Figure 1 in this prior article looks clear enough – even if you don't like the analysis that went with it. Wealth inequality still climbs but income inequality has plateaued since Clinton I. Whatever the reasons for that, the 1% should be concerned – where is the ROI?

ke , April 29, 2016 at 10:22 am

Barter has always existed and always will. Debt money expands and contracts the middle class, acting as a feedback signal, which never works over the long term, because the so encapsulated system can only implode, when natural resource liquidation cannot be accelerated. The whole point is to eliminate the initial requirement for capital, work. Debt fails because both sides of the same coin assume that labor can be replaced. The machines driven by dc technology are not replacing labor; neither the elites nor the middle class can fix the machines, which is why they keep accelerating debt, to replace one failed technology only to be followed by the next, netting extortion by whoever currently controls the debt machine, which the majority is always fighting over, expending more energy to avoid work, like the objective is to avoid sweating, unless you are dumb enough to run on asphalt with Nike gear.

ke , April 29, 2016 at 12:49 pm

Labor has no problem with multiwhatever presidents, geneticists, psychologists, or economists, trying to hunt down and replace labor, in or out of turn, but none are going to be any more successful than the others. Trump is being employed to bypass the middle class and cut a deal. There is no deal. Labor is always going to pay males to work and their wives to raise children. Obviously, the majority will vote for a competing economy, and it is welcome to do so, but if debt works so well, why is the majority voting to kidnap our kids with public healthcare and education policies.

meeps , April 29, 2016 at 5:36 pm

I'm not sure I heard an answer to the question of what people, who might be trying to save for the future or plan for retirement, can do? Is the point that there isn't anything? Because I'm definitely between rocks and hard places

Robert Coutinho , April 29, 2016 at 9:29 pm

Yeah, he basically said there is no good savings plan. Big-money interests have rigged the rules and are now manipulating the market (this used to be the definition of what was NOT allowed). Thus, they use computer algorithms to squeeze small amounts out of the market millions of times. This means that the "investments" are nothing of the sort. You don't "invest" in something for milliseconds. He said that the 1% are mostly just trying to hold on to what they have. Very few trust the rigged markets.

ke , April 29, 2016 at 7:22 pm

If Big G can print to infinity, print, but then why book it as debt to future generations?

The future is already becoming the present, because the millenials aren't paying.

Russell , April 29, 2016 at 10:00 pm

Low rent & cheap energy are key to the arts & innovations. My model has to work for airports, starts at the fuel farm as the CIA & MI6 Front Page Avjet did. Well before that was Air America. I wonder if now American Airlines itself is a Front.

All of America is a Front far as I can about tell. Hadn't heard that Manhattan rents were coming down. Come in from out of town, how you going to know? Not supposed to I guess.

I got that textbook and I liked that guy John Commons. He says capitalism is great, but it always leads to Socialism because of unbridled greed.

The frenzy to find another stable cash currency showing in Bit Coin and the discussion of Future Tax Credits while the Euro is controlled by the rent takers demands change on both sides of the Atlantic.

We got shot dead protesting the war, and civil rights backlash is the gift that keeps giving to the Southerners looking up every day in every courthouse town, County seat is all about spreading fear and desperation.

How to change it all without violence is going to be really tricky.

cnchal , April 30, 2016 at 4:36 am

Many thanks for the shout out to Canada.

. . . So, basically, if you're a Canadian investor, move.

LONG: So the Canadian investors are a better contrarian indicator than the front page cover, you're saying.

HUDSON: I'd think so. Once they get in, you know the bubble's over.

When one reads the financial press in Canada, every dollar extracted by the lords of finance is a glorious taking by brilliant people at the top of the financial food chain from the stupid little people at the bottom, but when it counts, there was silence, in cooperation with Canada's one percent.

The story starts about five years ago, with smart meters. Everyone knows what they are, a method by which electrical power use can be priced depending on the time of day, and day of the week.

To make this tasty, Ontario's local utilities at first kept the price the same for all the time, and then after all the meters were installed, came the changes, phased in over time. Prices were increased substantially, but there was an out. If you changed your living arrangements to live like a nocturnal rodent and washed your clothes in the middle of the night, had supper later in the evening or waited for weekend power rates you could still get low power rates, from the three tier price structure.

The local utilities bought the power from the government of Ontario power generation utility, renamed to Hydro One, and this is where Michael Hudson's talk becomes relevant.

The successful error of monetarism is to force countries to have such self-defeating policies that they end up having to privatize their natural resources, their public domain, their public enterprises, their communications and transportation, like you're seeing in Greece's selloffs. So when you find an error that is repeated, it's deliberate. It's not insane. It's part of the program, not a bug .

LONG: Where does this lead us? What's the roadmap ahead of us here?

HUDSON: A thousand years ago, if you were a marauding gang and you wanted to take over a country's land and its natural resources and public sector, you'd have to invade it with military troops. Now you use finance to take over countries. So it leads us into a realm where everything that the classical economists saw and argued for – public investment, bringing costs in line with the actual cost of production – that's all rejected in favor of a rentier class evolving into an oligarchy. Basically, financiers – the 1% – are going to pry away the public domain from the government. Pry away and privatize the public enterprises, land, natural resources, so that bondholders and privatizers get all of the revenue for themselves. It's all sucked up to the top of the pyramid, impoverishing the 99% .

Eighteen months ago, there was an election in Ontario, and the press was on radio silence during the whole time leading up to the election about the plans to "privatize" Hydro One. I cannot recall one instance of any mention that the new Premier, Kathleen Wynne was planning on selling Hydro One to "investors".

Where did this come from? Did the little people rise up and say to the politicians "you should privatize Hydro One" for whatever reason? No. This push came from the 1% and Hydro One was sold so fast it made my head spin, and is now trading on the Toronto Stock exchange.

At first I though the premier was an economic ignoramus, because Hydro One was generating income for the province and there was no other power supplier, so one couldn't even fire them if they raised their prices too high.

One of the arguments put forward by the 1% to privatize Hydro One was a classic divide and conquer strategy. They argued that too many people at Hydro One were making too much money, and by privatizing, the employees wages would be beat down, and the resultant savings would be passed on to customers.

Back to Michael Hudson

. . . The whole argument for privatization, for instance, is the opposite of what was taught in American business schools in the 19th century. The first professor of economics at the Wharton School of Business, which was the first business school, was Simon Patten. He said that public infrastructure is a fourth factor of production. But its role isn't to make a profit . It's to lower the cost of public services and basic inputs to lower the cost of living and lower the cost of doing business to make the economy more competitive. But privatization adds interest payments, dividends, managerial payments, stock buybacks, and merges and acquisitions . Obviously these financialized charges are factored into the price system and raise the cost of living and doing business .

Power prices have increased yet again in Ontario since privatization, and Canada's 1% are "making a killing" on it. There has been another change as well. Instead of a three tier price structure, there are now two, really expensive and super expensive. There is no longer a price break to living like a nocturnal rodent. The 1% took that for themselves.

Procopius , April 30, 2016 at 8:10 am

I am so tired of seeing that old lie about Old Henry and the $5 a day. I realize it was just a tossed off reference to something most people believe for the purpose of describing a discarded policy, but the fact is very, very few of Old Henry's employees ever got that pay. See, there were strings attached.

Old Henry hired a lot of spies, too. He sent them around to the neighborhoods where his workers lived (it was convenient having them all in Detroit). If the neighbors saw your kid bringing a bucket of beer home from the corner tavern for the family, you didn't get the $5.

If your lawn wasn't mowed to their satisfaction, you didn't get the $5. If you were thought not to bathe as often as they liked, you didn't get the $5. If you didn't go to a church on Sundays, you didn't get the $5. If you were an immigrant and not taking English classes at night school, you didn't get the $5. There were quite a lot of strings attached. The whole story was a public relations stunt, and Old Henry never intended to live up to it; he hated his workers.

[Nov 16, 2017] Natural Rate Hypothesid is junk science. There is nothing natural in natural rate of empoyment

Notable quotes:
"... Controlling inflation solely by focusing on workers wages since 1980 but allowing monopoly power and economic rents to skyrocket since 1980 is the main reason for the extreme inequality that has developed ..."
"... Prima facie evidence of distorted labor market where buyers of labor have control. At the very least, the next democratic President should use their weekly address to point out the metrics relating economic gains, net wealth gains, productivity gains, to wage gains. The Presudent should remind employers to fairly share the gains. Once the metrics indicate distortion in the labor markets the President will then introduce corrective legislation using the public communications weight behind this free market notion of a fair labor market, using these metrics. Let us try this bully pulpit, public communications effort with the idea of building public momentum for correctives, and maybe we will return to the 1960s future when gains were more proportionally shared. Perhaps we wont need much legislation at all, afterall we had one generation comport with fairness, you know, rational expectations. ..."
"... if demand cannot be kept up by wages, then the only option is loans and we have seen in 2008 the catastrophic results of that ..."
Nov 16, 2017 | economistsview.typepad.com

djb , November 16, 2017 at 01:46 AM

non accelerating inflation rate of unemployment is a better term

there is nothing "natural" about that rate

there are many factors that play a role, but the most important are

1. monopoly power is the most important, without monopoly power, in a perfectly competitive market, excessive inflation is not possible

2. factors that affect bargaining power OF workers

Controlling inflation solely by focusing on workers wages since 1980 but allowing monopoly power and economic rents to skyrocket since 1980 is the main reason for the extreme inequality that has developed

Paine -> djb... , November 16, 2017 at 05:18 AM
These are important conjectures

We may indeed have chosen to repress wage rates while allowing Firms market power over output prices and wages.

And firms share of total Economic rents and E rent rates themselves and thus total gross profits to rise.

Largely unchecked by policy moves

JF -> djb... , November 16, 2017 at 08:26 AM
Prima facie evidence of distorted labor market where buyers of labor have control.

At the very least, the next democratic President should use their weekly address to point out the metrics relating economic gains, net wealth gains, productivity gains, to wage gains. The Presudent should remind employers to fairly share the gains.

Once the metrics indicate distortion in the labor markets the President will then introduce corrective legislation using the public communications weight behind this free market notion of a fair labor market, using these metrics.

Let us try this bully pulpit, public communications effort with the idea of building public momentum for correctives, and maybe we will return to the 1960s future when gains were more proportionally shared. Perhaps we wont need much legislation at all, afterall we had one generation comport with fairness, you know, rational expectations.

We can expect to do that again, especially as all new economists will be trained on the why and on how to accomplish this metric of shared gains. One can only hope.

djb -> JF... , November 16, 2017 at 01:59 PM
I know this may not exactly fit your MMT model

if we don't allow median wages to go up to match production/productivity

and if economic rents continue to go up disproportionally then we need to do a redistribution, ideally by taxes, to get the median wage to keep pace with production/productivity

otherwise demand for products will eventually falter, making us all poorer for it

if demand cannot be kept up by wages, then the only option is loans and we have seen in 2008 the catastrophic results of that

[Nov 16, 2017] Should We Reject the Natural Rate Hypothesis

Nov 16, 2017 | economistsview.typepad.com

15, 2017 Should We Reject the Natural Rate Hypothesis? Olivier Blanchard:

Should We Reject the Natural Rate Hypothesis?, by Olivier Blanchard, PIIE : Fifty years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy. Second, there is no long-run tradeoff between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. Blanchard reviews the arguments and the macro and micro evidence against each and concludes that, in each case, the evidence is suggestive but not conclusive. Policymakers should keep the natural rate hypothesis as their null hypothesis but keep an open mind and put some weight on the alternatives. [ paper ]

Posted by Mark Thoma on Wednesday, November 15, 2017 at 10:22 AM in Academic Papers , Economics , Macroeconomics | Permalink Comments (9)


Comments Feed You can follow this conversation by subscribing to the comment feed for this post.

Paine , November 15, 2017 at 03:44 PM

"there is a strong case, although not an overwhelming case, to allow U.S. output to exceed potential for some time, so as to reintegrate some of the workers who left the labor force during the last ten years."

Blanchard calls for exploring the unknown regions
of lower and lower unemployment

Lower UE rates
Instead of accelerating output price inflation
Or even wage inflation
Given possible productivity pick ups
We may discover
We get a return to higher and higher participation
Not an unhappy result after all

Paine -> Paine ... , November 15, 2017 at 03:49 PM
The parting of the ways with the likes of Blanchard and krugman might come
When at long last wage rates do begin to rise faster then
Say
labor productivity plus three percent

But if the acceleration of the expected rate of change
of the rate of output price change
accelerates slowly

We'll have plenty of policy means and time to moderate the expansion of demand
Given the political will

Paine -> Paine ... , November 15, 2017 at 03:51 PM
Or better consider the imposition of a mark up warrant system
On selected firms and sectors
Paine -> Paine ... , November 15, 2017 at 03:58 PM
What is completely missed by looking at the impact of a slump on long run output capacity
Is the actual lost output out of existing capacity
And the misery this inflicts now
for many too many


Ten years of sub possible output
Contain How many weeks upon weeks
of reduced Welfare for too many souls ?

Paine -> Paine ... , November 15, 2017 at 04:01 PM
If average slack is now 7%
And could
with aggressive macro nautics
be reduced to 2%

We
each of us only live in the now
and for only a single all too brief life time

anne -> Paine ... , November 15, 2017 at 03:58 PM
This is arguing well, I agree and am grateful.
Paine -> anne... , November 15, 2017 at 04:08 PM
Blanchards uses the definition of potential output
That suggests over production has to be off set by under production

I.e. Potential output is not technical maximum output by any means

PO
Is more like a rate of output and consequent rate of existing factor utilization
That does not unduly
stress
the various institutional arrangements and practices
Or overly tax
the stability of existing social norms
Considered necessary
to sustaining the good of society
thru
It's gradual development over time

Paine -> Paine ... , November 15, 2017 at 04:11 PM
There is another set of conflicting visions
One of which
That any class pov might hatch

A vision
Perhaps too Faustian for most souls of that class
That is restless
to push faster
To Venture more
Face uncertainty with boldness even audacity

anne -> Paine ... , November 15, 2017 at 04:11 PM
Nice, nice.

[Oct 27, 2017] The Rise and Fall of the Phillips Curve by Ed Walker

Notable quotes:
"... The History of the Phillips Curve: Consensus and Bifurcation ..."
"... The Fed Has a Theory. Trouble is the Proof is Patchy ..."
"... Do Phillips Curves Conditionally Help to Forecast Inflation? ..."
"... Declining Labor and Capital Shaes ..."
"... I am constantly baffled by economists trying to explain very complex non-linear system with simple two variable models. I have been dealing with a couple of engineering problems today where the publication I am using has over 50 design charts just for gravity pipe flow. Each chart has about five variables accommodated while holding a number of others constant. ..."
"... So I think we see the Philips curve predictably happening in the short-term in fields like technology where there is big demand and not enough people. However, as a general rule across the economy, I simply don't see why the relationship between inflation and unemployment should be the same today as it was in 2007, 1997, 1987, or 1977. ..."
"... Economics is infected with too much ideology and not enough scientific method. That is more the definition of a religion than a science. ..."
"... If neoliberals were intellectually honest, they wouldn't call it supply side economics, they'd call it philo-capital economics ..."
"... 80's Poly-Sci defined, "neo-feudalism" (or, as "Shock Doctrine", privatization of all "resource" + government capacity, subject financial sector capture) ..."
"... As far as I can tell, the whole idea of NAIRU is strictly an artifact of economic modeling, not something that's actually ever been observed in the wild. And doesn't it seem odd that making sure we don't drop below NAIRU is something the Fed feels like it needs to intervene to ensure rather than letting the market sort it out. Even if NAIRU was a real thing, you would assume that low unemployment –> increased wages –> increased prices –> reduced consumption –> lay-offs and higher unemployment. Which is to say, if there were such a thing as a natural rate of unemployment, wouldn't markets naturally produce it, obviating any need for the Fed to, say, jack up interest rates to keep the economy from "heating up" (I guess because people have so much money burning holes in their pockets?). It almost like, when it suits the capitalists, they stop believing in this whole "invisible hand" thing .strange ..."
"... "Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that "the market" delivers benefits that could never be achieved by planning. ..."
Oct 27, 2017 | www.nakedcapitalism.com

The Rise and Fall of the Phillips Curve Posted on October 27, 2017 The Phillips Curve says that there is an inverse relation between unemployment and inflation. Low unemployment is correlated with a rise in inflation. It's an article of faith to economists of all stripes. It's listed in the popular introductory economics textbook by N. Gregory Mankiw as one of the Ten Things All Economists agree on . It's especially loved by the Fed, which raises or lowers interest rates depending in part on its predictions. Its critics point out that its predictions are poor.

In this post, I discuss the derivation of the Phillips Curve, its adaption by Samuleson and Solow to manage the economy, its breakdown in the 1970s, exploitation by neoliberals of that breakdown to replace Keynesian demand-based economics with monetarism and supply-side economics, its rejuvenation, and the evidence that it doesn't make accurate predictions.

I conclude with some observations based on an important paper by Simcha Barkai that challenges the core beliefs of neoliberalism. It suggests we can raise wages substantially without causing inflation by lowering corporate profits.

History

This part is based on Sections I-III of Robert Gordon's article, The History of the Phillips Curve: Consensus and Bifurcation , Economica (2011) 78, 10–50 (behind paywall, but you can find it online at your local library). Gordon is an economics professor at Northwestern and has worked on the Phillips Curve for decades.

William Phillips published a paper in 1958 showing a correlation between wage growth and inflation in the UK between 1861 and 1913. He fitted a curve to the data, and then compared that curve to UK data from two later periods. There was a remarkable similarity for most of the two periods, with exceptions Phillips explains away. Here is the curve Phillips derived:

1. w t = -.90 + 9.64U -1.39

Gordon says that " the inflation rate would be expected to equal the growth rate of wages minus the long-term growth rate of productivity." P. 12.

1a. p = w – k

Here p is inflation, w is wage growth, and k is productivity growth. Generally in these equations, lower case letters are rates of change and upper case letters are levels. We can substitute Equation 1a into Equation 1 to get the original Phillips Curve.

2. p = -.90 + 9.64U -1.39 – k.

Paul Samuelson and Robert Solow picked up on the Phillips paper with a paper of their own in 1960. Gordon says much of their paper is a discussion of pre-Phillips theory. They can't find data on the US economy similar to that found by Phillips for the UK economy, so they work up some of their own data and make some calculations showing a result similar to that of Phillips. Whereas Phillips does not mention the possibility that the curve might shift, Samuelson and Solow find such shifts and offer possible explanations, such as strong labor unions.

Here's a schematic drawing of the Phillips Curve from Wikipedia :

The standard curve might be the one on the left. It shows very high inflation at very low unemployment, but falls quickly as unemployment rises. That suggested to Samuelson and Solow that there is a trade-off if the economy is in specific parts of the Phillips Curve: by allowing a slightly higher level of inflation, you could get a big drop in unemployment. The US tried this idea in the 1960s. This policy was tied to Keynesianism, which was the predominate theory in the Kennedy and Johnson era, and into the Nixon Presidency.

When OPEC massively increased the price of oil in the early 70s, inflation soared far past the level suggested by the Phillips Curve. The neoliberals at the University of Chicago argued that the failure of the Phillips Curve proved that Keynesian economics was worthless, and pushed their solution: monetarism. They also had a formula to replace the Phillips Curve as a predictor of inflation.

Their explanation for the failure of the trade-off was something like this. Suppose the beginning rates of inflation and unemployment are at Point A on the above chart. The Fed lowers interest rates resulting in a small increase of inflation, so that the economy moves to Point B with lower unemployment. People believe that is unsustainable, and that the economy will revert to the natural rate of unemployment, the vertical line. As a result, the Phillips Curve shifts up and to the right over time, so that the economy moves to Point C, with the beginning unemployment rate but higher inflation.

The neoliberals won. Keynesianism lost out and was replaced by monetarism. This was probably not deserved, according to Gordon. He says that Samuelson and Solow were not talking about the situation that came about in the 70s, but rather the situation in the early 1960s. He also spends a good part of his paper showing that the formulas offered by Friedman and the neoliberals for predicting inflation were a total failure both on factual and theoretical grounds.

Gordon himself proposed a version of the Phillips Curve designed to deal with the problem of supply and demand shocks like the Oil Shock:

3. p = Ep t + b(U t – U t N ) + z t + e t

In Equation 3, the second U term is the natural rate of unemployment, z t represents cost-push pressure, and e t is apparently a constant. The natural rate of unemployment and the z term vary over time, and for some reason so does the e term. There is nothing left of the wage term. The Phillips Curve is now free from the bonds of factual data that gave Phillips his interesting result. It's a curve-fitting exercise, using economic theories put together in a way that fits the data. It's a complicated formula in which every term needs to be calculated from some other theory or data.

Gordon says that Equation 3 is the canonical version of the Phillips Curve. It is incorporated in most econometric models, modified by some other variables and terms, including levels of taxation, expectations of inflation, inflation inertia, which relates to price and wage rigidity in the short run, and a host of other terms. But as we shall see, it doesn't work as a predictor.

Criticism of the Phillips Curve

The Phillips Curve has been controversial for a long time, as Mankiw admits in his introductory textbook. Ben Leubsdorf wrote a very readable criticism for the Wall Street Journal on August 14, 2014, just before the Fed started raising interest rates. His title is The Fed Has a Theory. Trouble is the Proof is Patchy (sadly behind a paywall; it's available online at your local library).

Leubsdorf confirms that most economists believe that there is a short run trade-off between inflation and unemployment and also agree that this trade-off doesn't hold in the long term, meaning that we can't get permanently lower unemployment by accepting a bit more inflation. But the problem is that there is also no apparent connection in the short run either. Here's a chart originally in Leubsdorf's article and reprinted in a post discussing the article by Jared Bernstein .


Source: Wall Street Journal

To read this chart, select an expansion period from the list on the upper right, find the line that color, and locate the circle at one end of the line; that's the starting point. Then follow the line to see how the relationship between unemployment (x-axis) and inflation (y-axis) changes over time. As you can see there is no apparent connection in any except the first expansion. The lack of connection to theory is especially obvious in the current expansion.

The Leubsdorf article has several quotes from Very Serious People to the effect we think there's a relationship and we're going to act like there is a relationship, and we can fine-tune the economy with our gut instincts.

It doesn't look like the latest study will change minds either. That one comes from the Philadelphia Fed in August 2017, Do Phillips Curves Conditionally Help to Forecast Inflation? The conclusion is that the Phillips Curve does worse than something called a univariate model which I won't discuss.

In this September 26 New York Times article there are more Very Serious People explaining they need to follow their instincts about the economy in deciding on interest rates and they are sure inflation is coming. Meanwhile, the economy continues to add jobs with no obvious increase in inflation as shown by the blue line on the above chart. Inflation is currently running at 1.3% .

Damage From the Phillips Curve

We have already seen that the first notable failure of the Phillips Curve was used to undermine Keynesian economics in favor of monetarism. As a result, working people of all classes were doubly harmed, first by the abandonment of the Fed of any significant role in cutting unemployment, and second by the savage use of high rates to control inflation.

Here's a chart showing the labor share in gross national product on the left axis (blue line) and the prime rate on the right axis (red line).

The grey bars are recessions. This chart shows that up to 2000 every time workers start to get a bigger share of the GDP, the Fed raises interest rates. The Phillips Curve was the justification for those rate hikes. There is some evidence wages are firming up today, and maybe even rising a fraction faster than inflation. Following tradition but not evidence, the Fed is raising rates. If that hurts workers, also in accordance with tradition, that's just too bad.

Observations

Take another look at Equation 1a. If we set inflation at zero, Equation 1 says that wage growth equals productivity growth. That's not true. Here's a chart from the Economic Policy Institute .

The wage line is for production and non-supervisory personnel, which the EPI says is about 80% of employed people. The average wage for all workers has grown somewhat faster, but is still well under the rate of increase of productivity over the long term.

Money produced in the economy goes either to capital or labor. So, the excess gains from productivity must be going to capital.

Actually, it seems strange to suggest that none of the gains from increased productivity go to capital, as Equation 1a does. Consider a company like Google. It can buy a few more computer blades and serve more customers with little or no increase in total wages. The gains from the productivity of the new capital all go to the company. Or consider a company that outsources its labor. Some of the gains might be used to cut prices, I suppose, but surely most of the gain stays with the company.

The following chart shows the sudden growth in top wealth. It demonstrates that the growth began at the same time as the productivity-wages gap began, more support for the idea that the gains from productivity are going to capital.

Capital can take many forms. It could be plant and equipment, commercial or agricultural land, personal residences, art, gold, and many other things believed to store value, whether or not they are actually producing anything, or even whether they actually store value. We know that top wealth is rising, the stock market is up, and the value of residential real property in all major cities is rising. All these and more suggest that the total amount of capital is increasing. All that increase is funded by the gains from productivity.

A recent paper by Simcha Barkai, Declining Labor and Capital Shaes , provides a convincing explanation. The labor share is declining he says. But so is what he calls the "capital share", a defined term, calculated by multiplying the "required rate of return" by the capital stock deployed in the non-financial business sector. Capital stock includes plant and equipment, land, and intangibles such as patents and software, less depreciation. The required return on capital is approximately and sensibly defined as the cost of obtaining capital in the financial markets. He shows that the cost of capital has declined by 7% over the period of his study, 1984-2014. If the amount of capital deployed had increased as might be expected with this large drop in cost, the capital share might have remained the same. Instead, businesses did not deploy additional capital, and the capital share declined by some 30% over the period. During that period the labor share declined 10% from a larger starting point.

The combined losses were more than made up by increases in the profits share. Profits add to the value of the firm, and are distributed by the owners of firms as they see fit, which isn't to lowly workers. This is from Barkai's paper:

Across specifications, the profit share (equal to the ratio of profits to gross value added) has increased by more than 12 percentage points. To offer a sense of magnitude, the value of this increase in profits amounts to over $1.1 trillion in 2014, or $14 thousand for each of the approximately 81 million employees of the non-financial corporate sector. P. 3.

Barkai attributes this almost entirely to increased concentration of US industries, and most of the paper is devoted to proof of that conclusion. He links that increase in concentration to changes in anti-trust law and policy engineered by Robert Bork when he was at the University of Chicago.

Conclusion

Following Barkai, we should rewrite Equation 1a like this:

1b. p = w + γ + c t – k

where γ is the rate of growth of the profits share, c t is the rate of growth of the capital share, w is the rate of growth of wages, p is inflation, and k is productivity. Substituting the original Phillips equation, Equation 1 into Equation 1b gives us

4. p = -.90 + 9.64U -1.39 + γ + c t – k.

This equation calls attention to the role that profits play in the economy, something economists generally generally ignore. When people do discuss profits, it's always in the context of the importance of capital and the need to coddle it. That view lies at the heart of neoliberalism, and at the heart of Fed policy. It is also at the heart of the Law and Economics movement also spawned at the University of Chicago, a movement that has changed the legal system to favor capital. If neoliberals were intellectually honest, they wouldn't call it supply side economics, they'd call it philo-capital economics.

Equation 1 has been replaced by Equation 3 in the standard model of the Phillips Curve.

3. p = Ep t + b(U t – U t N ) + z t + e t

Making this work with Barkai's analysis is harder. We get a clue from Gordon's explanation of the z term: he call it cost push, meaning price shocks caused by labor unions and "bauxite barons". This is where capital growth fits in. The ability to control markets gives firms the ability to cause price shocks, as when pharmaceutical companies drive up the price of epi-pens or other drugs, but also the ability to gradually increase prices above the rate of inflation. Therefore, I'd rewrite Equation 3 this way:

5. 3. p = Ep t + b(U t – U t N ) + γ + c t + e t

Gordon doesn't explain the e term, so we'll just let that pick up anything that used to be in the z term that is somehow missed by my addition. It would, for example, include demand-pull inflation, which hasn't been a problem for some time.

In the current situation, with profits at very high levels, we can easily increase wages without increasing inflation if the rich were willing to accept lower profits, subject to the availability of sufficient resources to meet the new levels of demand substantially higher wages might cause.

Barkai says just distributing the historically high profits to workers would give every working person (other than those in the financial sector) a $14K raise. That dwarfs the make-believe $4K-9K per household the Republicans promise from their proposed tax cuts.

Unfortunately, the Phillips Curve isn't the only thing blocking action to help the average citizen.

Synoia , October 27, 2017 at 10:16 am

Economists will tell whatever story, with whatever rationale that fits their story, to please their pay-masters.

Just like court magicians or priests divining augers for their emperors

They try to predict the future of a chaotic system, which is impossible.

Telling the rich and powerful what they want to hear is both possible and profitable.

rd , October 27, 2017 at 1:21 pm

I am constantly baffled by economists trying to explain very complex non-linear system with simple two variable models. I have been dealing with a couple of engineering problems today where the publication I am using has over 50 design charts just for gravity pipe flow. Each chart has about five variables accommodated while holding a number of others constant.

So I believe the Philips curve is valid but it is in a different place in multi-variable space each decade or so based on fundamental changes in the economy. Over the past thirty years, I can think of four major changes off the top of my head that lead me to expect the Philips curve to translate in multi-variable space:

1. Free trade agreements (NAFTA etc.)
2. Technology displacing workers
3. Baby boomer demographic moving from entering peak productivity to retirement age
4. Women and minorities are becoming more widespread throughout most or all jobs.

So workers to day are now competing more with Second and Third World workers while technology is dramatically changing the workplace (e.g. secretarial positions dramatically reduced), and inexperienced 25 year old white men, women, minorities are being hired to replace experienced 60 year old white men. Why would we expect to have a nice linear relationship between unemployment and wages across this period?

So I think we see the Philips curve predictably happening in the short-term in fields like technology where there is big demand and not enough people. However, as a general rule across the economy, I simply don't see why the relationship between inflation and unemployment should be the same today as it was in 2007, 1997, 1987, or 1977.

Economics is infected with too much ideology and not enough scientific method. That is more the definition of a religion than a science.

diptherio , October 27, 2017 at 10:42 am

Good article. In my econ undergrad, I remember my intermediate macro professor pointing out that reality didn't match the theoretical Philips curve very well and then we continued assuming that it did, for the remainder of the course. {facepalm}

If neoliberals were intellectually honest, they wouldn't call it supply side economics, they'd call it philo-capital economics

Might I suggest "capitalphilic economics"? Seems to roll off the tongue a little better.

nonclassical , October 27, 2017 at 11:17 am

80's Poly-Sci defined, "neo-feudalism" (or, as "Shock Doctrine", privatization of all "resource" + government capacity, subject financial sector capture)

tegnost , October 27, 2017 at 11:22 am

I'll just leave this here along with a little deep thinking by diptherio
https://www.nakedcapitalism.com/2016/05/naked-capitalisms-diptherio-discusses-flaws-in-unemployment-reporting.html

diptherio

Doncha just love how it's defined, in practice, as whatever the unemployment rate seems to settle around. If I'm not mistaken, in the 70's NAIRU was considered to be 6 or 7 %. Then unemployment fell and inflation didn't accelerate so they changed NAIRU to 5%.

What I want to know is if there has ever been a documented case where it can be shown that low unemployment levels actually led to accelerating-inflation. The inflationary periods in US history that I'm familiar with seem to have all been caused by supply shocks (i.e. oil embargo) or financial shenanigans (the housing market of the early aughties). Ditto for other countries, so far as I know.

As far as I can tell, the whole idea of NAIRU is strictly an artifact of economic modeling, not something that's actually ever been observed in the wild. And doesn't it seem odd that making sure we don't drop below NAIRU is something the Fed feels like it needs to intervene to ensure rather than letting the market sort it out. Even if NAIRU was a real thing, you would assume that low unemployment –> increased wages –> increased prices –> reduced consumption –> lay-offs and higher unemployment. Which is to say, if there were such a thing as a natural rate of unemployment, wouldn't markets naturally produce it, obviating any need for the Fed to, say, jack up interest rates to keep the economy from "heating up" (I guess because people have so much money burning holes in their pockets?). It almost like, when it suits the capitalists, they stop believing in this whole "invisible hand" thing .strange

diptherio , October 27, 2017 at 3:07 pm

*blushes* Applying simple logic to mainsteam economics is always entertaining when it's not maddening

vlade , October 27, 2017 at 10:48 am

If I remember right, Phillips published this paper because LSE was pushing him to publish something so that they could justify awarding him professorship and tenure, and he could go to tinkering with his MONIAC. I was told he just wanted to get something out, and this was the first idea he had so he wrote it up, but wasn't really persuaded..

The damage to the real world the academia demands does..

JTMcPhee , October 27, 2017 at 3:31 pm

"Real world" powers can riffle through the files of academia, hard and soft sciences or the various humanities or whatever, even languages and linguistics, and, because "freedom," can always come up with something published that "proves" whatever line of BS the looters are pushing at any given moment to increase their "take."

But then ever since humans discovered ratiocination, thus it has always been. SOMEone or SOMEthing always has to be "the authority," or at least "authoritative "

Samuel Conner , October 27, 2017 at 4:11 pm

That story puts a new spin on "publish or perish", something like "(you) publish and (a lot of other people will) perish (sooner)".

Ned , October 27, 2017 at 11:07 am

This is one reason why America is being parasitized by finance -- - Math. That and the math card in computers that allows the instantaneous creation of speculation and playing of the numbers with hypothetical money that later translates into real productivity or more likely misery.

The average American's eyes glaze over as soon as you put up a math formula. He of course, will memorize all manner of arcane sports trivia and statistics, but when it comes time to quantify his own economic doom, or to think about his or her own economic travails with numbers and curves, it's mind shutdown time.

This is why we love Yves. She has allowed us to get an insight into, become informed and learn about economics through high quality reporting. Thank you for this reminder of the hocus pocus and the witch-doctory that is casting our spell into economic hell.

nonclassical , October 27, 2017 at 11:24 am

not just "math": Rand-Friedman-libertarian ideological definition:

"Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that "the market" delivers benefits that could never be achieved by planning.

Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive and morally corrosive. The market ensures that everyone gets what they deserve.

We internalise and reproduce its creeds. The rich persuade themselves that they acquired their wealth through merit, ignoring the advantages – such as education, inheritance and class – that may have helped to secure it. The poor begin to blame themselves for their failures, even when they can do little to change their circumstances.

Never mind structural unemployment: if you don't have a job it's because you are unenterprising. Never mind the impossible costs of housing: if your credit card is maxed out, you're feckless and improvident. Never mind that your children no longer have a school playing field: if they get fat, it's your fault. In a world governed by competition, those who fall behind become defined and self-defined as losers."

https://www.theguardian.com/books/2016/apr/15/neoliberalism-ideology-problem-george-monbiot

Synoia , October 27, 2017 at 11:49 am

That you suffer from parasites is your fault, but God help you if you try to eradicate them.

Summer , October 27, 2017 at 2:01 pm

Your link dances around calling it out: neoliberalism is a rebranding of social darwinism.

Not much "neo" about it. But for all the alleged "progress," it seems we're trapped in a culture that really finds it hard to let go of the 19th Century. And mot just economically, but socially as well.

"natural hierarchy of winners and losers " – does not exist. They rebranded to try to get around all the artificial selection in the global economy.

Ed Walker Post author , October 27, 2017 at 1:50 pm

In an early draft of this article, I had a reference to Econned, where Yves discusses the use of the Gaussian Copula in the organization of RMBSs. So, yes, it's largely the math that Samuelson and Solow and the people who came later loved.

You'll note that I only use very simple math, mostly because it's a nice shorthand, like Equations 1a and 1b

flora , October 27, 2017 at 2:09 pm

an aside: For readers who do not 'read math' you provide understandable English translations of the equations. Thanks.

Quanka , October 27, 2017 at 11:56 am

vlade hit on a key point, IMO. I was an undergrad at prestigious Midwestern school during the period where they split the Econ department in 2 -- a econometrics-esque degree from the Math/Science school, vs. 'Economics' which they kept in the College of Arts and Letters. They've been strangling the latter department since while ensuring steady flow of grants to the math-based department, a la the Phillips story alluded to above.

Seconding diptherio – I remember the introductory statistics and econometric courses I was required to take, where we'd routinely dissect econ reporting in the press based on flawed mathematics or poor statistical methods, and yet carry as though these were meaningful and useful figures (e.g. unemployment, inflation).

So what to do -- do you try to change the way economics is practiced? Or do you try to take away the influence that neoliberalism and/or industrial capitalism have on the education fields? And how exactly do you do that (reform education) given how instrumental it is for neoliberalism to continue.

I see an analogy here, maybe I am wrong. Picture bull-fighting, an appropriate concept,I think. I see neoliberalism as the Matador, education as the cape, and the public as the bull. So the questions above might be rephrased as from the bull's perspective, do you chase the cape or gore the matador?

The stakes are high for the matador -- although as a spectator that fact is hidden in plain sight.

flora , October 27, 2017 at 11:58 am

Thanks for this very readable and important post. Demystify the Phillips Curve and other economic "truths" being used against Main Street is significant.

" This equation calls attention to the role that profits play in the economy, something economists generally generally ignore. When people do discuss profits, it's always in the context of the importance of capital and the need to coddle it. That view lies at the heart of neoliberalism, and at the heart of Fed policy."

Travis Bickle , October 27, 2017 at 12:53 pm

When you think about it, the PC supports the argument of how Supply & Demand explains pretty much everything about economics. It you need to explain economics in a nutshell to a working guy who thinks nothing is really all that complicated (were it not for intellectuals over-thinking things), it fills the bill rather nicely. A matter of rhetorical Supply & Demand, come to think of it.

Thuto , October 27, 2017 at 1:08 pm

For most people, being confronted with "scientific evidence" is enough to lay to rest any and all doubt about the claims being made in a proposition. Scientific evidence hardens claims into hard facts, and does so quickly. What better way to make something appear scientific than to riddle its academic literature with curves and formulas, and give it its own pride of place at the nobles side by side with real sciences. That real sciences have laws that are universally applicable or can at least be reconciled across levels of reality with the consistency you'd expect of something labelled a science (e.g. how quantum electrodynamics reconciles classical electrodynamics at the atomic and subatomic levels) seems to be a minor inconvenience to those with vested interests in having economics accepted by the public as a hard science (precisely, I say again, because presenting "scientific evidence" with formulas and curves disarms most people, among them the political ruling class, of their critical thinking faculties). Add living in an age of credentialism to the mix and the general ineptitude of our ruling politicians and one can see how economists can wreak so much havoc with their ex-cathedra pronouncements on what makes the economy work

Ed Walker Post author , October 27, 2017 at 1:59 pm

The material about Simcha Barkai's paper is the most interesting part of this to me. That paper strikes a serious blow at the heart of neoliberal antitrust law, but it also explains the wage-productivity gap and shows the way to social changes that would benefit most of us.

Also, the billionaires of the world now control $6 Trillion. https://www.theguardian.com/business/2017/oct/26/worlds-witnessing-a-new-gilded-age-as-billionaires-wealth-swells-to-6tn

So naturally Republicans want tax cuts for the pig rich.

whateverhelps , October 27, 2017 at 2:21 pm

Phillips Curve has ever been ideological nonsense. Sad to see it alive 30 years later

EoH , October 27, 2017 at 3:49 pm

The Philips Curve exemplifies the dysfunction created by separating mathematical/quantitative descriptions of an economy from that same lived economy and its history. The PC was originally developed on British data covering a period roughly from ten years after the Crystal Palace Exhibition of 1851 to WWI, and then extended to WWII. Over the same period, literature met Oliver Twist and Alice and her rabbit hole, was jostled by Hardy and Lawrence, and jolted by Joyce, Woolf and Eliot, not least because a woman writer demanded a room of her own. The changes in social, economic and political life were comparable.

The British statistics cover a period when power shifted as dramatically as literature. A suffrage limited to propertied men became universal. The agency, the organization, persistence and determination necessary to create that change was considerable. So, too, a landowning aristocracy, once at the apex of all social, political, legal and economic life, saw its monopoly shrink, or rather found itself joined by large business owners, financiers, traders and press lords, and for a time, trades union leaders.

Parliament expressed that power shift, for example, by ending tariffs protecting domestic grain production, substituting, instead, subsidies for imported food stuffs, in order more cheaply to keep workers fed and at their machines. (A hard-fought concession to a new, competing power block of manufacturers, their financiers and traders,) A major constitutional crisis in 1910-11 presaged adoption of Bismarckian welfare programs, which America did not see until FDR and LBJ. These were a modest but viciously fought concession in order to avoid the kind of extra-constitutional change experienced by Russia a few years later.

Workers over this period witnessed the final stage of enclosures (privatizing of common lands), the end of cottage industries, and the rise, dominance and decline of heavy industry. The Crystal Palace's startling iron pillars and acres of glass yielded to curtain walls and structural steel. Technology, as today, raced headlong. Stage coaches gave way to steam railroads; the telegraph to the telephone and wireless; lances, swords and muzzle loaders to dreadnoughts, flying machines, automatic weapons and poison gas – all with vastly different supply chains, need for capital and levels of employment.

The empire added half of Africa, notably South Africa and its ores, diamonds and gold, and de facto control of Egypt and its canal at Suez. De jure imperial relations existed with India and the "white commonwealth" countries of Canada, Australia, New Zealand and South Africa (post-Boer War). De facto imperial relations existed with much of Latin America, the Caribbean and East Asia. The pound was a global currency and the Royal Navy was admonished to "rule the waves", an aspiration that has since given way to following and buying from the stars and stripes. The ebb and flow of imperial power affected raw material prices coming in and export prices going out.

By what logic would the statistics of economic relations, of changing notions of acceptable levels of employment and inflation (capital's nemesis), not be affected by dramatic changes in social, political and economic conditions? Demonstrating sufficient continuity to establish a "law" for those relations for a single country, let alone one valid across time and national boundaries, would seem to be a sisyphean task.

Wisdom Seeker , October 27, 2017 at 5:13 pm

There's a persuasive interpretation of Phillips' original work and application to US data by John Hussman, which argues :

1) Phillips' original paper is right but most of the work since is garbage which missed the point.

2) Phillips' correct result is a relationship between unemployment and real wage growth ("wage inflation"), not consumer prices.

3) Most modern interpretations have either incompetently lost the point about real wages, or deliberately obfuscated. (Modern econ exists to serve capital more than labor, so this is not surprising.)

Hussman followed up the original piece with some others in recent years:
2013 / 11/ 04
2014 / 08 / 25

And from January 19, 2010 (emphasis added) :

"When labor is scarce (low unemployment), the price of labor tends to rise relative to the price of other things (thus we observe real wage inflation ). In contrast, when labor is plentiful (high unemployment), the price of labor tends to stagnate relative to the price of other things (real wages stagnate)."

Whether real wage inflation translates into consumer price inflation depends on the supply and demand of consumer goods, repayment of debts, workers' need to save for retirements etc.

I believe real wage growth, at the expense of corporate profits, is exactly what has been missing from the health of the economy for the past 20-40 years.

I also suspect the true reason why central banks fear low unemployment is because those increases in workers' wages will come at the expense of corporate profitability. (Especially in an economy with high corporate profit levels and inadequate price competition.)

I also suspect most modern recessions have not been caused by the low unemployment, but rather by the credit tightening applied to prevent low unemployment – to prevent workers from enjoying higher wages at the owners' expense.

[Oct 11, 2017] The elite schools, and I have taught as a visiting professor at a few of them, such as Princeton and Columbia, replicate the structure and goals of corporations

Notable quotes:
"... The elite schools, and I have taught as a visiting professor at a few of them, such as Princeton and Columbia, replicate the structure and goals of corporations. If you want to even get through a doctoral committee, much less a tenure committee, you must play it really, really safe. You must not challenge the corporate-friendly stance that permeates the institution and is imposed through corporate donations and the dictates of wealthy alumni. Half of the members of most of these trustee boards should be in prison! ..."
"... Speculation in the 17th century in Britain was a crime. Speculators were hanged. And today they run the economy and the country. They have used the capturing of wealth to destroy the intellectual, cultural and artistic life in the country and snuff out our democracy. There is a word for these people: traitors. ..."
Oct 11, 2017 | www.unz.com

Originally from: The elites "have no credibility left" by Chris Hedges

...The elite schools, and I have taught as a visiting professor at a few of them, such as Princeton and Columbia, replicate the structure and goals of corporations. If you want to even get through a doctoral committee, much less a tenure committee, you must play it really, really safe. You must not challenge the corporate-friendly stance that permeates the institution and is imposed through corporate donations and the dictates of wealthy alumni. Half of the members of most of these trustee boards should be in prison!

Speculation in the 17th century in Britain was a crime. Speculators were hanged. And today they run the economy and the country. They have used the capturing of wealth to destroy the intellectual, cultural and artistic life in the country and snuff out our democracy. There is a word for these people: traitors.

[Oct 10, 2017] The US Economy: Explaining Stagnation and Why It Will Persist by Thomas I. Palley

Highly recommended!
The paper is two years old. Looks how his prediction fared. Stagnation is still with us althouth low oil prices lifted all the boats. But this period is coming to the end.
Notable quotes:
"... The financial crisis that erupted in 2008 challenged the foundations of orthodox economic theory and policy. At its outset, orthodox economists were stunned into silence as evidenced by their inability to answer the Queen of England's simple question (November 5th, 2008) to the faculty of the London School of Economics as to why no one foresaw the crisis. ..."
"... Six years later, orthodoxy has fought back and largely succeeded in blocking change of thought and policy. The result has been economic stagnation ..."
"... Perspective # 3 is the progressive position which is rooted in Keynesian economics and can be labeled the "destruction of shared prosperity hypothesis" ..."
"... It is identified with the New Deal wing of the Democratic Party and the labor movement, but it has no standing within major economics departments owing to their suppression of alternatives to economic orthodoxy. ..."
"... However, financial excess is just an element of the crisis and the full explanation is far deeper than just financial market regulatory failure According to the Keynesian destruction of shared prosperity hypothesis, the deep cause is generalized economic policy failure rooted in the flawed neoliberal economic paradigm that was adopted in the late 1970s and early 1980s. ..."
"... globalization reconfigured global production by transferring manufacturing from the U.S. and Europe to emerging market economies. This new global division of labor was then supported by having U.S. consumers serve as the global economy's buyer of first and last resort, which explains the U.S. trade deficit and the global imbalances problem. ..."
"... This new global division of labor inevitably created large trade deficits that also contributed to weakening the aggregate demand (AD)generation process by causing a hemorrhage of spending on imports (Palley, 2015) ..."
"... Finance does this through three channels. First, financial markets have captured control of corporations via enforcement of the shareholder value maximization paradigm of corporate governance. Consequently, corporations now serve financial market interests along with the interests of top management. Second, financial markets in combination with corporations lobby politically for the neoliberal policy mix. ..."
"... Third, financial innovation has facilitated and promoted financial market control of corporations via hostile take-overs, leveraged buyouts and reverse capital distributions. Financial innovation has therefore been key for enforcing Wall Street's construction of the shareholder value maximization paradigm. ..."
"... The second vital role of finance is the support of AD. The neoliberal model gradually undermined the income and demand generation process, creating a growing structural demand gap. The role of finance was to fill that gap. Thus, within the U.S., deregulation, financial innovation, speculation, and mortgage lending fraud enabled finance to fill the demand gap by lending to consumers and by spurring asset price inflation ..."
"... this AD generation role of finance was an unintended consequence and not part of a grand plan. Neoliberal economists and policymakers did not realize they were creating a demand gap, but their laissez-faire economic ideology triggered financial market developments that coincidentally filled the demand gap. ..."
"... the financial process they unleashed was inevitably unstable and was always destined to hit the wall. There are limits to borrowing and limits to asset price inflation and all Ponzi schemes eventually fall apart. ..."
"... the long duration of financial excess made the collapse far deeper when it eventually happened. It has also made escaping the after-effects of the financial crisis far more difficult as the economy is now burdened by debts and destroyed credit worthiness. That has deepened the proclivity to economic stagnation. ..."
"... The neoliberal labor market flexibility agenda explicitly attacks unions and works to shift income to wealthier households. ..."
"... That model inevitably produces stagnation because it produces a structural demand shortage via (i) its impact on income distribution, and (ii) via its design of globalization which generates massive trade deficits, wage competition and off-shoring of jobs and investment. In terms of the three-way contest between the government failure hypothesis, the market failure hypothesis and the destruction of shared prosperity hypothesis, the economic policy debate during the Great Recession was cast as exclusively between government failure and market failure. ..."
"... This attitude to fiscal policy reflects the dominance within the Democratic Party of "Rubinomics", the Wall Street view associated with former Treasury Secretary Robert Rubin, that government spending and budget deficits raise real interest rates and thereby lower growth. According to that view, the US needs long-term fiscal austerity to offset Social Security and Medicare Side-by-side with the attempt to reflate the economy, the Obama administration also pushed for major overhaul and tightening of financial sector regulation via the Dodd- Frank Act (2010). ..."
"... The Obama administration's softcore neoliberalism would have likely generated stagnation by itself, but the prospect has been further strengthened by Republicans. ..."
"... The Obama administration was to provide fiscal stimulus to jump start the economy; the Fed would use QE to blow air back into the asset price bubble; the Dodd-Frank Act (2010) would stabilize financial markets; and globalization would be deepened by further NAFTA-styled international agreements. This is a near-identical model to that which failed so disastrously. Consequently, stagnation is the logical prognosis. ..."
"... Consequently, the economy is destined to repeat the patterns of the 1990s and 2000s. However, the US economy has also experienced almost twenty more years of neoliberalism which has left its economic body in worse health than the 1990s. That means the likelihood of delivering another bubble-based boom is low and stagnation tendencies will likely reassert themselves after a shorter and weaker period of expansion ..."
Apr 10, 2015 | www.thomaspalley.com

Abstract

This paper examines the major competing interpretations of the economic crisis in the US and explains the rebound of neoliberal orthodoxy. It shows how US policymakers acted to stabilize and save the economy, but failed to change the underlying neoliberal economic policy model. That failure explains the emergence of stagnation, which is likely to endure

Current economic conditions in the US smack of the mid-1990s. The 1990s expansion proved unsustainable and so will the current modest expansion. However, this time it is unlikely to be followed by financial crisis because of the balance sheet cleaning that took place during the last crisis

Revised 1: This paper has been prepared for inclusion in Gallas, Herr, Hoffer and Scherrer (eds.), Combatting Inequality: The Global North and South , Rouledge, forthcoming in 2015.

The crisis and the resilience of neoliberal economic orthodoxy

The financial crisis that erupted in 2008 challenged the foundations of orthodox economic theory and policy. At its outset, orthodox economists were stunned into silence as evidenced by their inability to answer the Queen of England's simple question (November 5th, 2008) to the faculty of the London School of Economics as to why no one foresaw the crisis.

Six years later, orthodoxy has fought back and largely succeeded in blocking change of thought and policy. The result has been economic stagnation

This paper examines the major competing interpretations of the economic crisis in the US and explains the rebound of neoliberal orthodoxy. It shows how US policymakers acted to stabilize and save the economy, but failed to change the underlying neoliberal economic policy model.

That failure explains the emergence of stagnation in the US economy and stagnation is likely to endure.

Current economic conditions in the US smack of the mid-1990s. The 1990s expansion proved unsustainable and so will the current modest expansion. However, this time it is unlikely to be followed by financial crisis because of the balance sheet cleaning that took place during the last crisis.

Competing explanations of the crisis

The Great Recession, which began in December 2007 and includes the financial crisis of 2008, is the deepest economic downturn in the US since the World War II. The depth of the downturn is captured in Table 1 which shows the decline in GDP and the peak unemployment rate. The recession has the longest duration and the decline in GDP is the largest. The peak unemployment rate was slightly below the peak rate of the recession of 1981-82. However, this ignores the fact that the labor force participation rate fell in the Great Recession (i.e. people left the labor force and were not counted as unemployed) whereas it increased in the recession of 1981-82 (i.e. people entered the labor force and were counted as unemployed).

Table 1. Alternative measures of the depth of US recessions.

... ... ...

Table 2 provides data on the percent change in private sector employment from business cycle peak to trough. The 7.6 percent loss of private sector jobs in the Great Recession dwarfs other recessions, providing another measure of its depth and confirming it extreme nature. 2 Over the course of the 1981-82 labor force participation rose from 63.8 percent to 64.2 percent, thereby likely increasing the unemployment rate. In contrast, over the course of the Great Recession the labor force participation rate fell from 66.0 percent to 65.7 percent, thereby likely decreasing the unemployment. The decrease in the labor force participation rate was even sharper for prime age (25 – 54 years old) workers, indicating that the decrease in the overall participation rate was not due to demographic factors such as an aging population. Instead, it was due to lack of job opportunities, which supports the claim that labor force exit lowered the unemployment rate. Table 2. U.S. private employment cycles, peak to trough. Source: Bureau of labor statistics and author's calculations.

... ... ...

Broadly speaking there exist three competing perspectives on the crisis (Palley, 2012).

For the period 1945 - 1975 the U.S. economy was characterized by a "virtuous circle" Keynesian growth model built on full employment and wage growth tied to productivity growth. This model is illustrated in Figure 1 and its logic was as follows. Productivity growth drove wage growth, which in turn fuelled demand growth and created full employment. That provided an incentive for investment, which drove further productivity growth and supported higher wages. This model held in the U.S. and, subject to local modifications, it also held throughout the global economy - in Western Europe, Canada, Japan, Mexico, Brazil and Argentina.

Figure 1. The 1945 – 75 virtuous circle Keynesian growth model. Wage growth Demand growth Full employment Productivity growth Investment

After 1980 the virtuous circle Keynesian growth model was replaced by a neoliberal growth model. The reasons for the change are a complex mix of economic, political and sociological reasons that are beyond the scope of the current paper. The key changes wrought by the new model were:

  1. Abandonment of the commitment to full employment and the adoption of commitment to very low inflation;
  2. Severing of the link between wages and productivity growth.

Together, these changes created a new economic dynamic. Before 1980, wages were the engine of U.S. demand growth. After 1980, debt and asset price inflation became the engine The new economic model was rooted in neoliberal economic thought. Its principal effects were to weaken the position of workers; strengthen the position of corporations; and unleash financial markets to serve the interests of financial and business elites.

As illustrated in figure 2, the new model can be described as a neoliberal policy box that fences workers in and pressures them from all sides. On the left hand side, the corporate model of globalization put workers in international competition via global production networks that are supported by free trade agreements and capital mobility.

On the right hand side, the "small" government agenda attacked the legitimacy of government and pushed persistently for deregulation regardless of dangers. From below, the labor market flexibility agenda attacked unions and labor market supports such as the minimum wage, unemployment benefits, employment protections, and employee rights. From above, policymakers abandoned the commitment of full employment, a development that was reflected in the rise of inflation targeting and the move toward independent central banks influenced by financial interests.

Figure 2. The neoliberal policy box. Globalization WORKERS Abandonment of full employment Small Government Labor Market Flexibility

Corporate globalization is an especially key feature. Not only did it exert downward inward pressures on economies via import competition and the threat of job off-shoring, it also provided the architecture binding economies together. Thus, globalization reconfigured global production by transferring manufacturing from the U.S. and Europe to emerging market economies. This new global division of labor was then supported by having U.S. consumers serve as the global economy's buyer of first and last resort, which explains the U.S. trade deficit and the global imbalances problem.

This new global division of labor inevitably created large trade deficits that also contributed to weakening the aggregate demand (AD)generation process by causing a hemorrhage of spending on imports (Palley, 2015)

An important feature of the Keynesian hypothesis is that the neoliberal policy box was implemented on a global basis, in both the North and the South. As in the U.S., there was also a structural break in policy regime in both Europe and Latin America. In Latin America , the International Monetary Fund and World Bank played an important role as they used the economic distress created by the 1980s debt crisis to push neoliberal policy

They did so by making financial assistance conditional on adopting such policies. This global diffusion multiplied the impact of the turn to neoliberal economic policy and it explains why the Washington Consensus enforced by the International Monetary Fund and World Bank has been so significant. It also explains why stagnation has taken on a global dimension.

III The role of finance in the neoliberal model

Owing to the extraordinarily deep and damaging nature of the financial crisis of 2008, financial market excess has been a dominant focus of explanations of the Great Recession. Within the neoliberal government failure hypothesis the excess is attributed to ill-advised government intervention and Federal Reserve interest rate policy. Within the neoliberal market failure hypothesis it is attributed to ill-advised deregulation and failure to modernize regulation.

According to the Keynesian destruction of shared prosperity hypothesis neither of those interpretations grasps the true significance of finance. The government failure hypothesis is empirically unsupportable (Palley, 2012a, chapter 6), while the market failure hypothesis has some truth but also misses the true role of finance That role is illustrated in Figure 3 which shows that finance performed two roles in the neoliberal model. The first was to structurally support the neoliberal policy box. The second was to support the AD generation process. These dual roles are central to the process of increasing financial domination of the economy which has been termed financialization (Epstein, 2004, p.3; Krippner, 2004, 2005; Palley, 2013). Figure 3. The role of finance in the neoliberal model. The role of finance: "financialization" Supporting the neoliberal policy box Aggregate demand generation Corporate behavior Economic policy Financial innovation The policy box shown in Figure 2 has four sides.

A true box has six sides and a four sided structure would be prone to structural weakness.

Metaphorically speaking, one role of finance is to provide support on two sides of the neoliberal policy box, as illustrated in Figure 4.

Finance does this through three channels. First, financial markets have captured control of corporations via enforcement of the shareholder value maximization paradigm of corporate governance. Consequently, corporations now serve financial market interests along with the interests of top management. Second, financial markets in combination with corporations lobby politically for the neoliberal policy mix.

The combination of changed corporate behavior and economic policy produces an economic matrix that puts wages under continuous pressure and raises income inequality.

Third, financial innovation has facilitated and promoted financial market control of corporations via hostile take-overs, leveraged buyouts and reverse capital distributions. Financial innovation has therefore been key for enforcing Wall Street's construction of the shareholder value maximization paradigm.

Figure 4. Lifting the lid on the neoliberal policy box. The neoliberal box Corporations Financial markets

The second vital role of finance is the support of AD. The neoliberal model gradually undermined the income and demand generation process, creating a growing structural demand gap. The role of finance was to fill that gap. Thus, within the U.S., deregulation, financial innovation, speculation, and mortgage lending fraud enabled finance to fill the demand gap by lending to consumers and by spurring asset price inflation

Financialization assisted with this process by changing credit market practices and introducing new credit instruments that made credit more easily and widely available to corporations and households. U.S. consumers in turn filled the global demand gap, along with help from U.S. and European corporations who were shifting manufacturing facilities and investment to the emerging market economies.

Three things should be emphasized.

  1. First, this AD generation role of finance was an unintended consequence and not part of a grand plan. Neoliberal economists and policymakers did not realize they were creating a demand gap, but their laissez-faire economic ideology triggered financial market developments that coincidentally filled the demand gap.
  2. Second, the financial process they unleashed was inevitably unstable and was always destined to hit the wall. There are limits to borrowing and limits to asset price inflation and all Ponzi schemes eventually fall apart. The problem is it is impossible to predict when they will fail. All that can be known with confidence is that it will eventually fail.
  3. Third, the process went on far longer than anyone expected, which explains why critics of neoliberalism sounded like Cassandras (Palley, 1998, Chapter 12). However, the long duration of financial excess made the collapse far deeper when it eventually happened. It has also made escaping the after-effects of the financial crisis far more difficult as the economy is now burdened by debts and destroyed credit worthiness. That has deepened the proclivity to economic stagnation.
IV Evidence

Evidence regarding the economic effects of the neoliberal model is plentiful and clear Figure 5 shows productivity and average hourly compensation of non-supervisory workers (that is non-managerial employees who are about 80 percent of the workforce). The link with productivity growth was severed almost 40 years ago and hourly compensation has been essentially stagnant since then.

Figure 5.

... ... ...

Table 3 shows data on the distribution of income growth by business cycle expansion across the wealthiest top 10 percent and bottom 90 percent of households. Over the past sixty years there has been a persistent decline in the share of income gains going to the bottom 90 percent of households ranked by wealth. However, in the period 1948 – 1979 the decline was gradual. After 1980 there is a massive structural break and the share of income gains going to the bottom 90 percent collapses. Before 1980, on average the bottom 90 percent received 66 percent of business cycle expansion income gains. After 1980, on average they receive just 8 percent.

Table 3. Distribution of income growth by business cycle expansion across the wealthiest top 10 percent and bottom 90 percent of households. Source: Tcherneva (2014), published in The New York Times , September 26, 2014. '49- '53 '54- '57 '59- '60 '61- '69 '70- '73 '75- '79 '82- '90 '91- '00 '01- '07 '09- '12 Average Pre-1908 Average Post-1980 Top 10% 20% 28 32 33 43 45 80 73 98 116 34% 92% Bottom 90% 80% 72 68 67 57 55 20 27 2 -16 66% 8%

Figure 6 shows the share of total pre-tax income of the top one percent of households ranked by wealth. From the mid-1930s, with the implementation of the New Deal social contract, that share fell from a high of 23.94 percent in 1928 to a low of 8.95 percent in 1978. Thereafter it has steadily risen, reaching 23.5 percent in 2007 which marked the beginning of the Great Recession. It then fell during the Great Recession owing to a recession-induced fall in profits, but has since recovered most of that decline as income distribution has worsened again during the economic recovery. In effect, during the neoliberal era the US economy has retraced its steps, reversing the improvements achieved by the New Deal and post-World War II prosperity, so that the top one percent's share of pre-tax income has returned to pre-Great Depression levels.

Figure 6. US pre-tax income share of top 1 percent. Source: http://inequality.org/income-inequality/. Original source: Thomas Piketty and Emanuel Saez (2003), updated at http://emlab.edu/users/saez.

As argued in Palley (2012a, p. 150-151) there is close relationship between union membership density (i.e. percent of employed workers that are unionized) and income distribution. This is clearly shown in Figure 7 which shows union density and the share of pre-tax income going to the top ten percent of wealthiest households. The neoliberal labor market flexibility agenda explicitly attacks unions and works to shift income to wealthier households.

Share of income going to the top 10 percent 2013: 47.0% Union membership density 11.2% 0% 10% 20% 30% 40% 50% 60% 1917 1923 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007 2013 Source: Data on union density follows the composite series found in Historical Statistics of the United States; updated to 2013 from unionstats.com. Income inequality (share of income to top 10%) from Piketty and Saez,

"Income Inequality in the United States, 1913-1998, Quarterly Journal of Economics , 118(1), 2003, 1-39. Updated Figure 7. Union membership and the share of income going to the top ten percent of wealthiest households, 1917 – 2013. Source: Mishel, Gould and Bivens (2015). Table 4 provides data on the evolution of the U.S. goods and services trade balance as a share of GDP by business cycle peak. Comparison across peaks controls for the effect of the business cycle. The data show through to the late 1970s U.S. trade was roughly in balance, but after 1980 it swung to massive deficit and the deficits increased each business cycle. These deficits were the inevitable product of the neoliberal model of globalization (Palley, 2015) and they undermined the AD generation process in accordance with the Keynesian hypothesis.

Table 4. The U.S. goods & services trade deficit/surplus by business cycle peaks, 1960 – 2007. Sources: Economic Report of the President, 2009 and author's calculations. Business cycle peak year Trade balance ($ millions) GDP ($ billions) Trade balance/ GDP (%) 1960 3,508 526.4 0.7 1969 91 984.6 0.0 1973 1,900 1,382.7 0.1 1980 -25,500 2,789.5 -0.9 1981 -28,023 3,128.4 -0.9 1990 -111,037 5,803.1 -1.9 2001 -429,519 10,128.0 -4.2 2007 -819,373 13,807.5 -5.9

Finally, Figure 8 shows total domestic debt relative to GDP and growth. This Figure is highly supportive of the Keynesian interpretation of the role of finance. During the neoliberal era real GDP growth has actually slowed but debt growth has exploded. The reason is the neoliberal model did nothing to increase growth, but it needed faster debt growth to fill the demand gap created by the model's worsening of income distribution and creation of large trade deficits. Debt growth supported debt-financed consumer spending and it supported asset price inflation that enabled borrowing which filled the demand gap caused by the neoliberal model. Figure 8. Total domestic debt and growth (1952-2007). Source: Grantham, 2010.

V The debate about the causes of the crisis: why it matters

The importance of the debate about the causes of the crisis is that each perspective recommends its own different policy response. For hardcore neoliberal government failure proponents the recommended policy response is to double-down on the policies described by the neoliberal policy box and further deregulate markets; to deepen central bank independence and the commitment to low inflation via strict rules based monetary policy; and to further shrink government and impose fiscal austerity to deal with increased government debt produced by the crisis For softcore neoliberal market failure proponents the recommended policy response is to tighten financial regulation but continue with all other aspects of the existing neoliberal policy paradigm. That means continued support for corporate globalization, socalled labor market flexibility, low inflation targeting, and fiscal austerity in the long term. Additionally, there is need for temporary large-scale fiscal and monetary stimulus to combat the deep recession caused by the financial crisis.

However, once the economy has recovered, policy should continue with the neoliberal model For proponents of the destruction of shared prosperity hypothesis the policy response is fundamentally different. The fundamental need is to overthrow the neoliberal paradigm and replace it with a "structural Keynesian" paradigm. That involves repacking the policy box as illustrated in Figure 9.

The critical step is to take workers out of the box and put corporations and financial markets in so that they are made to serve a broader public interest. The key elements are to replace corporate globalization with managed globalization that blocks race to the bottom trade dynamics and stabilizes global financial markets; restore a commitment to full employment; replace the neoliberal anti-government agenda with a social democratic government agenda; and replace the neoliberal labor market flexibility with a solidarity based labor market agenda.

The goals are restoration of full employment and restoration of a solid link between wage and productivity growth.

Figure 9. The structural Keynesian box Corporations & Managed Financial Markets Globalization Full Employment Social Democratic Government Solidarity Labor Markets

Lastly, since the neoliberal model was adopted as part of a new global economic order, there is also need to recalibrate the global economy. This is where the issue of "global rebalancing" enters and emerging market economies need to shift away from export-led growth strategies to domestic demand-led strategies. That poses huge challenges for many emerging market economies because they have configured their growth strategies around export-led growth whereby they sell to U.S. consumers.

VI From crisis to stagnation: the failure to change

Massive policy interventions, unequalled in the post-war era, stopped the Great Recession from spiraling into a second Great Depression. The domestic economic interventions included the 2008 Troubled Asset Relief Program (TARP) that bailed out the financial sector via government purchases of assets and equity from financial institutions; the 2009 American Recovery and Reinvestment Act (ARRA) that provided approximately $800 billion of fiscal stimulus, consisting of approximately $550 billion of government spending and $250 billion of tax cuts; the Federal Reserve lowering its interest target to near-zero (0 - 0.25 percent); and the Federal Reserve engaging in quantitative easing (QE) transactions that involve it purchasing government and private sector securities. At the international level, in 2008 the Federal Reserve established a temporary $620 billion foreign exchange (FX) swap facility with foreign central banks.

That facility provided the global economy with dollar balances, thereby preventing a dollar liquidity shortage from triggering a wave of global default on short-term dollar loans that the financial system was unwilling to roll-over because of panic.3

Additionally, there was unprecedented globally coordinated fiscal stimulus arranged via the G-20 mechanism. 3

The FX swaps with foreign central banks have been criticized as being a bail-out for foreign economies. In fact, they saved the US financial system which would have been pulled down by financial collapse outside

Despite their scale, these interventions did not stop the recession from being the deepest since 1945, and nor did they stop the onset of stagnation. Table 5 shows how GDP growth has failed to recover since the end of the Great Recession, averaging just 2.1 percent for the five year period from 2010 – 2014. Furthermore, that period includes the rebound year of 2010 when the economy rebounded from its massive slump owing to the extraordinary fiscal and monetary stimulus measures that were put in place

Table 5. U.S. GDP growth. Source: Statistical Annex of the European Union, Autumn 2014 and author's calculations.

The growth rate for 2014 is that estimated in October 2014.

1961 - 1970 1971 - 1980 1981 - 1990 1991 - 2000 2001 - 2007 2008 - 2009 2010 - 2014

4.2% 3.2% 3.3% 3.5% 2.5% -1.6% 2.1%

Table 6 shows employment creation in the five years after the end of recessions, which provides another window on stagnation. The job creation numbers show that the neoliberal model was already slowing in the 1990s with the first episode of "jobless the US.

Many foreign banks operating in the US had acquired US assets financed with short-term dollar borrowings. When the US money market froze in 2008 they could not roll-over these loans in accordance with normal practice. That threatened massive default by these banks within the US financial system, which would have pulled down the entire global financial system.

The Federal Reserve could not lend directly to these foreign banks and their governing central banks lacked adequate dollar liquidity to fill the financing gap. The solution was to lend dollars to foreign central banks, which then made dollar loans to foreign banks in need of dollar roll-over short-term financing. recovery".

It actually ground to stagnation in the 2001 – 2007 period, but this was masked by the house price bubble and the false prosperity it created. Stagnation has persisted after the Great Recession, but the economic distress caused by the recession has finally triggered awareness of stagnation among elites economists. In a sense, the Great Recession called out the obvious, just as did the little boy in the Hans Anderson story about the emperor's new suit

Table 6. U.S. private sector employment creation in the five year period after the end of recessions for six business cycles with extended expansions. Source: Bureau of labor statistics and author's calculations. * = January 1980 the beginning of the next recession Recession end date Employment at recession end date (millions) Employment five years later (millions) Percent growth in employment Feb 1961 45.0 52.2 16.0% Mar 1975 61.9 74.6* 20.5% Nov 1982 72.8 86.1 18.3% March 1991 90.1 99.5 10.4% Nov 2001 109.8 115.0 4.7% June 2009 108.4 117.1 8.0% The persistence of stagnation after the Great Recession raises the question "why"? The answer is policy has done nothing to change the structure of the underlying neoliberal economic model.

That model inevitably produces stagnation because it produces a structural demand shortage via (i) its impact on income distribution, and (ii) via its design of globalization which generates massive trade deficits, wage competition and off-shoring of jobs and investment. In terms of the three-way contest between the government failure hypothesis, the market failure hypothesis and the destruction of shared prosperity hypothesis, the economic policy debate during the Great Recession was cast as exclusively between government failure and market failure.

With the Democrats controlling the Congress and Presidency after the 2008 election, the market failure hypothesis won out and has framed policy since then. According to the hypothesis, the financial crisis caused an exceptionally deep recession that required exceptionally large monetary and fiscal stimulus to counter it and restore normalcy. Additionally, the market failure hypothesis recommends restoring and renovating financial regulation, but other than that the neoliberal paradigm is appropriate and should be deepened In accordance with this thinking, the in-coming Obama administration affirmed existing efforts to save the system and prevent a downward spiral by supporting the Bush administration's TARP, the Federal Reserve's first round of QE (November/December 2008) that provided market liquidity, and the Federal Reserve's FX swap agreement with foreign central banks

Thereafter, the Obama administration worked to reflate the economy via passage of the ARRA (2009) which provided significant fiscal stimulus. With the failure to deliver a V-shaped recovery, candidate Obama became even more vocal about fiscal stimulus However, reflecting its softcore neoliberal inclinations, the Obama administration then became much less so when it took office. Thus, the winners of the internal debate about fiscal policy in the first days of the Obama administration were those wanting more modest fiscal stimulus.4 Furthermore, its analytical frame was one of temporary stimulus with the 4 Since 2009 there has been some evolution of policy positions characterized by a shift to stronger support for fiscal stimulus. This has been especially marked in Larry Summers, who was the Obama administration's goal of long-term fiscal consolidation, which is softcore neoliberal speak for fiscal austerity Seen in the above light, after the passage of ARRA (2009), the fiscal policy divide between the Obama administration and hardcore neoliberal Republicans was about the speed and conditions under which fiscal austerity should be restored.

This attitude to fiscal policy reflects the dominance within the Democratic Party of "Rubinomics", the Wall Street view associated with former Treasury Secretary Robert Rubin, that government spending and budget deficits raise real interest rates and thereby lower growth. According to that view, the US needs long-term fiscal austerity to offset Social Security and Medicare Side-by-side with the attempt to reflate the economy, the Obama administration also pushed for major overhaul and tightening of financial sector regulation via the Dodd- Frank Act (2010).

That accorded with the market failure hypothesis's claim about the economic crisis and Great Recession being caused by financial excess permitted by the combination of excessive deregulation, lax regulation and failure to modernize regulation Finally, and again in accordance with the logic of the market failure hypothesis, the Obama administration has pushed ahead with doubling-down and further entrenching the neoliberal policy box. This is most visible in its approach to globalization. In 2010, free trade agreements modelled after NAFTA were signed with South Korea, Colombia and Panama. The Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP), two mega-agreements negotiated in secrecy and apparently bearing chief economic adviser when it took office. This shift has become a way of rewriting history by erasing the memory of initial positions. That is also true of the IMF which in 2010-2011 was a robust supporter of fiscal consolidation in Europe. similar hallmarks to prior trade agreements, are also being pushed by the Obama administration

The Obama administration's softcore neoliberalism would have likely generated stagnation by itself, but the prospect has been further strengthened by Republicans.

Thus, in accordance with their point of view, Republicans have persistently pushed the government failure hypothesis by directing the policy conversation to excessive regulation and easy monetary policy as the causes of the crisis. Consequently, they have consistently opposed strengthened financial regulation and demands for fiscal stimulus.

At the same time, they have joined with softcore neoliberal Democrats regarding doubling-down on neoliberal box policies, particularly as regards trade and globalization Paradoxically, the failure to change the overall economic model becomes most visible by analyzing the policies of the Federal Reserve, which have changed the most dramatically via the introduction of QE. The initial round of QE (QE1) was followed by QE2 in November 2010 and QE3 in September 2012, with the Fed shifting from providing short-term emergency liquidity to buying private sector financial assets.

The goal was to bid up prices of longer term bonds and other securities, thereby lowering interest rates on longer-term financing and encouraging investors to buy equities and other riskier financial assets. The Fed's reasoning was lower long-term rates would stimulate the economy, and higher financial asset prices would trigger a positive wealth effect on consumption spending. This makes clear the architecture of policy.

The Obama administration was to provide fiscal stimulus to jump start the economy; the Fed would use QE to blow air back into the asset price bubble; the Dodd-Frank Act (2010) would stabilize financial markets; and globalization would be deepened by further NAFTA-styled international agreements. This is a near-identical model to that which failed so disastrously. Consequently, stagnation is the logical prognosis.

VII Déjà vu all over again: back to the 1990s but with a weaker economy

The exclusion of the destruction of shared prosperity hypothesis, combined with the joint triumph of the market failure and government failure hypotheses, means the underlying economic model that produced the Great Recession remains essentially unchanged. That failure to change explains stagnation. It also explains why current conditions smack of "déjà vu all over again" with the US economy in 2014-15 appearing to have returned to conditions reminiscent of the mid-1990s.

Just as the 1990s failed to deliver durable prosperity, so too current optimistic conditions will prove unsustainable absent deeper change The déjà vu similarities are evident

All of these features mean both policy context and policy design look a lot like the mid-1990s. The Obama administration saved the system but did not change it

Consequently, the economy is destined to repeat the patterns of the 1990s and 2000s. However, the US economy has also experienced almost twenty more years of neoliberalism which has left its economic body in worse health than the 1990s. That means the likelihood of delivering another bubble-based boom is low and stagnation tendencies will likely reassert themselves after a shorter and weaker period of expansion

This structurally weakened state of the US economy is evident in the further worsening of income inequality that has occurred during the Great Recession and subsequent slow recovery.

... ... ...

Thomas I. Palley, Senior Economic Policy Advisor, AFL-CIO Washington, D.C. mail@thomaspalley.com

[Oct 09, 2017] Instead of drawing the best and the brightest, or being a place where scholarship was valued, where students were taught critical thinking skills, the University I attended was nothing more than an expensive diploma mill for the children of the wealthy

Chris Hedges published this book eight years ago and the things he predicted have sadly been realized
Notable quotes:
"... his screed is a liberating tonic against the crazy-making double-speak and the lies Americans are sold by our country's elite in order to distract us from the true threat and nature of the Corporate State, from the cult of celebrity, to how our nation's Universities have been hijacked to serve the interests, not of the public, but of our corporate overlords. It explains the self-same conditions in all aspects of our society and culture that we now must face, the ever-shrinking flame of enlightenment being exchanged for the illusory shadows on a cave wall. ..."
"... He fearlessly and incisively calls us out on the obvious farce our democracy has become, how we got here, and highlights the rapidly closing window in which we have to do something to correct it. It is a revelation, and yet he merely states the obvious. The empire has no clothes. ..."
"... One of the most powerful aspects of this book was in regard to how our Universities are run these days. I may be in the minority, but I experienced a life-changing disillusionment when I gained entrance to a prestigious "elite" University. Instead of drawing the best and the brightest, or being a place where scholarship was valued, where students were taught critical thinking skills, the University I attended was nothing more than an expensive diploma mill for the children of the wealthy. In the eyes of the University, students were not minds to be empowered and developed, but walking dollar signs. ..."
"... Instead of critical thinking, students were taught to OBEY, not to question authority, and then handed a piece of paper admitting them to the ruling class that is destroying America without a moral compass. Selfishness, deceit, disregard for the common good, and a win-at-all-costs attitude were rewarded. Empathy, curiosity, dissent, and an honest, intellectually rigorous evaluation of ourselves and our world were punished. Obviously I am not the only one to whom this was cause to fear for the future of our country. ..."
Oct 09, 2017 | www.amazon.com

H. I. on May 13, 2011

This Book Explains EVERYTHING!!!!!

Hedges cogently and systematically dismantles the most pernicious cultural delusions of our era and lays bare the pitiful truths that they attempt to mask. This book is a deprogramming manual that trims away the folly and noise from our troubled society so that the reader can focus on the most pressing matters of our time.

Despite the dark reality Hedges excavates, his screed is a liberating tonic against the crazy-making double-speak and the lies Americans are sold by our country's elite in order to distract us from the true threat and nature of the Corporate State, from the cult of celebrity, to how our nation's Universities have been hijacked to serve the interests, not of the public, but of our corporate overlords. It explains the self-same conditions in all aspects of our society and culture that we now must face, the ever-shrinking flame of enlightenment being exchanged for the illusory shadows on a cave wall.

As a twenty-something caught in the death-throes of American Empire and culture, I have struggled to anticipate where our country and our world are heading, why, and what sort of life I can expect to build for myself. Hedges presents the reader with the depressing, yet undeniable truth of the forces that have coalesced to shape the world in which we now find ourselves. The light he casts is searing and relentless. He fearlessly and incisively calls us out on the obvious farce our democracy has become, how we got here, and highlights the rapidly closing window in which we have to do something to correct it. It is a revelation, and yet he merely states the obvious. The empire has no clothes.

One of the most powerful aspects of this book was in regard to how our Universities are run these days. I may be in the minority, but I experienced a life-changing disillusionment when I gained entrance to a prestigious "elite" University. Instead of drawing the best and the brightest, or being a place where scholarship was valued, where students were taught critical thinking skills, the University I attended was nothing more than an expensive diploma mill for the children of the wealthy. In the eyes of the University, students were not minds to be empowered and developed, but walking dollar signs.

Instead of critical thinking, students were taught to OBEY, not to question authority, and then handed a piece of paper admitting them to the ruling class that is destroying America without a moral compass. Selfishness, deceit, disregard for the common good, and a win-at-all-costs attitude were rewarded. Empathy, curiosity, dissent, and an honest, intellectually rigorous evaluation of ourselves and our world were punished. Obviously I am not the only one to whom this was cause to fear for the future of our country.

Five stars is not enough. Ever since I began reading Empire of Illusion, I have insisted friends and family pick up a copy, too. Everyone in America should read this incredibly important book.

The truth shall set us free.

[Oct 06, 2017] How Economists Turned Corporations into Predators

Highly recommended!
The idea the a scientist can be a gangster was probably first presented by Sir Arthur Conan Doyle in his famous Sherlock Holmes detective stories. Neoliberalism just made this a reality. Mass production of "scientific gangsters" is an immanent feature of neoliberalism.
Notable quotes:
"... By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website ..."
"... The Idea That Businesses Exist Solely to Enrich Shareholders Is Harmful Nonsense ..."
"... Neil Fligstein wrote a good book awhile back called The Transformation of Corporate Control that shows how most large manufacturing companies were initially run by engineers, then sales people, then finance people (as corporations came to be seen as bundles of assets as opposed to businesses). I think this transformation paralleled the rise of neoclassical economics. So, not so much "chicken-and-egg" as "class war." In Germany, at least until recently, I believe CEO's of manufacturing firms were still disproportionately engineers. ..."
"... a group of hedge fund activists can suck the value that you've created right out, driving your company down and making you worse off and the company financially fragile ..."
"... That means transforming business education, including the replacement of agency theory with innovation theory ..."
"... since gigantism is the norm, rather than family run farms in a mostly agrarian economy such failures are catastrophic. The linkage between these elephants tends to create systemic risk. Previously, failure was small and isolated. ..."
"... Welcome to our wonderful new world of infinite mutual vulnerability! Risk On! Nuclear weapons, Equifax, Googleamazon, NSApanopticon, FIRE, hacking, crapification The Soviet Union vanished as an entity, many starved, but the mopes there at least still knew how to raise up edible crops and live on "less" and maybe do better collective response to that sharp peak on the entropy curve. Wonder how things might play out exceptionally, here in the Empire? ..."
"... It should be noted that Michael Jensen of HBS, one of the originators of the `maximize shareholder value' of corporate governance, is on some short lists for this year's not-exactly-the-Nobel Prize in Economics. ..."
Oct 06, 2017 | www.nakedcapitalism.com

By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

The Idea That Businesses Exist Solely to Enrich Shareholders Is Harmful Nonsense

In a new INET paper featured in the Financial Times , economist William Lazonick lays out a theory about how corporations can work for everyone – not just a few executives and Wall Streeters. He challenges a set of controversial ideas that became gospel in business schools and the mainstream media starting in the 1980s. He sat down with INET's Lynn Parramore to discuss.

Lynn Parramore: Since the 1980s, business schools have touted "agency theory," a controversial set of ideas meant to explain how corporations best operate. Proponents say that you run a business with the goal of channeling money to shareholders instead of, say, creating great products or making any efforts at socially responsible actions such as taking account of climate change. Many now take this view as gospel, even though no less a business titan than Jack Welch, former CEO of GE, called the notion that a company should be run to maximize shareholder value "the dumbest idea in the world." Why did Welch say that?

William Lazonick: Welch made that statement in a 2009 interview , just ahead of the news that GE had lost its S&P Triple-A rating in the midst of the financial crisis. He explained that, "shareholder value is a result, not a strategy" and that a company's "main constituencies are your employees, your customers and your products." During his tenure as GE CEO from 1981 to 2001, Welch had an obsession with increasing the company's stock price and hitting quarterly earnings-per-share targets, but he also understood that revenues come when your company generates innovative products. He knew that the employees' skills and efforts enable the company to develop those products and sell them.

If a publicly-listed corporation succeeds in creating innovative goods or services, then shareholders stand to gain from dividend payments if they hold shares or if they sell at a higher price. But where does the company's value actually come from? It comes from employees who use their collective and cumulative learning to satisfy customers with great products. It follows that these employees are the ones who should be rewarded when the business is a success. We've become blinded to this simple, obvious logic.

LP: What have these academic theorists missed about how companies really operate and perform? How have their views impacted our economy and society?

WL: As I show in my new INET paper " Innovative Enterprise Solves the Agency Problem ," agency theorists don't have a theory of innovative enterprise. That's strange, since they are talking about how companies succeed.

They believe that to be efficient, business corporations should be run to "maximize shareholder value." But as I have argued in another recent INET paper , public shareholders at a company like GE are not investors in the company's productive capabilities.

LP: Wait, as a stockholder I'm not an investor in the company's capabilities?

WL: When you buy shares of a stock, you are not creating value for the company -- you're just a saver who buys shares outstanding on the stock market for the sake of a yield on your financial portfolio. Public shareholders are value extractors , not value creators.

By touting public shareholders as a corporation's value creators, agency theorists lay the groundwork for some very harmful activities. They legitimize "hedge fund activists," for example. These are aggressive corporate predators who buy shares of a company on the stock market and then use the power bestowed upon them by the ill-conceived U.S. proxy voting system, endorsed by the Securities and Exchange Commission (SEC), to demand that the corporation inflate profits by cutting costs. That often means mass layoffs and depressed incomes for anybody who remains. In an industry like pharmaceuticals , the activists also press for extortionate product price increases. The higher profits tend to boost stock prices for the activists and other shareholders if they sell their shares on the market.

LP: So the hedge fund activists are extracting value from a corporation instead of creating it, and yet they are the ones who get enriched.

WL: Right. Agency theory aids and abets this value extraction by advocating, in the name of "maximizing shareholder value," massive distributions to shareholders in the form of dividends for holding shares as well as stock buybacks that you hear about, which give manipulative boosts to stock prices. Activists get rich when they sell the shares. The people who created the value -- the employees -- often get poorer.

###p"downsize-and-distribute" -- something that corporations have been doing since the 1980s, which has resulted in extreme concentration of income among the richest households and the erosion of middle-class employment opportunities.

LP: You've called stock buybacks -- what happens when a company buys back its own shares from the marketplace, often to manipulate the stock price upwards -- the "legalized looting of the U.S. business corporation." What's the problem with this practice?

WL: If you buy shares in Apple, for example, you can get a dividend for holding shares and, possibly, a capital gain when you sell the shares. Since 2012, when Apple made its first dividend payment since 1996, the company has shelled out $57.4 billion as dividends, equivalent to over 22 percent of net income. That's fine. But the company has also spent $157.9 billion on stock buybacks, equal to 62 percent of net income.

Yet the only time in its history that Apple ever raised funds on the public stock market was in 1980, when it collected $97 million in its initial public offering. How can a corporation return capital to parties that never supplied it with capital? It's a very misleading concept.

The vast majority of people who hold Apple's publicly-listed shares have simply bought outstanding shares on the stock market. They have contributed nothing to Apple's value-creating capabilities. That includes veteran corporate raider Carl Icahn, who raked in $2 billion by holding $3.6 billion in Apple shares for about 32 months, while using his influence to encourage Apple to do $80.3 billion in buybacks in 2014-2015, the largest repurchases ever. Over this period, Apple, the most cash-rich company in history, increased its debt by $47.6 billion to do buybacks so that it would not have to repatriate its offshore profits, sheltered from U.S. corporate taxes.

There are many ways in which the company could have returned its profits to employees and taxpayers -- the real value creators -- that are consistent with an innovative business model. Instead, in doing massive buybacks, Apple's board (which includes former Vice President Al Gore) has endorsed legalized looting. The SEC bears a lot of blame. It's supposed to protect investors and make sure financial markets are free of manipulation. But back in 1982, the SEC bought into agency theory under Reagan and came up with a rule that gives corporate executives a "safe harbor" against charges of stock-price manipulation when they do billions of dollars of buybacks for the sole purpose of manipulating their company's stock price.

LP: But don't shareholders deserve some of the profits as part owners of the corporation?

WL: Let's say you buy stock in General Motors. You are just buying a share that is outstanding on the market. You are contributing nothing to the company. And you will only buy the shares because the stock market is highly liquid, enabling you to easily sell some or all of the shares at any moment that you so choose.

In contrast, people who work for General Motors supply skill and effort to generate the company's innovative products. They are making productive contributions with expectations that, if the innovative strategy is successful, they will share in the gains -- a bigger paycheck, employment security, a promotion. In providing their labor services, these employees are the real value creators whose economic futures are at risk.

LP: This is really different from what a lot of us have been taught to believe. An employee gets a paycheck for showing up at work -- there's your reward. When we take a job, we probably don't expect management to see us as risk-takers entitled to share in the profits unless we're pretty high up.

WL: If you work for a company, even if its innovative strategy is a big success, you run a big risk because under the current regime of "maximizing shareholder value" a group of hedge fund activists can suck the value that you've created right out, driving your company down and making you worse off and the company financially fragile. And they are not the only predators you have to deal with. Incentivized with huge amounts of stock-based pay, senior corporate executives will, and often do, extract value from the company for their own personal gain -- at your expense. As Professor Jang-Sup Shin and I argue in a forthcoming book, senior executives often become value-extracting insiders. And they open the corporate coffers to hedge fund activists, the value-extracting outsiders. Large institutional investors can use their proxy votes to support corporate raids, acting as value-extracting enablers.

You put in your ideas, knowledge, time, and effort to make the company a huge success, and still you may get laid off or find your paycheck shrinking. The losers are not only the mass of corporate employees -- if you're a taxpayer, your money provides the business corporation with physical infrastructure, like roads and bridges, and human knowledge, like scientific discoveries, that it needs to innovate and profit. Senior corporate executives are constantly complaining that they need lower corporate taxes in order to compete, when what they really want is more cash to distribute to shareholders and boost stock prices. In that system, they win but the rest of us lose .

LP: Some academics say that hedge fund activism is great because it makes a company run better and produce higher profits. Others say, "No, Wall Streeters shouldn't have more say than executives who know better how to run the company." You say that both of these camps have got it wrong. How so?

WL: A company has to be run by executive insiders, and in order to produce innovation these executives have got to do three things:

First you need a resource-allocation strategy that, in the face of uncertainty, seeks to generate high-quality, low-cost products. Second, you need to implement that strategy through training, retaining, motivating, and rewarding employees, upon whom the development and utilization of the organization's productive capabilities depend. Third, you have to mobilize and leverage the company's cash flow to support the innovative strategy. But under the sway of the "maximizing shareholder value" idea, many senior corporate executives have been unwilling, and often unable, to perform these value-creating functions. Agency theorists have got it so backwards that they actually celebrate the virtues of " the value extracting CEO ." How strange is that?

Massive stock buybacks is where the incentives of corporate executives who extract value align with the interests of hedge fund activists who also want to suck value from a corporation. When they promote this kind of alliance, agency theorists have in effect served as academic agents of activist aggression. Lacking a theory of the value-creating firm, or what I call a "theory of innovative enterprise," agency theorists cannot imagine what an executive who creates value actually does. They don't see that it's crucial to align executives' interests with the value-creating investment requirements of the organizations over which they exercise strategic control. This intellectual deficit is not unique to agency theorists; it is inherent in their training in neoclassical economics .

LP: So if shareholders and executives are too often just looting companies to enrich themselves – "value extraction," as you put it – and not caring about long-term success, who is in a better position to decide how to run them, where to allocate resources and so on?

WL: We need to redesign corporate-governance institutions to promote the interests of American households as workers and taxpayers. Because of technological, market, or competitive uncertainties, workers take the risk that the application of their skills and the expenditure of their efforts will be in vain. In financing investments in infrastructure and knowledge, taxpayers make productive capabilities available to business enterprises, but with no guaranteed return on those investments.

These stakeholders need to have representation on corporate boards of directors. Predators, including self-serving corporate executives and greed-driven shareholder activists, should certainly not have representation on corporate boards.

LP: Sounds like we've lost sight of what a business needs to do to be successful in the long run, and it's costing everybody except a handful of senior executives, hedge fund managers, and Wall Street bankers. How would your "innovation theory" help companies run better and make for a healthier economy and society?

WL: Major corporations are key to the operation and performance of the economy. So we need a revolution in corporate governance to get us back on track to stable and equitable economic growth. Besides changing board representation, I would change the incentives for top executives so that they are rewarded for allocating corporate resources to value creation. Senior executives should gain along with the rest of the organization when the corporation is successful in generating competitive products while sharing the gains with workers and taxpayers.

Innovation theory calls for changing the mindsets and skill sets of senior executives. That means transforming business education, including the replacement of agency theory with innovation theory. That also means changing the career paths through which corporate personnel can rise to positions of strategic control, so that leaders who create value get rewarded and those who extract it are disfavored. At the institutional level, it would be great to see the SEC, as the regulator of financial markets, take a giant step in supporting value creation by banning stock buybacks whose purpose it is to manipulate stock prices.

To get from here to there, we have to replace nonsense with common sense in our understanding of how business enterprises operate and perform.

Enquiring Mind , October 6, 2017 at 10:44 am

Owners come first!
That was the slogan of our former board chair. He didn't disclose to the employees that his compensation was influenced mightily by how big the net income was. He did tell the employees that they were well down the hierarchy, after Owners (capital O) and then vendors and then customers. His former employees deserted in droves.

RepubAnon , October 6, 2017 at 12:14 pm

I'd say that maximizing long-term shareholder value is a great idea the problem is, as is so often the case these days, short-term thinking.

Driving away a company's best employees makes that quarter's numbers look better, but destroys long-term value. Same thing for so many other short-term, "I'll be gone, you'll be gone" strategies.

One step to fixing things – change the definition of long-term capital gains from the current 1 year to, say, 5 years. This "one simple trick" would fix everything from the carried interest loophole to the abuses inherent in the current Wall Street gambling mentality.

It won't happen, of course, but it'd be nice.

Tim , October 6, 2017 at 2:21 pm

We can talk about what is best in theory, but reality is just that, shareholders come first.

They control the board and the CEO and the CEO institutes the will of the shareholders down into the business entities, determining the level of reinvestment in the business units and the level of employee compensation. That will continue to be the case until the company goes bankrupt at which point shareholders are entitled to nothing.

I agree with others that Jack Welch is saying what he is saying after the fact. Way too easy to do.

a different chris , October 6, 2017 at 10:47 am

>Welch had an obsession with increasing the company's stock price and hitting quarterly earnings-per-share targets, but he also understood

Yeah so he talks a good game but when he had the reins – one of the most powerful men in the world meekly (ok, that's a hilarious adjective when applied to Jack Welsh) followed the herd. Or more accurately, found out where the herd was heading and got out in front of it. The true sign of modern "leadership".

RepubAnon , October 6, 2017 at 12:20 pm

Folks at GE back in the day nicknamed him "Neutron Jack" – if he visited a site, all the employees disappeared, leaving only the buildings standing

digi_owl , October 6, 2017 at 1:06 pm

Or more accurately, found out where the herd was heading and got out in front of it. The true sign of modern "leadership".

Reminds me of something i have read, supposedly a quite from some politician or other, going to the tune of "i need to find out where the mob is going, so i can lead them there".

Left in Wisconsin , October 6, 2017 at 1:06 pm

Welch's primary business strategy at GE was to exit every product market in which GE's market share was not in the top two in the industry (selling them off or closing them down) and reallocate resources to industries where GE was market dominant, often buying up the competition rather than truly investing in innovation. A truly awful human being.

Synoia , October 6, 2017 at 11:18 am

As I personally have always believed, Employees have more invested in their employers than shareholders. Shareholders can sell quickly and have no loyalty. Employees do not enjoy such a liquid "jobs market."

There also seems to be a turning point in companies, where they change the perception of the customers form a group to be treasured, to a group who are to b exploited – change the relationship so the customers become "marks."

I also believe there should be an almost automatic "break -up" provision for companies who reach a certain market share.

Finally there should be one definition of income, and it should include Wages, Dividends, and Capital Gains.

Vatch , October 6, 2017 at 11:27 am

there should be an almost automatic "break -up" provision for companies who reach a certain market share.

Yes, anti-trust enforcement would be nice. Hypothetical President Sanders might actually do that. Real and hypothetical Presidents Bush, Obama, Romney, B. Clinton, H. Clinton, and Trump have other priorities.

readerOfTeaLeaves , October 6, 2017 at 12:15 pm

Sen Bernie Sanders sees right through the neoclassical fetters, blinders, and bullshit. He recognizes how intellectually and economically stagnant and dangerous it is. He has the most powerful conceptual, articulate grasp of economics that I've seen the past 40 years. He also, IIRC, had MMTer Stephanie Kelton as an advisor, and had her advise the Senate Finance Committee. Also notable: Sen Elizabeth Warren.

The other political operators that you mention are still in thrall to neoclassical assumptions. They mistake 'takers' for 'makers' and are economically bamboozled. And it has worked out well for all of them, on a personal basis, so it is not surprising that they don't see the problems.

Anyone actually trying to build an innovative business, OTOH, has to see through the bamboozlement or else you're out of business pronto.

JTMcPhee , October 6, 2017 at 12:05 pm

Chicken and egg question:

The class of humans that by inclination and opportunity become C-Suite and VC looters and "owners:" did they precede the imprimatur of "economists" with their notions of price, value, and crossing of curves, or did the "economists" do a Martin Luther, nail up a bunch of theses, and preach fire and brimstone to turn the greedheads loose?

And was/is any other outcome for the species and the planet even possible?

Left in Wisconsin , October 6, 2017 at 1:14 pm

Neil Fligstein wrote a good book awhile back called The Transformation of Corporate Control that shows how most large manufacturing companies were initially run by engineers, then sales people, then finance people (as corporations came to be seen as bundles of assets as opposed to businesses). I think this transformation paralleled the rise of neoclassical economics. So, not so much "chicken-and-egg" as "class war." In Germany, at least until recently, I believe CEO's of manufacturing firms were still disproportionately engineers.

Carla , October 6, 2017 at 3:05 pm

"most large manufacturing companies were initially run by engineers, then sales people, then finance people"

The Lincoln Electric Company, which became famous for its "Incentive Management" program of compensating employees, was a client of mine. Over three decades I saw it progress through precisely those stages, and gradually lose every characteristic that had made the company unique.

readerOfTeaLeaves , October 6, 2017 at 12:30 pm

This post was a genuine pleasure to read. Especially:

If you work for a company, even if its innovative strategy is a big success, you run a big risk because under the current regime of "maximizing shareholder value" a group of hedge fund activists can suck the value that you've created right out, driving your company down and making you worse off and the company financially fragile .

And we've had a government by and for hedge fund managers for about the same amount of time that we've had economic woes. One problem is that hedge funders like Romney, who actually don't think about consumer product development, actually don't have to test and deploy products, bring their bean-counter assumptions to business and make a hash of things. I mention Romney specifically, because he presents himself to the world as a paragon of economic wisdom.

Romney has a prestigious business school background. Which makes me want to highlight this:

Innovation theory calls for changing the mindsets and skill sets of senior executives. That means transforming business education, including the replacement of agency theory with innovation theory .

JTMcPhee , October 6, 2017 at 12:59 pm

Just a thought: "innovation theory," like MMT, is maybe just a tool set? "Innovation" includes "autonomous combat devices," and CRSP-R, and nuclear weapons, and the F-35, and fracking, and derivatives, and plastics, and charter schools, stuff and ideas that for some of us constitute "value" are corporations as the category has grown to be, any more likely to "innovate" in the areas of social improvements and possibilities, or stewardship of the planet, or close down the toll stations and all the other rent collection scams and extortions they have "innovated" to date? Or release their chokehold on "policy?"

Says the proponent: "Major corporations are key to the operation and performance of the economy. So we need a revolution in corporate governance to get us back on track to stable and equitable economic growth. Besides changing board representation, I would change the incentives for top executives so they are rewarded for allocating corporate resources to value creation. Senior executives should gain along with the rest of the organization when the corporation is successful in generating competitive products while sharing the gains with workers and taxpayers." There seems to be so much wrong and just more Biz-babble about this, one hardly knows where to start unpacking.

"Major corporations are key?" Really? Monsanto? GM? Bechtel? The Big Banks? And "back on track": When has the political economy, writ small or large, ever been "on track to stability and equitable growth," said "growth' itself seemingly one of the pathologies that's killing us? And who's going to write the entries for the corporate senior executives' dance cards that will measure their "success," in those feel-good categories?

But it's a good conversation piece, and maybe an opening into Something Better, however us inherently mostly self-interested, self-pleasing omnivorous predators might define "better "

Disturbed Voter , October 6, 2017 at 12:36 pm

Badly run companies, naturally extinguish themselves. Unfortunately they take down their customers, owners, vendors and employees in the process. But the government can step in and either save a company that otherwise would die, or act as a crony corruption partner on behalf of a well connected company. Same as it always was.

But since gigantism is the norm, rather than family run farms in a mostly agrarian economy such failures are catastrophic. The linkage between these elephants tends to create systemic risk. Previously, failure was small and isolated.

JTMcPhee , October 6, 2017 at 1:06 pm

Welcome to our wonderful new world of infinite mutual vulnerability! Risk On! Nuclear weapons, Equifax, Googleamazon, NSApanopticon, FIRE, hacking, crapification The Soviet Union vanished as an entity, many starved, but the mopes there at least still knew how to raise up edible crops and live on "less" and maybe do better collective response to that sharp peak on the entropy curve. Wonder how things might play out exceptionally, here in the Empire?

allan , October 6, 2017 at 12:48 pm

It should be noted that Michael Jensen of HBS, one of the originators of the `maximize shareholder value' of corporate governance, is on some short lists for this year's not-exactly-the-Nobel Prize in Economics.

[Oct 06, 2017] Prof. Philip Mirowski keynote for Life and Debt conference

Highly recommended!
Among interesting ideas that Mirkowski presented in this lecture are "privatization of science" -- when well paid intellectual prostitutes produce the reuslt which are expected by their handlers. the other is his thought on the difference between neoclassical economics and neoliberalism. Neoliberalism believes in state intervention and this intervention should take the form of enforcing market on all spheres of human society.
Another interesting idea that neoliberalism in many cases doe not need the success of its ideas. The failure can also be exploited for enforcing "more market" on the society.
In other words market fundamentalism has all features of civil religion and like in Middle Ages it is enforced from above. heretics are not burned at the stake but simply ostracized.
Notable quotes:
"... how it is that science came to be subordinate to economics and the very future of nature to be contingent upon the market. ..."
"... As a leading exponent of the Institutional school, he has published formal treatments of financial markets that update Minsky's 'financial instability hypothesis' for the world of computerised derivative trading. ..."
Aug 18, 2013 | www.youtube.com

Life and Debt: Living through the Financialisation of the Biosphere

How can it be that the climate crisis, the biodiversity crisis and the deepest financial crisis since 1930s have done so little to undermine the supremacy of orthodox economics?

The lecture will preview material from Mirowski's new book: Never Lt a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown (Verso, 2013).

In this lecture, Professor Mirowski responds to the question of how it is that science came to be subordinate to economics and the very future of nature to be contingent upon the market. Charting the contradictions of the contemporary political landscape, he notes that science denialism, markets for pollution permits and proposals for geo-engineering can all be understood as political strategies designed to neutralize the impact of environmentalism, as they all originated in the network of corporate-sponsored think-tanks that have made neoliberal accounts of society, politics and the economy so prevalent that even the most profound crises are unable to shake their grip on the political imagination.

For those of us who are still paying attention, the task of constructing an alternative politics of science and markets is a vital one.

Philip Mirowski is Carl E. Koch Professor at the University of Notre Dame, Indiana. His most famous book, More Heat Than Light: Economics as Social Physics (1989) established his reputation as a formidable critic of the scientific status of neoclassical economics. His Machine Dreams: Economics becomes a Cyborg Science (2002) presents a history of the Cold War consolidation of American economic orthodoxy in the same intellectual milieu that produced systems theory, the digital computer, the atomic bomb, the strategy of Mutually Assured Destruction, and the 'think tank'. The Road from Mont Pelerin: the Making of the Neoliberal Thought Collective (with Dieter Plewhe, 2009), drawn from the archives of the Mont Pelerin Society and the Chicago School, presents a scholarly history of neoliberalism: the political movement initiated by Friedrich Hayek and Milton Friedman in the 1940s, which has since become the world's dominant philosophy of government.

As a leading exponent of the Institutional school, he has published formal treatments of financial markets that update Minsky's 'financial instability hypothesis' for the world of computerised derivative trading.

This lecture is presented by the UTS Cosmopolitan Civil Societies Research Centre and the Australian Working Group on Financialisation at the University of Sydney.

[Oct 01, 2017] Bulletproof Neoliberalism by Paul Heideman

Highly recommended!
Notable quotes:
"... Mirowski identifies three basic aspects of neoliberalism that the Left has failed to understand: the movement's intellectual history, the way it has transformed everyday life, and what constitutes opposition to it. Until we come to terms with them, Mirowski suggests, right-wing movements such as the Tea Party (a prominent player in the book) will continue to reign triumphant. ..."
"... Joining a long line of thinkers, most famously Karl Polanyi, Mirowski insists that a key error of the Left has been its failure to see that markets are always embedded in other social institutions. Neoliberals, by contrast, grasp this point with both hands -- and therefore seek to reshape all of the institutions of society, including and especially the state, to promote markets. Neoliberal ascendancy has meant not the retreat of the state so much as its remaking. ..."
"... he also recognizes that the neoliberals themselves have been canny about keeping the real nature of their project hidden through a variety of means. Neoliberal institutions tend to have what he calls a "Russian doll" structure, with the most central ones well hidden from public eyes. Mirowski coins an ironic expression, "the Neoliberal Thought Collective," for the innermost entities that formulate the movement's doctrine. The venerable Mont Pelerin Society is an NTC institution. Its ideas are frequently disseminated through venues which, formally at least, are unconnected to the center, such as academic economics departments. Thus, neoclassical economists spread the gospel of the free market while the grand project of remaking the state falls to others. ..."
"... At the same time as neoliberal commonsense trickles down from above, Mirowski argues that it also wells up from below, reinforced by our daily patterns of life. Social networking sites like Facebook encourage people to view themselves as perpetual cultural entrepreneurs, striving to offer a newer and better version of themselves to the world. Sites like LinkedIn prod their users to present themselves as a fungible basket of skills, adjustable to the needs of any employer, without any essential characteristics beyond a requisite subservience. Classical liberalism always assumes the coherent individual self as its basic unit. Neoliberalism, by contrast, sees people as little more than variable bundles of human capital, with no permanent interests or even attributes that cannot be remade through the market. For Mirowski, the proliferation of these forms of everyday neoliberalism constitute a "major reason the neoliberals have emerged from the crisis triumphant." ..."
"... Finally, Mirowski argues that the Left has too often been sucked in by neoliberalism's loyal opposition. Figures like Joseph Stiglitz or Paul Krugman, while critical of austerity and supportive of the welfare state, accept the fundamental neoclassical economic precepts at the heart of neoliberal policy. Mirowski argues that we must ditch this tradition in its entirety. Even attempts to render its assumptions more realistic -- as in the case of behavioral economics, for example, which takes account of the ways real people diverge from the hyperrationality of homo economicus -- provide little succor for those seeking to overturn the neoliberals. ..."
"... Mirowski's insistence on the centrality of the state to the neoliberal project helps correct the unfortunate tendency of many leftists over the past decade to assent to neoliberal nostrums about the obsolescence of the state. Indeed, Mirowski goes further than many other critics who have challenged the supposed retreat of the state under neoliberalism. ..."
"... Loïc Wacquant, for instance, has described the "centaur state" of neoliberalism, in which a humanist liberalism reigns for the upper classes, while the lower classes face the punitive state apparatus in all its bestiality. ..."
"... Mirowski shows us that the world of the rich under neoliberalism in no way corresponds to the laissez-faire of classical liberalism. The state does not so much leave the rich alone as actively work to reshape the world in their interests, helping to create markets for the derivatives and securities that made (and then destroyed) so many of the fortunes of the recent past. The neoliberal state is an eminently interventionist one, and those mistaking it for the austere nightwatchman of libertarian utopianism have little hope of combating it. ..."
"... Mirowski's concern to disabuse his readers of the notion that the wing of neoliberal doctrine disseminated by neoclassical economists could ever be reformed produces some of the best sections of the book. His portrait of an economics profession in haggard disarray in the aftermath of the crisis is both comic and tragic, as the amusement value of the buffoonery on display diminishes quickly when one realizes the prestige still accorded to these figures. Reading his comprehensive examination of the discipline's response to the crisis, one is reminded of Freud's famous broken kettle. The professional economists' account of their role in the crisis went something like (a) there was no bubble and (b) bubbles are impossible to predict but (c) we knew it was a bubble all along. ..."
"... Though Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis (which holds that prices in a competitive financial market reflect all relevant economic information), Mirowski argues that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has rendered them doubly ineffective. ..."
"... First, their adoption of the battery of assumptions that accompany most neoclassical theorizing -- about representative agents, treating information like any other commodity, and so on -- make it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis. ..."
Oct 01, 2017 | www.jacobinmag.com

To understand how a body of thought became an era of capitalism requires more than intellectual history.

"What is going to come after neoliberalism?" It was the question on many radicals' lips, present writer included, after the financial crisis hit in 2008. Though few were so sanguine about our prospects as to repeat the suicidal optimism of previous radical movements ("After Hitler, Our Turn!"), the feeling of the day was that the era of unfettered marketization was coming to a close. A new period of what was loosely referred to as Keynesianism would be the inevitable result of a crisis caused by markets run amok.

Five years later, little has changed. What comes after neoliberalism? More neoliberalism, apparently. The prospects for a revived Left capable of confronting it appear grim.

Enter Philip Mirowski's Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown . Mirowski maintains that the true nature of neoliberalism has gone unrecognized by its would-be critics, allowing the doctrine to flourish even in conditions, such as a massive financial crisis, that would seem to be inimical to its survival. Leftists keep busy tilting at the windmill of deregulation as the giants of neoliberalism go on pillaging unmolested.

Mirowski identifies three basic aspects of neoliberalism that the Left has failed to understand: the movement's intellectual history, the way it has transformed everyday life, and what constitutes opposition to it. Until we come to terms with them, Mirowski suggests, right-wing movements such as the Tea Party (a prominent player in the book) will continue to reign triumphant.

The book begins with the war of ideas -- a conflict in which, Mirowski argues, the Left has been far too generous in taking neoliberals at their word, or at least their best-publicized word. We have, in effect, been suckered by kindly old Milton Friedman telling us how much better off we'd all be if the government simply left us "free to choose." But neoliberals have at times been forthright about their appreciation for the uses of state power. Markets, after all, do not simply create themselves. Joining a long line of thinkers, most famously Karl Polanyi, Mirowski insists that a key error of the Left has been its failure to see that markets are always embedded in other social institutions. Neoliberals, by contrast, grasp this point with both hands -- and therefore seek to reshape all of the institutions of society, including and especially the state, to promote markets. Neoliberal ascendancy has meant not the retreat of the state so much as its remaking.

If Mirowski is often acidic about the Left's failure to understand this point, he also recognizes that the neoliberals themselves have been canny about keeping the real nature of their project hidden through a variety of means. Neoliberal institutions tend to have what he calls a "Russian doll" structure, with the most central ones well hidden from public eyes. Mirowski coins an ironic expression, "the Neoliberal Thought Collective," for the innermost entities that formulate the movement's doctrine. The venerable Mont Pelerin Society is an NTC institution. Its ideas are frequently disseminated through venues which, formally at least, are unconnected to the center, such as academic economics departments. Thus, neoclassical economists spread the gospel of the free market while the grand project of remaking the state falls to others.

At the same time as neoliberal commonsense trickles down from above, Mirowski argues that it also wells up from below, reinforced by our daily patterns of life. Social networking sites like Facebook encourage people to view themselves as perpetual cultural entrepreneurs, striving to offer a newer and better version of themselves to the world. Sites like LinkedIn prod their users to present themselves as a fungible basket of skills, adjustable to the needs of any employer, without any essential characteristics beyond a requisite subservience. Classical liberalism always assumes the coherent individual self as its basic unit. Neoliberalism, by contrast, sees people as little more than variable bundles of human capital, with no permanent interests or even attributes that cannot be remade through the market. For Mirowski, the proliferation of these forms of everyday neoliberalism constitute a "major reason the neoliberals have emerged from the crisis triumphant."

Finally, Mirowski argues that the Left has too often been sucked in by neoliberalism's loyal opposition. Figures like Joseph Stiglitz or Paul Krugman, while critical of austerity and supportive of the welfare state, accept the fundamental neoclassical economic precepts at the heart of neoliberal policy. Mirowski argues that we must ditch this tradition in its entirety. Even attempts to render its assumptions more realistic -- as in the case of behavioral economics, for example, which takes account of the ways real people diverge from the hyperrationality of homo economicus -- provide little succor for those seeking to overturn the neoliberals.

For Mirowski, these three failures of the Left go a long way toward explaining how neoliberals have largely escaped blame for a crisis they created. The Left persistently goes after phantoms like deregulation or smaller government, which neoliberals easily parry by pointing out that the regulatory apparatus has never been bigger. At the same time, we ignore the deep roots of neoliberal ideology in everyday life, deceiving ourselves as to the scale of the task in front of us.

Whatever criticisms of Mirowski's analysis are in order, much of it is compelling, particularly in regard to the intellectual history of the NTC. Mirowski's insistence on the centrality of the state to the neoliberal project helps correct the unfortunate tendency of many leftists over the past decade to assent to neoliberal nostrums about the obsolescence of the state. Indeed, Mirowski goes further than many other critics who have challenged the supposed retreat of the state under neoliberalism.

Loïc Wacquant, for instance, has described the "centaur state" of neoliberalism, in which a humanist liberalism reigns for the upper classes, while the lower classes face the punitive state apparatus in all its bestiality. But Mirowski shows us that the world of the rich under neoliberalism in no way corresponds to the laissez-faire of classical liberalism. The state does not so much leave the rich alone as actively work to reshape the world in their interests, helping to create markets for the derivatives and securities that made (and then destroyed) so many of the fortunes of the recent past. The neoliberal state is an eminently interventionist one, and those mistaking it for the austere nightwatchman of libertarian utopianism have little hope of combating it.

It's here that we begin to see the strategic genius of neoliberal infrastructure, with its teams of college economics professors teaching the wondrous efficacy of supply and demand on the one hand, and the think tanks and policy shops engaged in the relentless pursuit of state power on the other. The Left too often sees inconsistency where in fact there is a division of labor.

Mirowski's concern to disabuse his readers of the notion that the wing of neoliberal doctrine disseminated by neoclassical economists could ever be reformed produces some of the best sections of the book. His portrait of an economics profession in haggard disarray in the aftermath of the crisis is both comic and tragic, as the amusement value of the buffoonery on display diminishes quickly when one realizes the prestige still accorded to these figures. Reading his comprehensive examination of the discipline's response to the crisis, one is reminded of Freud's famous broken kettle. The professional economists' account of their role in the crisis went something like (a) there was no bubble and (b) bubbles are impossible to predict but (c) we knew it was a bubble all along.

Incoherence notwithstanding, however, little in the discipline has changed in the wake of the crisis. Mirowski thinks that this is at least in part a result of the impotence of the loyal opposition -- those economists such as Joseph Stiglitz or Paul Krugman who attempt to oppose the more viciously neoliberal articulations of economic theory from within the camp of neoclassical economics. Though Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis (which holds that prices in a competitive financial market reflect all relevant economic information), Mirowski argues that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has rendered them doubly ineffective.

First, their adoption of the battery of assumptions that accompany most neoclassical theorizing -- about representative agents, treating information like any other commodity, and so on -- make it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis. Instead, they end up tinkering with it, introducing a nuance here or a qualification there. This tinkering causes their arguments to be more or less ignored in neoclassical pedagogy, as economists more favorably inclined toward hard neoliberal arguments can easily ignore such revisions and hold that the basic thrust of the theory is still correct. Stiglitz's and Krugman's arguments, while receiving circulation through the popular press, utterly fail to transform the discipline.

Mirowski also heaps scorn on the suggestion, sometimes made in leftist circles, that the problem at the heart of neoclassical economics is its assumption of a hyperrational homo economicus , relentlessly comparing equilibrium states and maximizing utility. Though such a revision may be appealing to a certain radical romanticism, Mirowski shows that a good deal of work going on under the label of behavioral economics has performed just this revision, and has come up with results that don't differ substantively from those of the mainstream. The main problem with neoclassicism isn't its theory of the human agent but rather its the theory of the market -- which is precisely what behavioral economics isn't interested in contesting.

In all, Mirowski's indictment of the state of economic theory and its imbrication with the neoliberal project is devastating. Unfortunately, he proves much less successful in explaining why things have turned out as they have. The book ascribes tremendous power to the Neoliberal Thought Collective, which somehow manages to do everything from controlling the economics profession to reshaping the state to forging a new sense of the human self. The reader is left wondering how the NTC came to acquire such power. This leads to the book's central flaw: a lack of any theory of the structure of modern capitalism. Indeed, the NTC seems to operate in something of a vacuum, without ever confronting other institutions or groups, such as the state or popular movements, with interests and agendas of their own.

To be fair, Mirowski does offer an explanation for the failure of popular movements to challenge neoliberalism, largely through his account of "everyday" neoliberalism. At its strongest, the book identifies important strategic failures, such as Occupy's embrace of "a mimicry of media technologies as opposed to concerted political mobilization." However, Mirowski extends the argument well beyond a specific failure of the Occupy movement to propose a general thesis that developments like Facebook and reality TV have transmitted neoliberal ideology to people who have never read Friedman and Hayek. In claiming that this embodied or embedded ideology plays an important role in the failure of the Left, he places far more explanatory weight on the concept of everyday neoliberalism than it is capable of bearing.

At the simplest level, it's just not clear that everyday neoliberalism constitutes the kind of block to political action that Mirowski thinks it does. No doubt, many people reading this article right now simultaneously have another browser tab open to monster.com or LinkedIn, where they are striving to present themselves as a fungible basket of skills to any employer that will have them. In this economy, everyone has to hustle, and that means using all available means. That many of these same readers have probably also done things like organize against foreclosures should give pause to any blurring of the distinction between using various media technologies and embracing the ideology Mirowski sees embodied in them.

Indeed, the ubiquity of participation in such technologies by people who support, oppose, or are apathetic about neoliberalism points to a larger phenomenon on which Mirowski is silent: the labor market. Put bluntly, it is difficult to imagine anyone engaging in the painfully strained self-advertisement facilitated by LinkedIn in a labor market with, say, 2-percent unemployment. In such a market, in which employers were competing for comparatively scarce workers, there would be very little need for those workers to go through the self-abasing ritual of converting themselves into fungible baskets of skills. In our current situation, by contrast, where secure and remunerative employment is comparatively scarce, it is no surprise that people turn to whatever technologies are available to attempt to sell themselves. As Joan Robinson put it, the only thing worse than being exploited by capitalism is not being exploited by it.

In evaluating the role of everyday neoliberalism, it is also helpful to move, for the moment, beyond the perspective of the United States, where the NTC has clearly had great success, and adopt that of countries where resistance is significantly more developed, such as Venezuela or South Africa. Especially in the former, popular movements have been notably successful in combating neoliberal efforts to take over the state and reshape the economy, and have instead pushed the country in the opposite direction. Is it really plausible that a main reason for this difference is that everyday neoliberalism is more intense in the United States? I doubt it. For one thing, the strength of Venezuela's radical movements, in comparison with the US, clearly antedates the developments (social media, Here Comes Honey Boo Boo , and so on) that Mirowski discusses.

Moreover, it is just as plausible that the entrepreneurial culture he describes is even more extensive in the slums of the global South, where neoliberal devastation has forced many poor households to rely on at least one family member engaging in semi-legal arbitrage in goods salvaged from garbage or made at home. Surely such activities provide a firmer foundation for commercial subjectivity than having a 401(k). That resistance has grown in such circumstances suggests that looking to malignant subjectivities to explain popular passivity is an analytic dead-end.

If everyday neoliberalism doesn't explain the comparative weakness of the US left, what does? This is, of course, the key question, and I can do no more than gesture at an answer here. But I would suggest that the specific histories of the institutions of the American left, from the Communist Party to Students for a Democratic Society to labor unions, and the histories of the situations they confronted, provide us with a more solid foundation for understanding our current weakness than the hegemony of neoliberal culture does. Moreover, with a theory of capitalism that emphasizes the way the structure of the system makes it both necessary and very difficult for most people to organize to advance their interests, it becomes very easy to explain the persistence of a low level of popular mobilization against neoliberalism in the context of a weakened left.

If Mirowski's account doesn't give us a good basis for explaining why popular resistance has been so lacking in the US, it nonetheless suggests why he is so concerned with explaining the supposed dominance of neoliberal ideology among the general population. From the beginning, he raises the specter of right-wing resurgence, whether in the form of Scott Walker surviving the recall campaign in Wisconsin, the Tea Party mania of 2010, or the success of right-wing parties in Europe. However, much of this seems overstated, especially from a contemporary perspective. The Tea Party has, for all intents and purposes, disappeared from the front lines of American politics, and the Republican Party, while capable of enacting all kinds of sadistic policies on the state level, has remained in a state of disarray on the national level since the 2006 congressional elections.

More fundamentally, the argument that the voting public embraces neoliberalism doesn't square well with recent research by political scientists like Larry Bartels and Martin Gilens emphasizing the profound disconnect between the policy preferences of the poor and what transpires in Washington. What appears to be happening is less the general populace's incorporation into neoliberalism than their exclusion from any institutions that would allow them to change it. Importantly, this alternative explanation does not rely on the Left conceit that rebellion lurks perpetually just below the placid social surface, ready to explode into radical insurgency at any moment. It simply contends that the political passivity of neoliberalism's victims reflects a real diminution of their political options.

Mirowski's failure to address these larger institutional and structural dynamics vitiates much of the explanatory power of his book. On a purely descriptive level, the sections on the intellectual history of neoliberalism and the non-crisis of neoclassical economics illuminate many of the hidden corners of neoliberal ideology. However, if Mirowski is right to suggest that we need to understand neoliberalism better to be successful in fighting it -- and he surely is -- then much more is needed to explain neoliberal success and Left failure.

To understand how a body of thought became an era of capitalism requires more than intellectual history. It demands an account of how capitalism actually works in the period in question, and how the ideas of a small group of intellectuals came to be the policy preferences of the rich. Mirowski has given us an excellent foundation for understanding the doctrine, but it will remain for others to explain its actual development.

https://staticxx.facebook.com/connect/xd_arbiter/r/Z2duorNoYeF.js?version=42#channel=f1c0e2812ec10f6&origin=https%3A%2F%2Fwww.jacobinmag.com

[Sep 25, 2017] Free market as a neoliberal myth, the cornerstone of neoliberalism as a secular religion

Highly recommended!
Notable quotes:
"... Two of my criticisms about Krugman/Friedman, etc is that is 'free markets' are supposed to substitute for policy in the government sphere. Except very telling except when we're talking about funding the security state. ..."
"... The other is that the real power of markets is that in a real free market (not a Potemkin one) decisions are made often at the point where needs, information, incentives, and economic power come together. But where the large scale decisions the governments have to make, markets fail. Policy though doesn't. But Neoliberals hate policy. ..."
"... Well, duh. "Policy" and "Capitalism" don't go together and never have. When you enact policy, you destroy the ability to make profit and you get the 1970's. ..."
"... Free market is a neoliberal myth, the cornerstone of neoliberalism as a secular religion. Somewhat similar to "Immaculate Conception" in Catholicism. ..."
"... In reality market almost by definition is controlled by government, who enforces the rules and punish for the transgressions. ..."
"... Also note interesting Orwellian "corruption of the language" trick neoliberals use: neoliberals talk about "free market, not "fair market". ..."
"... After 2008 few are buying this fairy tale about how markets can operate and can solve society problems independently of political power, and state's instruments of violence (the police and the military). This myths is essentially dead. ..."
"... Friedmanism is this sense a flavor of economic Lysenkoism. Note that Lysenko like Friedman was not a complete charlatan. Some of his ideas were pretty sound and withstood the test of time. But that does not make his less evil. ..."
Jan 06, 2017 | economistsview.typepad.com
anne -> Paul Mathis... , December 31, 2016 at 07:09 PM
Krugman's refusal to endorse fiscal stimulus unless the economy is at zero lower bound. That is not only anti-Keynesian, it plays directly into the hands of the debt fear mongers. (Krugman is also worried about the debt.)

[ Only correct to a degree, economic weakness is recognized. ]

Gibbon1 -> anne... , December 31, 2016 at 10:21 PM
Two of my criticisms about Krugman/Friedman, etc is that is 'free markets' are supposed to substitute for policy in the government sphere. Except very telling except when we're talking about funding the security state.

The other is that the real power of markets is that in a real free market (not a Potemkin one) decisions are made often at the point where needs, information, incentives, and economic power come together. But where the large scale decisions the governments have to make, markets fail. Policy though doesn't. But Neoliberals hate policy.

AngloSaxon -> Gibbon1... , January 01, 2017 at 06:08 PM
Well, duh. "Policy" and "Capitalism" don't go together and never have. When you enact policy, you destroy the ability to make profit and you get the 1970's.
likbez -> Gibbon1... , -1
Free market is a neoliberal myth, the cornerstone of neoliberalism as a secular religion. Somewhat similar to "Immaculate Conception" in Catholicism.

In reality market almost by definition is controlled by government, who enforces the rules and punish for the transgressions.

Also note interesting Orwellian "corruption of the language" trick neoliberals use: neoliberals talk about "free market, not "fair market".

After 2008 few are buying this fairy tale about how markets can operate and can solve society problems independently of political power, and state's instruments of violence (the police and the military). This myths is essentially dead.

But like Adventists did not disappear when the Second Coming of Christ did not occurred in predicted timeframe, neoliberals did not did not disappeared after 2008 either. And neither did neoliberalism, it just entered into zombie, more bloodthirsty stage.

The fact that even the term "neoliberalism" is prohibited in the US MSM also helped. It is king of stealth ideology, unlike say, Marxists, neoliberals do not like to identify themselves as such. The behave more like members of some secret society, free market masons.

Friedmanism is this sense a flavor of economic Lysenkoism. Note that Lysenko like Friedman was not a complete charlatan. Some of his ideas were pretty sound and withstood the test of time. But that does not make his less evil.

And for those who try to embellish this person, I would remind his role in 1973 Chilean coup d'état ( https://en.wikipedia.org/wiki/1973_Chilean_coup_d%27%C3%A9tat ) and bringing Pinochet to power. His "Chicago boys" played a vital role in the events. This man did has blood on his hands.

http://www.bidstrup.com/economics.htm

Of course, bringing a reign of terror to Chile was not why the CIA had sponsored him. The reason he was there was to reverse the gains of the Allende social democracy and return control of the country's economic and political assets to the oligarchy. Pinochet was convinced, through supporters among the academics in the elite Chilean universities, to try a new series of economic policies, called "neoliberal" by their founders, the economists of the University of Chicago, led by an economist by the name of Milton Friedman, who three years later would go on to win a Nobel Prize in Economics for what he was about to unleash upon Chile.

Friedman and his colleagues were referred to by the Chileans as "the Chicago Boys." The term originally meant the economists from the University of Chicago, but as time went on, as their policies began to disliquidate the middle class and poor, it took on a perjorative meaning. That was because as the reforms were implemented, and began to take hold, the results were not what Friedman and company had been predicting. But what were the reforms?

The reforms were what has come to be called "neoliberalism." To understand what "neoliberal" economics is, one must first understand what "liberal" economics are, and so we'll digress briefly from our look at Chile for a quick

[Sep 19, 2017] Neoliberalism: the deep story that lies beneath Donald Trumps triumph: How a ruthless network of super-rich ideologues killed choice and destroyed people's faith in politics by George Monbiot

Highly recommended!
Notable quotes:
"... The book was The Constitution of Liberty by Frederick Hayek . Its publication, in 1960, marked the transition from an honest, if extreme, philosophy to an outright racket. The philosophy was called neoliberalism . It saw competition as the defining characteristic of human relations. The market would discover a natural hierarchy of winners and losers, creating a more efficient system than could ever be devised through planning or by design. Anything that impeded this process, such as significant tax, regulation, trade union activity or state provision, was counter-productive. Unrestricted entrepreneurs would create the wealth that would trickle down to everyone. ..."
"... But by the time Hayek came to write The Constitution of Liberty, the network of lobbyists and thinkers he had founded was being lavishly funded by multimillionaires who saw the doctrine as a means of defending themselves against democracy. Not every aspect of the neoliberal programme advanced their interests. Hayek, it seems, set out to close the gap. ..."
"... He begins the book by advancing the narrowest possible conception of liberty: an absence of coercion. He rejects such notions as political freedom, universal rights, human equality and the distribution of wealth, all of which, by restricting the behaviour of the wealthy and powerful, intrude on the absolute freedom from coercion he demands. ..."
"... The general thrust is about the gradual hollowing out of the middle class (or more affluent working class, depending on the analytical terms being used), about insecurity, stress, casualisation, rising wage inequality. ..."
"... So Hayek, I feel, is like many theoreticians, in that he seems to want a pure world that will function according to a simple and universal law. The world never was, and never will be that simple, and current economics simply continues to have a blindspot for externalities that overwhelm the logic of an unfettered so-called free market. ..."
"... "Neoliberalism" is entirely compatible with "growth of the state". Reagan greatly enlarged the state. He privatized several functions and it actually had the effect of increasing spending. ..."
"... As for the rest, it's the usual practice of gathering every positive metric available and somehow attributing it to neoliberalism, no matter how tenuous the threads, and as always with zero rigour. Supposedly capitalism alone doubled life expectancy, supports billions of extra lives, invented the railways, and provides the drugs and equipment that keep us alive. As though public education, vaccines, antibiotics, and massive availability of energy has nothing to do with those things. ..."
"... I think the damage was done when the liberal left co-opted neo-liberalism. What happened under Bill Clinton was the development of crony capitalism where for example the US banks were told to lower their credit standards to lend to people who couldn't really afford to service the loans. ..."
Nov 16, 2017 | www.theguardian.com
he events that led to Donald Trump's election started in England in 1975. At a meeting a few months after Margaret Thatcher became leader of the Conservative party, one of her colleagues, or so the story goes, was explaining what he saw as the core beliefs of conservatism. She snapped open her handbag, pulled out a dog-eared book, and slammed it on the table . "This is what we believe," she said. A political revolution that would sweep the world had begun.

The book was The Constitution of Liberty by Frederick Hayek . Its publication, in 1960, marked the transition from an honest, if extreme, philosophy to an outright racket. The philosophy was called neoliberalism . It saw competition as the defining characteristic of human relations. The market would discover a natural hierarchy of winners and losers, creating a more efficient system than could ever be devised through planning or by design. Anything that impeded this process, such as significant tax, regulation, trade union activity or state provision, was counter-productive. Unrestricted entrepreneurs would create the wealth that would trickle down to everyone.

This, at any rate, is how it was originally conceived. But by the time Hayek came to write The Constitution of Liberty, the network of lobbyists and thinkers he had founded was being lavishly funded by multimillionaires who saw the doctrine as a means of defending themselves against democracy. Not every aspect of the neoliberal programme advanced their interests. Hayek, it seems, set out to close the gap.

He begins the book by advancing the narrowest possible conception of liberty: an absence of coercion. He rejects such notions as political freedom, universal rights, human equality and the distribution of wealth, all of which, by restricting the behaviour of the wealthy and powerful, intrude on the absolute freedom from coercion he demands.

Democracy, by contrast, "is not an ultimate or absolute value". In fact, liberty depends on preventing the majority from exercising choice over the direction that politics and society might take.

He justifies this position by creating a heroic narrative of extreme wealth. He conflates the economic elite, spending their money in new ways, with philosophical and scientific pioneers. Just as the political philosopher should be free to think the unthinkable, so the very rich should be free to do the undoable, without constraint by public interest or public opinion.

The ultra rich are "scouts", "experimenting with new styles of living", who blaze the trails that the rest of society will follow. The progress of society depends on the liberty of these "independents" to gain as much money as they want and spend it how they wish. All that is good and useful, therefore, arises from inequality. There should be no connection between merit and reward, no distinction made between earned and unearned income, and no limit to the rents they can charge.

Inherited wealth is more socially useful than earned wealth: "the idle rich", who don't have to work for their money, can devote themselves to influencing "fields of thought and opinion, of tastes and beliefs". Even when they seem to be spending money on nothing but "aimless display", they are in fact acting as society's vanguard.

Hayek softened his opposition to monopolies and hardened his opposition to trade unions. He lambasted progressive taxation and attempts by the state to raise the general welfare of citizens. He insisted that there is "an overwhelming case against a free health service for all" and dismissed the conservation of natural resources. It should come as no surprise to those who follow such matters that he was awarded the Nobel prize for economics .

By the time Thatcher slammed his book on the table, a lively network of thinktanks, lobbyists and academics promoting Hayek's doctrines had been established on both sides of the Atlantic, abundantly financed by some of the world's richest people and businesses , including DuPont, General Electric, the Coors brewing company, Charles Koch, Richard Mellon Scaife, Lawrence Fertig, the William Volker Fund and the Earhart Foundation. Using psychology and linguistics to brilliant effect, the thinkers these people sponsored found the words and arguments required to turn Hayek's anthem to the elite into a plausible political programme.

Thatcherism and Reaganism were not ideologies in their own right: they were just two faces of neoliberalism. Their massive tax cuts for the rich, crushing of trade unions, reduction in public housing, deregulation, privatisation, outsourcing and competition in public services were all proposed by Hayek and his disciples. But the real triumph of this network was not its capture of the right, but its colonisation of parties that once stood for everything Hayek detested.

Bill Clinton and Tony Blair did not possess a narrative of their own. Rather than develop a new political story, they thought it was sufficient to triangulate . In other words, they extracted a few elements of what their parties had once believed, mixed them with elements of what their opponents believed, and developed from this unlikely combination a "third way".

It was inevitable that the blazing, insurrectionary confidence of neoliberalism would exert a stronger gravitational pull than the dying star of social democracy. Hayek's triumph could be witnessed everywhere from Blair's expansion of the private finance initiative to Clinton's repeal of the Glass-Steagal Act , which had regulated the financial sector. For all his grace and touch, Barack Obama, who didn't possess a narrative either (except "hope"), was slowly reeled in by those who owned the means of persuasion.

As I warned in April, the result is first disempowerment then disenfranchisement. If the dominant ideology stops governments from changing social outcomes, they can no longer respond to the needs of the electorate. Politics becomes irrelevant to people's lives; debate is reduced to the jabber of a remote elite. The disenfranchised turn instead to a virulent anti-politics in which facts and arguments are replaced by slogans, symbols and sensation. The man who sank Hillary Clinton's bid for the presidency was not Donald Trump. It was her husband.

The paradoxical result is that the backlash against neoliberalism's crushing of political choice has elevated just the kind of man that Hayek worshipped. Trump, who has no coherent politics, is not a classic neoliberal. But he is the perfect representation of Hayek's "independent"; the beneficiary of inherited wealth, unconstrained by common morality, whose gross predilections strike a new path that others may follow. The neoliberal thinktankers are now swarming round this hollow man, this empty vessel waiting to be filled by those who know what they want. The likely result is the demolition of our remaining decencies, beginning with the agreement to limit global warming .

Those who tell the stories run the world. Politics has failed through a lack of competing narratives. The key task now is to tell a new story of what it is to be a human in the 21st century. It must be as appealing to some who have voted for Trump and Ukip as it is to the supporters of Clinton, Bernie Sanders or Jeremy Corbyn.

A few of us have been working on this, and can discern what may be the beginning of a story. It's too early to say much yet, but at its core is the recognition that – as modern psychology and neuroscience make abundantly clear – human beings, by comparison with any other animals, are both remarkably social and remarkably unselfish . The atomisation and self-interested behaviour neoliberalism promotes run counter to much of what comprises human nature.

Hayek told us who we are, and he was wrong. Our first step is to reclaim our humanity.

justamug -> Skytree 16 Nov 2016 18:17

Thanks for the chuckle. On a more serious note - defining neoliberalism is not that easy since it is not a laid out philosophy like liberalism, or socialism, or communism or facism. Since 2008 the use of the word neoliberalism has increased in frequency and has come to mean different things to different people.

A common theme appears to be the negative effects of the market on the human condition.

Having read David Harvey's book, and Phillip Mirowski's book (both had a go at defining neoliberalism and tracing its history) it is clear that neoliberalism is not really coherent set of ideas.

ianfraser3 16 Nov 2016 17:54

EF Schumacher quoted "seek first the kingdom of God" in his epilogue of "Small Is Beautiful: a study of economics as if people mattered". This was written in the early 1970s before the neoliberal project bit in the USA and the UK. The book is laced with warnings about the effects of the imposition of neoliberalism on society, people and the planet. The predictions have largely come true. New politics and economics needed, by leaders who place at the heart of their approach the premise, and fact, that humans are "by comparison with any other animals, are both remarkably social and remarkably unselfish". It is about reclaiming our humanity from a project that treats people as just another commodity.


Filipio -> YouDidntBuildThat 16 Nov 2016 17:42

Whoa there, slow down.

Your last post was questioning the reality of neoliberalism as a general policy direction that had become hegemonic across many governments (and most in the west) over recent decades. Now you seem to be agreeing that the notion does have salience, but that neoliberalism delivered positive rather than negative consequences.

Well, its an ill wind that blows nobody any good, huh?

Doubtless there were some positive outcomes for particular groups. But recall that the context for this thread is not whether, on balance, more people benefited from neoliberal policies than were harmed -- an argument that would be most powerful only in very utilitarian style frameworks of thought (most good for the many, or most harm for only the few). The thread is about the significance of the impacts of neoliberalism in the rise of Trump. And in specific relation to privatisation (just one dimension of neoliberalism) one key impact was downsizing (or 'rightsizing'; restructuring). There is a plethora of material, including sociological and psychological, on the harm caused by shrinking and restructured work-forces as a consequence of privatisation. Books have been written, even in the business management sector, about how poorly such 'change' was handled and the multiple deleterious outcomes experienced by employees.

And we're still only talking about one dimension of neoliberalism! Havn't even touched on deregulation yet (notably, labour market and financial sector).

The general thrust is about the gradual hollowing out of the middle class (or more affluent working class, depending on the analytical terms being used), about insecurity, stress, casualisation, rising wage inequality.

You want evidence? I'm not doing your research for you. The internet can be a great resource, or merely an echo chamber. The problem with so many of the alt-right (and this applies on the extreme left as well) is that they only look to confirm their views, not read widely. Open your eyes, and use your search engine of choice. There is plenty out there. Be open to having your preconceptions challenged.

RichardErskine -> LECKJ3000 16 Nov 2016 15:38

LECKJ3000 - I am not an economist, but surely the theoretical idealised mechanisms of the market are never realised in practice. US subsidizing their farmers, in EU too, etc. And for problems that are not only externalities but transnational ones, the idea that some Hayek mechanism will protect thr ozone layer or limit carbon emissions, without some regulation or tax.

Lord Stern called global warming the greatest market failure in history, but no market, however sophisticated, can deal with it without some price put on the effluent of product (the excessive CO2 we put into the atmosphere).

As with Montreal and subsequent agreements, there is a way to maintain a level playing field; to promote different substances for use as refrigerants; and to address the hole in ozone layer; without abandoning the market altogether. Simple is good, because it avoids over-engineering the interventions (and the unintended consequences you mention).

The same could/ should be true of global warming, but we have left it so late we cannot wait for the (inevitable) fall of fossil fuels and supremacy of renewables. We need a price on carbon, which is a graduated and fast rising tax essentially on its production and/or consumption, which has already started to happen ( http://www.worldbank.org/content/dam/Worldbank/document/SDN/background-note_carbon-tax.pdf ), albeit not deep / fast / extensive enough, or international in character, but that will come, if not before the impacts really bite then soon after.

So Hayek, I feel, is like many theoreticians, in that he seems to want a pure world that will function according to a simple and universal law. The world never was, and never will be that simple, and current economics simply continues to have a blindspot for externalities that overwhelm the logic of an unfettered so-called free market.

LionelKent -> greven 16 Nov 2016 14:59

And persistent. J.K. Galbraith viewed the rightwing mind as predominantly concerned with figuring out a way to justify the shift of wealth from the immense majority to an elite at the top. I for one regret acutely that he did not (as far as I know) write a volume on his belief in progressive taxation.

RandomLibertarian -> JVRTRL 16 Nov 2016 09:19

Not bad points.

When it comes to social safety net programs, e.g. in health care and education -- those programs almost always tend to be more expensive and more complicated when privatized. If the goal was to actually save taxpayer money, in the U.S. at least, it would have made a lot more sense to have a universal Medicare system, rather than a massive patch-work like the ACA and our hybrid market.

Do not forget that the USG, in WW2, took the deliberate step of allowing employers to provide health insurance as a tax-free benefit - which it still is, being free even from SS and Medicare taxes. In the post-war boom years this resulted in the development of a system with private rooms, almost on-demand access to specialists, and competitive pay for all involved (while the NHS, by contrast, increasingly drew on immigrant populations for nurses and below). Next, the large sums of money in the system and a generous court system empowered a vast malpractice industry. So to call our system in any way a consequence of a free market is a misnomer.

Entirely state controlled health care systems tend to be even more cost-effective.

Read Megan McArdle's work in this area. The US has had similar cost growth since the 1970s to the rest of the world. The problem was that it started from a higher base.

Part of the issue is that privatization tends to create feedback mechanism that increase the size of spending in programs. Even Eisenhower's noted "military industrial complex" is an illustration of what happens when privatization really takes hold.

When government becomes involved in business, business gets involved in government!

Todd Smekens 16 Nov 2016 08:40

Albert Einstein said, "capitalism is evil" in his famous dictum called, "Why Socialism" in 1949. He also called communism, "evil", so don't jump to conclusions, comrades. ;)

His reasoning was it distorts a human beings longing for the social aspect. I believe George references this in his statement about people being "unselfish". This is noted by both science and philosophy.

Einstein noted that historically, the conqueror would establish the new order, and since 1949, Western Imperialism has continued on with the predatory phase of acquiring and implementing democracy/capitalism. This needs to end. As we've learned rapidly, capitalism isn't sustainable. We are literally overheating the earth which sustains us. Very unwise.

Einstein wrote, "Man is, at one and the same time, a solitary being and a social being. As a solitary being, he attempts to protect his own existence and that of those who are closest to him, to satisfy his personal desires, and to develop his innate abilities. As a social being, he seeks to gain the recognition and affection of his fellow human beings, to share in their pleasures, to comfort them in their sorrows, and to improve their conditions of life. Only the existence of these varied, frequently conflicting, strivings accounts for the special character of a man, and their specific combination determines the extent to which an individual can achieve an inner equilibrium and can contribute to the well-being of society."

Personally, I'm glad George and others are working on a new economic and social construct for us "human beings". It's time we leave the predatory phase of "us versus them", and construct a new society which works for the good of our now, global society.

zavaell -> LECKJ3000 16 Nov 2016 06:28

The problem is that both you and Monbiot fail to mention that your "the spontaneous order of the market" does not recognize externalities and climate change is outside Hayek's thinking - he never wrote about sustainability or the limits on resources, let alone the consequences of burning fossil fuels. There is no beauty in what he wrote - it was a cold, mechanical model that assumed certain human behaviour but not others. Look at today's money-makers - they are nearly all climate change deniers and we have to have government to reign them in.

aLERNO 16 Nov 2016 04:52

Good, short and concise article. But the FIRST NEOLIBERAL MILESTONE WAS THE 1973 COUP D'ETAT IN CHILE, which not surprisingly also deposed the first democratically-elected socialist government.

accipiter15 16 Nov 2016 02:34

A great article and explanation of the influence of Hayek on Thatcher. Unfortunately this country is still suffering the consequences of her tenure and Osborne was also a proponent of her policies and look where we are as a consequence. The referendum gave the people the opportunity to vent their anger and if we had PR I suspect we would have a greater turn-out and nearly always have some sort of coalition where nothing gets done that is too hurtful to the population. As for Trump, again his election is an expression of anger and desperation. However, the American voting system is as unfair as our own - again this has probably been the cause of the low turn-out. Why should people vote when they do not get fair representation - it is a waste of time and not democratic. I doubt that Trump is Keynsian I suspect he doesn't have an economic theory at all. I just hope that the current economic thinking prevailing currently in this country, which is still overshadowed by Thatcher and the free market, with no controls over the city casino soon collapses and we can start from a fairer and more inclusive base!

JVRTRL -> Keypointist 16 Nov 2016 02:15

The system that Clinton developed was an inheritance from George H.W. Bush, Reagan (to a large degree), Carter, with another large assist from Nixon and the Powell Memo.

Bill Clinton didn't do it by himself. The GOP did it with him hand-in-hand, with the only resistance coming from a minority within the Democratic party.

Trump's victory was due to many factors. A large part of it was Hillary Clinton's campaign and the candidate. Part of it was the effectiveness of the GOP massive resistance strategy during the Obama years, wherein they pursued a course of obstruction in an effort to slow the rate of the economic recovery (e.g. as evidence of the bad faith, they are resurrecting a $1 trillion infrastructure bill that Obama originally proposed in 2012, and now that they have full control, all the talk about "deficits" goes out the window).

Obama and the Democratic party also bear responsibility for not recognizing the full scope of the financial collapse in 2008-2009, passing a stimulus package that was about $1 trillion short of spending needed to accelerate the recovery by the 2010 mid-terms, combined with a weak financial regulation law (which the GOP is going to destroy), an overly complicated health care law -- classic technocratic, neoliberal incremental policy -- and the failure of the Obama administration to hold Wall Street accountable for criminal misconduct relating to the financial crisis. Obama's decision to push unpopular trade agreements didn't help either. As part of the post-mortem, the decision to continuing pushing the TPP may have cost Clinton in the rust belt states that went for Trump. The agreement was unpopular, and her shift on the policy didn't come across as credible. People noticed as well that Obama was trying to pass the measure through the lame-duck session of Congress post-election. With Trump's election, the TPP is done too.

JVRTRL daltonknox67 16 Nov 2016 02:00

There is no iron law that says a country has to run large trade deficits. The existence of large trade deficits is usually a result of policy choices.

Growth also hasn't gone into the tank. What's changed is the distribution of the gains in GDP growth -- that is in no small part a direct consequence of changes in policy since the 1970s. It isn't some "market place magic". We have made major changes to tax laws since that time. We have weakened collective bargaining, which obviously has a negative impact on wages. We have shifted the economy towards financial services, which has the tendency of increasing inequality.

The idea too that people will be "poorer" than in the 1920s and 1930s is just plain ignorant. It has no basis in any of the data. Wages in the bottom quartile have actually decreased slightly since the 1970s in real terms, but those wages in the 1970s were still exponentially higher than wages in the 1920s in real terms.

Wages aren't stagnating because people are working less. Wages have stagnated because of dumb policy choices that have tended to incentives looting by those at the top of the income distribution from workers in the lower parts of the economy. The 2008 bailouts were a clear illustration of this reality. People in industries rigged rules to benefit themselves. They misallocated resources. Then they went to representatives and taxpayers and asked for a large no-strings attached handout that was effectively worth trillions of dollars (e.g. hundreds of billions through TARP, trillions more through other programs). As these players become wealthier, they have an easier time buying politicians to rig rules further to their advantage.


JVRTRL YinxxXing 16 Nov 2016 01:50

Part of the problem is a quirk of the U.S. system. We have an electoral college system, which was originally adopted over 200 years ago, in part, in order to help to preserve slavery. If the presidential election was based on a national vote, I suspect we would have higher participation rates, because every vote in every state would carry equal weight.

As things stand now, in 35-40 states in any election cycle, there usually isn't much doubt about the result of the presidential race.

On top of this, there are all kind of obstacles that tend to make voting more difficult. e.g. voting on a weekday, voter IDs, voter suppression efforts.

JVRTRL -> RandomLibertarian 16 Nov 2016 01:44

"The tyranny of the 51 per cent is the oldest and most solid argument against a pure democracy."

"Tyranny of the majority" is always a little bizarre, given that the dynamics of majority rule are unlike the governmental structures of an actual tyranny. Even in the context of the U.S. we had minority rule due to voting restrictions for well over a century that was effectively a tyranny for anyone who was denied the ability to participation in the elections process. Pure majorities can go out of control, especially in a country with massive wealth disparities and with weak civic institutions.

On the other hand, this is part of the reason to construct a system of checks and balances. It's also part of the argument for representative democracy.

"Neoliberalism" is entirely compatible with "growth of the state". Reagan greatly enlarged the state. He privatized several functions and it actually had the effect of increasing spending.

When it comes to social safety net programs, e.g. in health care and education -- those programs almost always tend to be more expensive and more complicated when privatized. If the goal was to actually save taxpayer money, in the U.S. at least, it would have made a lot more sense to have a universal Medicare system, rather than a massive patch-work like the ACA and our hybrid market.

Entirely state controlled health care systems tend to be even more cost-effective. Part of the issue is that privatization tends to create feedback mechanism that increase the size of spending in programs. Even Eisenhower's noted "military industrial complex" is an illustration of what happens when privatization really takes hold.

daltonknox67 15 Nov 2016 21:46

After WWII most of the industrialised world had been bombed or fought over with destruction of infrastructure and manufacturing. The US alone was undamaged. It enjoyed a manufacturing boom that lasted until the 70's when competition from Germany and Japan, and later Taiwan, Korea and China finally brought it to an end.

As a result Americans born after 1950 will be poorer than the generation born in the 20's and 30's.

This is not a conspiracy or government malfunction. It is a quirk of history. Get over it and try working.

Arma Geddon 15 Nov 2016 21:11

Another nasty neoliberal policy of Reagan and Thatcher, was to close all the mental hospitals, and to sweeten the pill to sell to the voters, they called it Care in the Community, except by the time those hospitals closed and the people who had to relay on those institutions, they found out and are still finding out that there is very little care in the community left any more, thanks to Thatcher's disintegration of the ethos community spirit.

In their neoliberal mantra of thinking, you are on your own now, tough, move on, because you are hopeless and non productive, hence you are a burden to taxpayers.

Its been that way of thinking for over thirty years, and now the latest group targeted, are the sick and disabled, victims of the neoliberal made banking crash and its neoliberal inspired austerity, imposed of those least able to fight back or defend themselves i.e. vulnerable people again!

AlfredHerring GimmeHendrix 15 Nov 2016 20:23

It was in reference to Maggie slapping a copy of Hayek's Constitution of Liberty on the table and saying this is what we believe. As soon as you introduce the concept of belief you're talking about religion hence completeness while Hayek was writing about economics which demands consistency. i.e. St. Maggie was just as bad as any Stalinist: economics and religion must be kept separate or you get a bunch of dead peasants for no reason other than your own vanity.

Ok, religion based on a sky god who made us all is problematic but at least there's always the possibility of supplication and miracles. Base a religion on economic theory and you're just making sausage of your neighbors kids.

TanTan -> crystaltips2 15 Nov 2016 20:10

If you claim that the only benefit of private enterprise is its taxability, as you did, then why not cut out the middle man and argue for full state-directed capitalism?

Because it is plainly obvious that private enterprise is not directed toward the public good (and by definition). As we have both agreed, it needs to have the right regulations and framework to give it some direction in that regard. What "the radical left" are pointing out is that the idea of private enterprise is now completely out of control, to the point where voters are disenfranchised because private enterprise has more say over what the government does than the people. Which is clearly a problem.

As for the rest, it's the usual practice of gathering every positive metric available and somehow attributing it to neoliberalism, no matter how tenuous the threads, and as always with zero rigour. Supposedly capitalism alone doubled life expectancy, supports billions of extra lives, invented the railways, and provides the drugs and equipment that keep us alive. As though public education, vaccines, antibiotics, and massive availability of energy has nothing to do with those things.

As for this computer being the invention of capitalism, who knows, but I suppose if one were to believe that everything was invented and created by capitalism and monetary motives then one might believe that. Energy allotments referred to the limit of our usage of readily available fossil fuels which you remain blissfully unaware of.

Children have already been educated to agree with you, in no small part due to a fear of the communist regimes at the time, but at the expense of critical thinking. Questioning the system even when it has plainly been undermined to its core is quickly labelled "radical" regardless of the normalcy of the query. I don't know what you could possibly think left-wing motives could be, but your own motives are plain to see when you immediately lump people who care about the planet in with communist idealogues. If rampant capitalism was going to solve our problems I'm all for it, but it will take a miracle to reverse the damage it has already done, and only a fool would trust it any further.

YouDidntBuildThat -> Filipio 15 Nov 2016 20:06

Filipo

You argue that a great many government functions have been privatized. I agree. Yet strangely you present zero evidence of any downsides of that happening. Most of the academic research shows a net benefit, not just on budgets but on employee and customer satisfaction. See for example.

And despite these privitazation cost savings and alleged neoliberal "austerity" government keeps taking a larger share of our money, like a malignant cancer. No worries....We're from the government, and we're here to help.

Keypointist 15 Nov 2016 20:04

I think the damage was done when the liberal left co-opted neo-liberalism. What happened under Bill Clinton was the development of crony capitalism where for example the US banks were told to lower their credit standards to lend to people who couldn't really afford to service the loans.

It was this that created too big to fail and the financial crisis of 2008. Conservative neo-liberals believe passionately in competition and hate monopolies. The liberal left removed was was productive about neo-liberalism and replaced it with a kind of soft state capitalism where big business was protected by the state and the tax payer was called on to bail out these businesses. THIS more than anything else led to Trump's victory.

[Sep 19, 2017] Neoliberalism: the idea that swallowed the world by Stephen Metcalf

Highly recommended!
Notable quotes:
"... The word ["neoliberalism"] has become a rhetorical weapon, but it properly names the reigning ideology of our era – one that venerates the logic of the market and strips away the things that make us human. ..."
"... Last summer, researchers at the International Monetary Fund settled a long and bitter debate over "neoliberalism": they admitted it exists. Three senior economists at the IMF, an organisation not known for its incaution, published a paper questioning the benefits of neoliberalism ..."
"... The paper gently called out a "neoliberal agenda" for pushing deregulation on economies around the world, for forcing open national markets to trade and capital, and for demanding that governments shrink themselves via austerity or privatisation. The authors cited statistical evidence for the spread of neoliberal policies since 1980, and their correlation with anaemic growth, boom-and-bust cycles and inequality. ..."
"... In the aftermath of the 2008 financial crisis, it was a way of assigning responsibility for the debacle, not to a political party per se, but to an establishment that had conceded its authority to the market. For the Democrats in the US and Labour in the UK, this concession was depicted as a grotesque betrayal of principle. Bill Clinton and Tony Blair, it was said, had abandoned the left's traditional commitments, especially to workers, in favour of a global financial elite and the self-serving policies that enriched them; and in doing so, had enabled a sickening rise in inequality. ..."
"... Peer through the lens of neoliberalism and you see more clearly how the political thinkers most admired by Thatcher and Reagan helped shape the ideal of society as a kind of universal market ..."
"... Of course the goal was to weaken the welfare state and any commitment to full employment, and – always – to cut taxes and deregulate. But "neoliberalism" indicates something more than a standard rightwing wish list. It was a way of reordering social reality, and of rethinking our status as individuals. ..."
"... In short, "neoliberalism" is not simply a name for pro-market policies, or for the compromises with finance capitalism made by failing social democratic parties. It is a name for a premise that, quietly, has come to regulate all we practise and believe: that competition is the only legitimate organising principle for human activity. ..."
"... No sooner had neoliberalism been certified as real, and no sooner had it made clear the universal hypocrisy of the market, than the populists and authoritarians came to power ..."
"... Against the forces of global integration, national identity is being reasserted, and in the crudest possible terms. What could the militant parochialism of Brexit Britain and Trumpist America have to do with neoliberal rationality? ..."
"... It isn't only that the free market produces a tiny cadre of winners and an enormous army of losers – and the losers, looking for revenge, have turned to Brexit and Trump. There was, from the beginning, an inevitable relationship between the utopian ideal of the free market and the dystopian present in which we find ourselves; ..."
"... That Hayek is considered the grandfather of neoliberalism – a style of thought that reduces everything to economics – is a little ironic given that he was such a mediocre economist. ..."
"... This last is what makes neoliberalism "neo". It is a crucial modification of the older belief in a free market and a minimal state, known as "classical liberalism". In classical liberalism, merchants simply asked the state to "leave us alone" – to laissez-nous faire. Neoliberalism recognised that the state must be active in the organisation of a market economy. The conditions allowing for a free market must be won politically, and the state must be re-engineered to support the free market on an ongoing basis. ..."
"... Hayek had only his idea to console him; an idea so grand it would one day dissolve the ground beneath the feet of Keynes and every other intellectual. Left to its own devices, the price system functions as a kind of mind. And not just any mind, but an omniscient one: the market computes what individuals cannot grasp. Reaching out to him as an intellectual comrade-in-arms, the American journalist Walter Lippmann wrote to Hayek, saying: "No human mind has ever understood the whole scheme of a society At best a mind can understand its own version of the scheme, something much thinner, which bears to reality some such relation as a silhouette to a man." ..."
"... The only social end is the maintenance of the market itself. In its omniscience, the market constitutes the only legitimate form of knowledge, next to which all other modes of reflection are partial, in both senses of the word: they comprehend only a fragment of a whole and they plead on behalf of a special interest. Individually, our values are personal ones, or mere opinions; collectively, the market converts them into prices, or objective facts. ..."
"... According to the logic of Hayek's Big Idea, these expressions of human subjectivity are meaningless without ratification by the market ..."
"... ociety reconceived as a giant market leads to a public life lost to bickering over mere opinions; until the public turns, finally, in frustration to a strongman as a last resort for solving its otherwise intractable problems. ..."
"... What began as a new form of intellectual authority, rooted in a devoutly apolitical worldview, nudged easily into an ultra-reactionary politics ..."
Aug 18, 2017 | www.theguardian.com

The word ["neoliberalism"] has become a rhetorical weapon, but it properly names the reigning ideology of our era – one that venerates the logic of the market and strips away the things that make us human.

Last summer, researchers at the International Monetary Fund settled a long and bitter debate over "neoliberalism": they admitted it exists. Three senior economists at the IMF, an organisation not known for its incaution, published a paper questioning the benefits of neoliberalism . In so doing, they helped put to rest the idea that the word is nothing more than a political slur, or a term without any analytic power. The paper gently called out a "neoliberal agenda" for pushing deregulation on economies around the world, for forcing open national markets to trade and capital, and for demanding that governments shrink themselves via austerity or privatisation. The authors cited statistical evidence for the spread of neoliberal policies since 1980, and their correlation with anaemic growth, boom-and-bust cycles and inequality.

Neoliberalism is an old term, dating back to the 1930s, but it has been revived as a way of describing our current politics – or more precisely, the range of thought allowed by our politics . In the aftermath of the 2008 financial crisis, it was a way of assigning responsibility for the debacle, not to a political party per se, but to an establishment that had conceded its authority to the market. For the Democrats in the US and Labour in the UK, this concession was depicted as a grotesque betrayal of principle. Bill Clinton and Tony Blair, it was said, had abandoned the left's traditional commitments, especially to workers, in favour of a global financial elite and the self-serving policies that enriched them; and in doing so, had enabled a sickening rise in inequality.

Neoliberalism: the idea that swallowed the world – podcast

Over the past few years, as debates have turned uglier, the word has become a rhetorical weapon, a way for anyone left of centre to incriminate those even an inch to their right. (No wonder centrists say it's a meaningless insult: they're the ones most meaningfully insulted by it.) But "neoliberalism" is more than a gratifyingly righteous jibe. It is also, in its way, a pair of eyeglasses.

Peer through the lens of neoliberalism and you see more clearly how the political thinkers most admired by Thatcher and Reagan helped shape the ideal of society as a kind of universal market (and not, for example, a polis, a civil sphere or a kind of family) and of human beings as profit-and-loss calculators (and not bearers of grace, or of inalienable rights and duties). Of course the goal was to weaken the welfare state and any commitment to full employment, and – always – to cut taxes and deregulate. But "neoliberalism" indicates something more than a standard rightwing wish list. It was a way of reordering social reality, and of rethinking our status as individuals.

Still peering through the lens, you see how, no less than the welfare state, the free market is a human invention. You see how pervasively we are now urged to think of ourselves as proprietors of our own talents and initiative, how glibly we are told to compete and adapt. You see the extent to which a language formerly confined to chalkboard simplifications describing commodity markets (competition, perfect information, rational behaviour) has been applied to all of society, until it has invaded the grit of our personal lives, and how the attitude of the salesman has become enmeshed in all modes of self-expression.

In short, "neoliberalism" is not simply a name for pro-market policies, or for the compromises with finance capitalism made by failing social democratic parties. It is a name for a premise that, quietly, has come to regulate all we practise and believe: that competition is the only legitimate organising principle for human activity.

No sooner had neoliberalism been certified as real, and no sooner had it made clear the universal hypocrisy of the market, than the populists and authoritarians came to power. In the US, Hillary Clinton, the neoliberal arch-villain, lost – and to a man who knew just enough to pretend he hated free trade . So are the eyeglasses now useless? Can they do anything to help us understand what is broken about British and American politics? Against the forces of global integration, national identity is being reasserted, and in the crudest possible terms. What could the militant parochialism of Brexit Britain and Trumpist America have to do with neoliberal rationality? What possible connection is there between the president – a freewheeling boob – and the bloodless paragon of efficiency known as the free market?

It isn't only that the free market produces a tiny cadre of winners and an enormous army of losers – and the losers, looking for revenge, have turned to Brexit and Trump. There was, from the beginning, an inevitable relationship between the utopian ideal of the free market and the dystopian present in which we find ourselves; between the market as unique discloser of value and guardian of liberty, and our current descent into post-truth and illiberalism.

Moving the stale debate about neoliberalism forward begins, I think, with taking seriously the measure of its cumulative effect on all of us, regardless of affiliation. And this requires returning to its origins, which have nothing to do with Bill or Hillary Clinton. There once was a group of people who did call themselves neoliberals, and did so proudly, and their ambition was a total revolution in thought. The most prominent among them, Friedrich Hayek, did not think he was staking out a position on the political spectrum, or making excuses for the fatuous rich, or tinkering along the edges of microeconomics.

He thought he was solving the problem of modernity: the problem of objective knowledge. For Hayek, the market didn't just facilitate trade in goods and services; it revealed truth. How did his ambition collapse into its opposite – the mind-bending possibility that, thanks to our thoughtless veneration of the free market, truth might be driven from public life altogether?


When the idea occurred to Friedrich Hayek in 1936, he knew, with the conviction of a "sudden illumination", that he had struck upon something new. "How can the combination of fragments of knowledge existing in different minds," he wrote, "bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess?"

This was not a technical point about interest rates or deflationary slumps. This was not a reactionary polemic against collectivism or the welfare state. This was a way of birthing a new world. To his mounting excitement, Hayek understood that the market could be thought of as a kind of mind.

Adam Smith's "invisible hand" had already given us the modern conception of the market: as an autonomous sphere of human activity and therefore, potentially, a valid object of scientific knowledge. But Smith was, until the end of his life, an 18th-century moralist. He thought the market could be justified only in light of individual virtue, and he was anxious that a society governed by nothing but transactional self-interest was no society at all. Neoliberalism is Adam Smith without the anxiety.

That Hayek is considered the grandfather of neoliberalism – a style of thought that reduces everything to economics – is a little ironic given that he was such a mediocre economist. He was just a young, obscure Viennese technocrat when he was recruited to the London School of Economics to compete with, or possibly even dim, the rising star of John Maynard Keynes at Cambridge.

The plan backfired, and Hayek lost out to Keynes in a rout. Keynes's General Theory of Employment, Interest and Money, published in 1936, was greeted as a masterpiece. It dominated the public discussion, especially among young English economists in training, for whom the brilliant, dashing, socially connected Keynes was a beau idéal . By the end of the second world war, many prominent free-marketers had come around to Keynes's way of thinking, conceding that government might play a role in managing a modern economy. The initial excitement over Hayek had dissipated. His peculiar notion that doing nothing could cure an economic depression had been discredited in theory and practice. He later admitted that he wished his work criticising Keynes would simply be forgotten.

... Hayek built into neoliberalism the assumption that the market provides all necessary protection against the one real political danger: totalitarianism. To prevent this, the state need only keep the market free.

This last is what makes neoliberalism "neo". It is a crucial modification of the older belief in a free market and a minimal state, known as "classical liberalism". In classical liberalism, merchants simply asked the state to "leave us alone" – to laissez-nous faire. Neoliberalism recognised that the state must be active in the organisation of a market economy. The conditions allowing for a free market must be won politically, and the state must be re-engineered to support the free market on an ongoing basis.

That isn't all: every aspect of democratic politics, from the choices of voters to the decisions of politicians, must be submitted to a purely economic analysis. The lawmaker is obliged to leave well enough alone – to not distort the natural actions of the marketplace – and so, ideally, the state provides a fixed, neutral, universal legal framework within which market forces operate spontaneously. The conscious direction of government is never preferable to the "automatic mechanism of adjustment" – ie the price system, which is not only efficient but maximises liberty, or the opportunity for men and women to make free choices about their own lives.

As Keynes jetted between London and Washington, creating the postwar order, Hayek sat pouting in Cambridge. He had been sent there during the wartime evacuations; and he complained that he was surrounded by "foreigners" and "no lack of orientals of all kinds" and "Europeans of practically all nationalities, but very few of real intelligence".

Stuck in England, without influence or respect, Hayek had only his idea to console him; an idea so grand it would one day dissolve the ground beneath the feet of Keynes and every other intellectual. Left to its own devices, the price system functions as a kind of mind. And not just any mind, but an omniscient one: the market computes what individuals cannot grasp. Reaching out to him as an intellectual comrade-in-arms, the American journalist Walter Lippmann wrote to Hayek, saying: "No human mind has ever understood the whole scheme of a society At best a mind can understand its own version of the scheme, something much thinner, which bears to reality some such relation as a silhouette to a man."

It is a grand epistemological claim – that the market is a way of knowing, one that radically exceeds the capacity of any individual mind. Such a market is less a human contrivance, to be manipulated like any other, than a force to be studied and placated. Economics ceases to be a technique – as Keynes believed it to be – for achieving desirable social ends, such as growth or stable money. The only social end is the maintenance of the market itself. In its omniscience, the market constitutes the only legitimate form of knowledge, next to which all other modes of reflection are partial, in both senses of the word: they comprehend only a fragment of a whole and they plead on behalf of a special interest. Individually, our values are personal ones, or mere opinions; collectively, the market converts them into prices, or objective facts.

... ... ...

The more Hayek's idea expands, the more reactionary it gets, the more it hides behind its pretence of scientific neutrality – and the more it allows economics to link up with the major intellectual trend of the west since the 17th century. The rise of modern science generated a problem: if the world is universally obedient to natural laws, what does it mean to be human? Is a human being simply an object in the world, like any other? There appears to be no way to assimilate the subjective, interior human experience into nature as science conceives it – as something objective whose rules we discover by observation.

... ... ...

More than anyone, even Hayek himself, it was the great postwar Chicago economist Milton Friedman who helped convert governments and politicians to the power of Hayek's Big Idea. But first he broke with two centuries of precedent and declared that economics is "in principle independent of any particular ethical position or normative judgments" and is "an 'objective' science, in precisely the same sense as any of the physical sciences". Values of the old, mental, normative kind were defective, they were "differences about which men can ultimately only fight". There is the market, in other words, and there is relativism.

Markets may be human facsimiles of natural systems, and like the universe itself, they may be authorless and valueless. But the application of Hayek's Big Idea to every aspect of our lives negates what is most distinctive about us. That is, it assigns what is most human about human beings – our minds and our volition – to algorithms and markets, leaving us to mimic, zombie-like, the shrunken idealisations of economic models. Supersizing Hayek's idea and radically upgrading the price system into a kind of social omniscience means radically downgrading the importance of our individual capacity to reason – our ability to provide and evaluate justifications for our actions and beliefs.

As a result, the public sphere – the space where we offer up reasons, and contest the reasons of others – ceases to be a space for deliberation, and becomes a market in clicks, likes and retweets. The internet is personal preference magnified by algorithm; a pseudo-public space that echoes the voice already inside our head. Rather than a space of debate in which we make our way, as a society, toward consensus, now there is a mutual-affirmation apparatus banally referred to as a "marketplace of ideas". What looks like something public and lucid is only an extension of our own pre-existing opinions, prejudices and beliefs, while the authority of institutions and experts has been displaced by the aggregative logic of big data. When we access the world through a search engine, its results are ranked, as the founder of Google puts it, "recursively" – by an infinity of individual users functioning as a market, continuously and in real time.

... ... ...

According to the logic of Hayek's Big Idea, these expressions of human subjectivity are meaningless without ratification by the market – as Friedman said, they are nothing but relativism, each as good as any other. When the only objective truth is determined by the market, all other values have the status of mere opinions; everything else is relativist hot air. But Friedman's "relativism" is a charge that can be thrown at any claim based on human reason. It is a nonsense insult, as all humanistic pursuits are "relative" in a way the sciences are not. They are relative to the (private) condition of having a mind, and the (public) need to reason and understand even when we can't expect scientific proof. When our debates are no longer resolved by deliberation over reasons, then the whimsies of power will determine the outcome.

This is where the triumph of neoliberalism meets the political nightmare we are living through now. "You had one job," the old joke goes, and Hayek's grand project, as originally conceived in 30s and 40s, was explicitly designed to prevent a backslide into political chaos and fascism. But the Big Idea was always this abomination waiting to happen. It was, from the beginning, pregnant with the thing it was said to protect against. Society reconceived as a giant market leads to a public life lost to bickering over mere opinions; until the public turns, finally, in frustration to a strongman as a last resort for solving its otherwise intractable problems.

... ... ...

What began as a new form of intellectual authority, rooted in a devoutly apolitical worldview, nudged easily into an ultra-reactionary politics. What can't be quantified must not be real, says the economist, and how do you measure the benefits of the core faiths of the enlightenment – namely, critical reasoning, personal autonomy and democratic self-government? When we abandoned, for its embarrassing residue of subjectivity, reason as a form of truth, and made science the sole arbiter of both the real and the true, we created a void that pseudo-science was happy to fill.

... ... ...

[Sep 18, 2017] Critical Realism: Mathematics versus Mythematics in Economics

Highly recommended!
Notable quotes:
"... I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone. ..."
"... A lady in the audi­ence named Barb Jacobson suggested that using the name Neo-Classical gives it a cer­tain degree of cache and wants you guys to start call­ing it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? ..."
Oct 02, 2015 | www.debtdeflation.com

This is the brief talk I gave at a conference celebrating 25 years of the Critical Realist seminar series at Cambridge University. Critical realists argue against the use of mathematics in economics; I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone.

I give the example of my own model of Minsky's Financial Instability Hypothesis, which revealed the possibility of a "Great Moderation" preceding a "Great Recession" before either event had happened.

David Milburn, September 12, 2015 at 9:38 am

Steve,

Last week Prof Bill Mitchell was in London where he gave a talk on re-framing the language used in the media that carried on the myth of the main­stream groupthink. A lady in the audi­ence named Barb Jacobson suggested that using the name Neo-Classical gives it a cer­tain degree of cache and wants you guys to start call­ing it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? Barb Jacobson is spot on!

Sue Madden, September 13, 2015 at 8:28 am

Hi Steve,
I was really amused to see an inter­view a while back in the New Sci­en­tist, with the "research chief" (!!) at the B of E. If you haven't seen it, you really must:

Opinion Interview with Andy Haldane: "Sackcloth and Ashes on Thread needle Street" New Scientist 25 March 2015

Corbyn was elected leader!!!! Now the sparks will fly. At least a pub­lic debate wor­thy of the name might at last be heard in our sad country.

Thanks for your work in trying to enlighten us!!
Sue.

[Sep 11, 2017] Neo-classical economics as a new flat earth cult

Highly recommended!
Notable quotes:
"... Comparative advantage is an absurdity. Protectionism is the only way to wealth, yet economists brainwashed generations of 17 and 18 year olds to believe that up was down and free trade would help the US. ..."
"... This is a new "flat earth" cult. And pretty well paid one: academic economists recently became something like lackeys of financial oligarchy and get some crump from the financial oligarchy table in return to promoting neo-classical economics, as a valuable for neoliberals pseudo-science. ..."
"... People who "do not fit" are filtered at early stages, much like in political parties. Nepotism is another factor. Having relatives in high positions (like is the case with Summers), being member of the dominant ethnic clan, or being a friend of an influential economist (like academic Mafiosi Andrei Shleifer) greatly helps... ..."
"... The most interesting part about this pseudoscience is how well it fits together (reminding me Marxism, to which it was a reaction). ..."
Apr 11, 2017 | economistsview.typepad.com

Will US Economists apologize for destroying the US? Free trade ruined America, April 11, 2017 at 03:28 PM

Will the American Economic Association ever apologize to the American people for helping to destroy the country with their absurd, simple-minded free trade preaching?

Comparative advantage is an absurdity. Protectionism is the only way to wealth, yet economists brainwashed generations of 17 and 18 year olds to believe that up was down and free trade would help the US.

AEA should toast itself in the ruins of Ohio, North Carolina or Iowa - pick any one of the thousands of ruined cities to gloat over.

libezkova -> Will US Economists apologize for destroying the US? Free trade ruined America, April 11, 2017 at 04:48 PM
You are simply naïve.

This is a new "flat earth" cult. And pretty well paid one: academic economists recently became something like lackeys of financial oligarchy and get some crump from the financial oligarchy table in return to promoting neo-classical economics, as a valuable for neoliberals pseudo-science.

Tremendous value of neoclassical economics for neoliberals is that they can use mathiness (trying to imitate physics) to obscure the promotions of neoliberal thinking. In fact, neoclassical economics is the major tool of indoctrination into "free market" nonsense of university students.

People who "do not fit" are filtered at early stages, much like in political parties. Nepotism is another factor. Having relatives in high positions (like is the case with Summers), being member of the dominant ethnic clan, or being a friend of an influential economist (like academic Mafiosi Andrei Shleifer) greatly helps...

People who do not fit but have tremendous talent are often suppressed. Like was the case with Hyman Minsky (and he was lucky that his career was at late stages during the full triumph of neoliberalism -- he managed to get a tenured professor position in 1965 when he was 46)

The most interesting part about this pseudoscience is how well it fits together (reminding me Marxism, to which it was a reaction).

Set of neoclassical myths such as "efficient market hypothesis", "rational expectations", "generalized stochastic equilibrium", "invisible hand", comprise a pretty coherent "secular religion". It may even have some minor value as a mathematical theory of some fictitious economic space (almost like in a computer game like Civilization) that never existed and will never exist.

But it is sold differently and tends to produce predictions and prescriptions (highly politicized in their nature) in line with neoliberal thinking. That's why it is maintained and promoted.

So expecting them to apologize is nonsense.

You can benefit from re-reading recent discussion of Karl Polanyi famous book "The Great Transformation" in this blog

http://economistsview.typepad.com/economistsview/2017/03/a-foreword-to-kari-polanyi-levitt.html#comment-6a00d83451b33869e201b7c8de5388970b

Another interesting question is how neoliberalism and neo-classical economics survived the financial meltdown. Here Professor Phillip Mirowski has some interesting insights:

https://www.youtube.com/watch?v=zsiT9P87J4g

>

[Jul 17, 2017] It Takes a Theory to Beat a Theory The Adaptive Markets Hypothesis naked capitalism

Notable quotes:
"... This piece sounds like the survival of the fittest in vogue during GE's CEO Jack Welch days. I always add something to the nietzschean sentence. What does not kill you will make you stronger or will physically and mentally disable you for life. What is the what? The what can be the being pushed to play the most distasteful and absurd capitalist games. A hierarchical screwing! ..."
"... We rely on groups to support each other, because individually it is very hard to survive through chaos. That's the reason we are herd or pack animals, and our associations are know as society. ..."
"... When Maggott Thatcher stated 'there is no such thing as society." she was denying our basic survival mechanism to promote her own narrow, neoliberal, selfish ends. ..."
"... The Master and His Emissary ..."
"... The Minimalist Program ..."
"... brain functions across time and under myriad circumstances to generate behaviors ..."
"... i was disappointed to find he simply dove deeper into the proposition that our behavior is determined by our genes. Homo sapiens's prime adaptation is culture, which allows learned behaviors in individuals to be tranformed into adaptations. Our genes do not determine our behavior. We do. And we determine the behavior of the next generation by our choices of what cultural norms to propagate. ..."
"... As Bill Black has pointed out numerous times, the people who brought on the financial collapse were acting completely rationally. They crashed their own corporations not out of irrationality. They did it because they were trying to make themselves rich, and they didn't give a damn about the corporations they were looting in the process. ..."
"... The writer himself should have spent more time focusing on that great white shark because he's failed to notice he's given renewed life to social darwinism. These "highly evolved" institutions he talks about – like banks and hedge funds – are, in fact, keenly honed predators. Which is odd. An advanced social species like ours isn't supposed to prey on other members. His competition model involves people essentially eating other people. He's failed to note any distinction between inter-species and intra-species competition. ..."
Jul 17, 2017 | www.nakedcapitalism.com

diptherio , July 12, 2017 at 12:09 pm

All that, and not one mention of fraud how convenient.

No Way Out , July 12, 2017 at 12:32 pm

Fraud? They're professionals.

https://www.youtube.com/watch?v=DYa6FNKSgbk

JEHR , July 12, 2017 at 12:57 pm

diptherio, that was my thought also as I read more and more rapidly down the article. Fraud seems to have disappeared from financial discussions altogether.

grizziz , July 12, 2017 at 1:00 pm

I believe fraud is covered under #5 as 'innovation.'

hemeantwell , July 12, 2017 at 2:02 pm

Convenient is putting it mildly. About 2/3 of the way through I was waiting for a reference to Keynes, or Minsky, or Marx or -- and this is from my reading of Geoffrey Ingham's "The Nature of Money" -- Weber but instead found him coasting into some general behavioral precepts before landing without reference to anyone. It's like we're witnessing Spinoza concoct a system, rather than an economist talk about the importance of dropping models that have been under attack, and via arguments that are much more specific, for decades.

ChrisPacific , July 12, 2017 at 9:57 pm

I think this model handles fraud a lot better than the EMT does. If you accept that individuals make decisions based on a collection of subjective heuristics unique to that individual (which may not bear more than an indirect relationship to rationality) then you need to consider the possibility that those heuristics might be manipulated by an outside party for the purpose of separating said individual from their cash. Which would cover a wide range of behaviours, from fraud to lesser examples like marketing (which is also not modeled by the EMT).

On a first impression it seems to be at least approximately consistent with reality and how people behave, which puts it ahead of EMT and most modern economic theory right off the bat, but it looks like more work is needed to get it to a point where it becomes a developed model capable of making falsifiable predictions.

ChrisPacific , July 12, 2017 at 11:56 pm

I also take exception to the definition of 'rationality' as the solution to an optimization problem based on a universal utility function in which everything can be measured by a single number and is directly comparable to everything else. To the extent this article uses the term, it seems to be adopting the standard utility maximization definition, which means it's more of a minor heresy than a completely new theory.

paul , July 12, 2017 at 12:13 pm

So adaptive markets are pretty much the same as rational ones, just taking a slightly more roundabout route to those optimal outcomes? Never been taken with the invocation of evolution outside biology. A lot of bacteria get killed before they find a way round a decent antibiotic.

Evolution at the speed of thought has me quite baffled.

Sue , July 12, 2017 at 2:21 pm

This piece sounds like the survival of the fittest in vogue during GE's CEO Jack Welch days. I always add something to the nietzschean sentence. What does not kill you will make you stronger or will physically and mentally disable you for life. What is the what? The what can be the being pushed to play the most distasteful and absurd capitalist games. A hierarchical screwing!

Terry Flynn , July 12, 2017 at 12:36 pm

OK I lay my cards on the table as someone who came from economics and ended up following the psychologists but this sounds like a belated attempt to reconcile a bunch of findings from experimental economics that were long known in psychology And which lay out an unduly long list of assumptions in an attempt to keep some links with economics when the psychologists recognised back in 1960 that just two assumptions were needed – giving the flexibility required to explain all sorts of heuristics.

Synoia , July 12, 2017 at 12:41 pm

Close, but no cigar:

We've seen how biofeedback measurements can be used to study behavior, We know that human behavior, both the rational and the seemingly irrational ,

Nonlinear Feedback generates Chaos .

As a result of this feedback As long as those challenges remain stable over time, their heuristics will eventually adapt to yield approximately optimal solutions to those challenges.

Nonlinear feedback – Chaos

Assumption = As long as these challenges remain stable .

Chaos removes any possibility of stability.

Good article, but the conclusion is hopeless, because the author is seeking some assurance of stability where there is none.

Now to the social part of the thought experiment:

We rely on groups to support each other, because individually it is very hard to survive through chaos. That's the reason we are herd or pack animals, and our associations are know as society.

When Maggott Thatcher stated 'there is no such thing as society." she was denying our basic survival mechanism to promote her own narrow, neoliberal, selfish ends.

Ultrapope , July 12, 2017 at 4:01 pm

I agree with your comment Synoia but I do have a small quibble with where you say Chaos removes any possibility of stability. Chaos in markets can lead to financial ruin, which is a form of stability. Think bank runs. Sudden, unpredictable changes in the market could cause investors to get cold feet and pull out there money en masse. Once my bank runs out of money I can predict with reasonable certainty that if I didn't get my money out in time, I ain't getting it back (well ok, maybe if I was too big to fail things would be different ). Regardless, you are right, the author isn't doing his theory any justice in assuming "challenges remain stable over time".

Synoia , July 12, 2017 at 5:49 pm

Sudden, unpredictable changes in the market could cause investors to get cold feet and pull out there money en masse.

That's the embodiment of Chaos.

jsn , July 13, 2017 at 6:40 am

I can only guess that "depression" is the stability Ultrapope is referring to.

animalogic , July 13, 2017 at 12:29 am

Maybe.
But, as with many things, there are varying quantities/qualities of "chaos". Differences count.

Carolinian , July 12, 2017 at 12:58 pm

Great article.

Financial markets are a product of human evolution, and follow biological laws instead. The same basic principles of mutation, competition, and natural selection that determine the life history of a herd of antelope also apply to the banking industry, albeit with somewhat different population dynamics.

It's time Lefties admit that the conservatives are right about one thing: there is such a thing as "human nature." Traditional humanism with its roots in religion prefers to see us as moral beings who must choose between good and evil using our "free will." But it's possible that what is really happening is that our sometimes overpowering instincts are warring with our reason. Where the conservatives get it wrong is by putting all the emphasis on the former–the latter not so much.

I have a friend who dislikes dogs and complains about people anthropomorphizing their pets. My reply is that what motivates animal lovers is not so much that they are like us but that we are like them. This recognition–that we are a part of nature–may be a way out of the planet's looming disaster. Good to see economists taking up a theory that admits reality.

Grebo , July 12, 2017 at 11:11 pm

there is such a thing as "human nature."

My stock response to this is "no, there is animal nature and there is human culture ". The point of the latter is largely to control the former.

jsn , July 13, 2017 at 6:46 am

This is a much deeper comment than it first appears. Thanks!

Tomonthebeach , July 12, 2017 at 1:00 pm

As a psychologist, when I look at economics (which is often), I see a few dangerous linear assumptions elaborated in complex calculus trying to apply LISREL or some other tool to make sense of past economic behavior which is then projected forward just in time to be proven incorrect – much of the time.

A theory is no use if it cannot be shown to predict better than what we have already. We have theories in behavioral science like chaos and complexity which seem to capture irrationality to some extent. We also have analytic strategies that do not depend on linear equations – dynamical models. Such dynamic models have been shown to predict all sorts of behaviors in the animal world, and work by folks like Josh Epstein has shown it works for people too.

Maybe thinking more dynamically is key to better understanding – like why Bitcoins are worth anything more than a bag of Legos – at least Legos are tangible.

edr , July 12, 2017 at 1:04 pm

Homo sapiens isn't Homo economicus. Humans have a full set of values, some of which conflict with straight up monetary gains.

There is some level of honest behavior that is most profitable to a society. Brazil and the U.S. have had similar level of land and natural resources but very different outcomes. Corruption is the indicator that determines which society did better.

Stephen Gardner , July 12, 2017 at 2:39 pm

Your statement: "Homo sapiens isn't Homo economicus" is the crux of the issue. This is why so much of modern economic theory is bunk. The main hypothesis is incorrect. My training is in physics so what we used to say to denigrate a theory that was based on bad assumptions was "assume a spherical cow". The economics profession has been harming the common people with their "spherical cows" for decades but it's all good because the people Carlin called the real owners have done nicely. At least until now. I think I'm beginning to here the distant sound of tumbrils rolling toward the homes of the real owners.

Jeremy Grimm , July 12, 2017 at 3:00 pm

Isn't "Assume a can-opener" or something like that the punch line for the joke about some guys starving on a desert island when a can of stew washes up on the beach.

Found it!:
[https://en.wikipedia.org/wiki/Assume_a_can_opener]
"There is a story that has been going around about a physicist, a chemist, and an economist who were stranded on a desert island with no implements and a can of food. The physicist and the chemist each devised an ingenious mechanism for getting the can open; the economist merely said, "Assume we have a can opener"

Terry Flynn , July 12, 2017 at 3:17 pm

yeah I always loved that joke. It ties in with the comments above made by Tomonthebeach and edr. The psychological stuff I deal with is careful to stay within the confines of the problem we are trying to solve, rather than assume some global utility function underpinned by homo economicus (and which therefore borders on religion).

Synoia also made a great comment regarding dynamics . if I'd stayed in academia the next project I'd have been trying to address was using choice model parameters as "starting values" to implement agent based models alas that's something I never got to investigate and that I hope others will.

Jeremy Grimm , July 12, 2017 at 3:58 pm

Reminds me of another joke -- mechanical engineering has made great progress elaborating the mathematics for a chair with zero legs and for chairs with one and two legs. There is a lot of excitement in recent developments in the study of chairs with three legs but deep mysteries remain in efforts to understand the mathematics of chairs with more than three legs.

Terry Flynn , July 12, 2017 at 4:26 pm

lol hadn't heard that one, thanks!

Byron the Light Bulb , July 12, 2017 at 1:10 pm

Ayn Rand's Objectivism was just a mating strategy in that it provided justification for her to poach husbands from heiresses and slap the buns on dreamboat Alan Greenspan. [Have you read my book? Let's erect that skyscraper.–Ayn] The economy is just a vehicle for the human genomes of economists to replicate.

David Barrera , July 12, 2017 at 1:41 pm

Survival to what? For the most part to a second nature world which is a cultural construction.
Adaptation to environment, as if the latter had been thrown to us by the gods of nature or, to give you a more scientific tang, it had been formed by natural evolutionary forces. Undoubtedly, the most powerful agents through the institutions they shape and control have a lot to do on how thick is the air we breath and how heavy is the weight of the world we carry on our backs. This is not to say that they are not to some degree obliged to their inheritance and creations or that others can not have any saying, influence or acquiescence to them.
Adaptations to changes, as if the changes were the inevitable product of autopiloted supra-objective structures for agents without agents and such changes-now indeed- brought about the corollary of adaptation.

Mel , July 12, 2017 at 2:10 pm

I still prefer Iain McGilchrist's The Master and His Emissary , for its neurological detail. It covers the same scope as this post, yet also says some things.

jCandlish , July 12, 2017 at 2:46 pm

Noam Chomsky was careful to label his latest linguistic approach The Minimalist Program , because it is not testable by hypotheses. It is a shame that this point of rigor was lost on his MIT colleges at the Sloan School.

Whatever. Adaptive Market? Fine. Never admit to the command economy.

Jeremy Grimm , July 12, 2017 at 3:51 pm

Thank you for the reference to Chomsky's recent books on linguistics. But a quibble -- did Chomsky label his linguistic approach as a 'Program' because it doesn't generate testable hypotheses? I haven't read "The Minimalist Program" yet but would think he used the label 'Program' to indicate he was proposing a broad framework for new research in linguistics and its implications for human cognition. I believe Chomsky is presenting the case for his life's work and proposing paths for its continuation.

jCandlish , July 12, 2017 at 4:58 pm

Quibble noted.

The MP is an approach to the subject of linguistics and language. While it encapsulates theoretical elements, an approach isn't provable. Linguistics is goofy because it is within the intersection of mathematics and biology, fields which expose themselves to different levels of rigor.

The sloppy five key principles of the singular Adaptive Market Hypothesis are teasing my brain functions across time and under myriad circumstances to generate behaviors other than to retch. They read like a sell sheet.

MP, in Chomsky's own words
https://youtu.be/Rgd8BnZ2-iw?list=PLGp2jSK7C8hC8zNdENTa3Y__VGQbcUK1D&t=2618

Jeremy Grimm , July 13, 2017 at 2:28 am

Thank you very much! it's too late at night to follow Chomsky's video but I put it on my list for tomorrow afternoon. I was surprised by how the price for Chomsky's book "The Minimalist Program" cost. The video will help me decide whether to spring for the book now or watch for a used copy..

As for the post -- I am not sure why we were presented with it. It seems like some warmed over rancid tripe.

Jeremy Grimm , July 13, 2017 at 2:44 am

Did you mean to reference https://www.youtube.com/watch?v=Oq5lMTKJiqE
This is titled "The minimalist program and language acqusition". I have a copy of "What kind of Creatures are We?" and I've watched several of his videos derivative from his Dewey Lectures.

Ignacio , July 12, 2017 at 3:44 pm

5. Survival is the ultimate force driving competition, innovation, and adaptation.

Nope.
This is an old view of evolution. Evolution has evolved more than that. Survival is just one of the forces. I would argue that randomness is a very powerful force.

Left in Wisconsin , July 12, 2017 at 4:17 pm

This seems a transparent effort by (some) economists to substitute one ridiculous paradigm with another. I guess the title says it all.

This was the most hilarious part:

On one side of the divide were the free market economists, who believe that we are all economically rational adults, governed by the law of supply and demand. On the other side were the behavioral economists, who believe that we are all irrational animals, driven by fear and greed like so many other species of mammals.

So not only is the neoclassical paradigm NOT driven by greed but apparently it (rational maximization) is the exact opposite! Who knew?

Terry Flynn , July 12, 2017 at 4:41 pm

yeah it's why people like me are regarded as traitors . if you disagree with both sides you simply double your enemies (there is a Terry Pratchett point in there) ..

it's simply a case of horses for courses in certain circumstances yes a traditional individual maximisation function works in others the maximand is some societal one. You can use the same simple psychological theory of prediction but you have to recognise what the intrinsic "underlying scale of value" is. The psychologists have known since 1927 that choices can be "irrational" according to neoclassical economics. By understanding how people make errors they have been streets ahead (e.g. proving something in 1960 that an economist published in 1974 and got a "nobel" prize for)

Jeremy Grimm , July 12, 2017 at 5:02 pm

Is this post representative of the deep thought available from the Sloan School? Drag in some evolution and discussions of our origins as troglodytes -- make a quick review of behavioral theories of the market -- throw in some Darwin and voilà -- "adaptive markets". If I give up on trying to derive a theory for how the market operates from a theory for how the individuals in that market operate why do I care about the rational economic man or the adaptive man evolving in the jungles of the market. Perhaps I might question some of the other assumptions used to construct my model of the market and look more closely at some of the fraud and some of the smarmy trading practices[as many other commenters noted].

Does the new book by the author of this post explain how to develop the heuristics which will eventually adapt to yield approximately optimal solutions -- so some quants can program my adaptive trader computer program?

[Footnote: "adaptive" is cool also for sounding like "adaptive systems" a systems approach for solving problems like noise cancellation.]

meeps , July 12, 2017 at 6:44 pm

If it takes a theory to beat a theory, this author needs to look under more rocks. This theory isn't new. Its former iteration was faith healing (to pray harder). The Adaptive Markets Hypothesis iteration is to flail and suffocate on the beach longer. I'll give it points though for cleverly tucking old articles of faith into a pocket protector.

bdy , July 12, 2017 at 7:18 pm

Nice when you don't even have to revise the textbooks to accommodate the new paradigm. I can already hear the calls for deregulation so that markets can better adapt.

Steven , July 12, 2017 at 8:03 pm

About a third through I thought I knew where he was going: economic behavior is predicated on cultural norms, it appears to give rise to laws where those norms are stable across time, but recent rapid shifts in norms have created behaviors which are not anticipated by the laws, exposing the fallacy of calling them laws. Example: short term profit seeking to the exclusion of all else was not culturally allowed before, but now it is. This leads to different market behavior. Prior observers were not wrong about the laws they pronounced. The laws simply relied on moral restraints that were as ubiquitous, and thus as hidden, as water is to a fish.

Instead, i was disappointed to find he simply dove deeper into the proposition that our behavior is determined by our genes. Homo sapiens's prime adaptation is culture, which allows learned behaviors in individuals to be tranformed into adaptations. Our genes do not determine our behavior. We do. And we determine the behavior of the next generation by our choices of what cultural norms to propagate.

Oh well.

blennylips , July 12, 2017 at 9:27 pm

If you got the time, I'd recommend "sitting" in on Robert Sapolsky's 2010 Stanford course " Human Behavioral Biology ".

Its very good. Genes are not the dictator of behavior, just one of several players. The environment comes in through epigenetics. See https://en.wikipedia.org/wiki/Dutch_famine_of_1944%E2%80%9345#Legacy for example.

H. Alexander Ivey , July 13, 2017 at 12:20 am

economic behavior is predicated on cultural norms

Yeah, if he had specified culture to be what most would call sub-cultures, like the 1%, the professional class, the blue-collar group, etc., then he would have a broad based, but consistent actions, division of an economy. But that idea is high heresy; there is not a 'society', there is only lone individuals acting alone. Quite the crock of BS.

PS. in the interest of 'efficiency' (instead of creating a second posting, I'll piggyback here), let me say these replys are one reason why I support this site: After reading the first 3 paragraphs and skimming his section headers, I recognized the storyline. So I dived into the replies and learned what was worth learning. Thanks guys, you saved my blood pressure.

craazyman , July 12, 2017 at 8:44 pm

This post could be a Thomas Friedman writing contest winner!

"We've travelled millions of years into our past, looked deep inside the human brain, and explored the cutting edge of current scientific theories. , , , We're neither entirely rational nor entirely irrational, hence neither the rationalists nor the behavioralists are completely convincing. We need a new narrative for how markets work, and now have enough pieces of the puzzle to start putting it all together."

That's not quite at Mr. Friedman's level of mixed metaphorical mayhem . . . But it's close!

It makes me think of FANTASTIC VOYAGE with Racquel Welch and Donald Pleasance, when scientists were shrunk to microscopic size and then rode around inside a human body's ciruclatory system in incredibly small submarine that lookd like a space ship. Then there was trouble and Donald Pleasance was sucked up head first into the white blood cell. I'm not making this up! You can Youtube it and see.

It may be that there's white blood cell like things we don't have the scientific equipment to see that actually cause booms and busts, but if we could see them through things like telescopes or time machine space ships like the Post sort of says, then you could see how they suck people up into them. This really is cutting edge financial science.

Also, if somebody has never been an animal, then how do they know animals are driven by fear and greed, That made me stop and think, just at the end of the first paragraph! That seems like an extraordinary claim to make. Maybe somebody can be injected with Zebra genes and let loose in Tanzania in some national park for a few weeks until the genes wash out of their system. Then they can report back. But until that time, it's only speculation.

H. Alexander Ivey , July 13, 2017 at 12:25 am

Dang craazyman. I wish I had said that. I stand in awe of your analytical insights of paragraph 1.

And there's no need for me to youtube, I saw the original big screen version. Ha!

Wisdom Seeker , July 13, 2017 at 1:48 pm

Did either of you read the actual book (Isaac Asimov)? Book usually beats movie.

Steven Greenberg , July 13, 2017 at 10:26 am

As Bill Black has pointed out numerous times, the people who brought on the financial collapse were acting completely rationally. They crashed their own corporations not out of irrationality. They did it because they were trying to make themselves rich, and they didn't give a damn about the corporations they were looting in the process.

Wade Riddick , July 14, 2017 at 12:41 am

As others have noted, the absence of fraud in this model is telling.

The writer himself should have spent more time focusing on that great white shark because he's failed to notice he's given renewed life to social darwinism. These "highly evolved" institutions he talks about – like banks and hedge funds – are, in fact, keenly honed predators. Which is odd. An advanced social species like ours isn't supposed to prey on other members. His competition model involves people essentially eating other people. He's failed to note any distinction between inter-species and intra-species competition.

The gene selection he invokes is far more complicated. We live in societies whose rules determines winners and losers. What, in essense, is this competition best optimizing? Does "survival" in this system mean optimizing each individual's potential? What is it we want "economic survival" to mean? He talks about environmental adaptation but leaves out the fact we define our own environment. There's no way to efface politics.

[Jul 13, 2017] How economics became a religion John Rapley

Notable quotes:
"... Main image: Maxian/Getty/iStockphoto/Guardian Design ..."
"... This is an edited extract from Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong by John Rapley, published by Simon & Schuster on 13 July at £20. To order a copy for £17, go to ..."
"... bookshop.theguardian.com ..."
"... or call 0330 333 6846. Free UK p&p over £10, online orders only. Phone orders min p&p of £1.99. ..."
Jul 13, 2017 | www.theguardian.com
--> Its moral code promises salvation, its high priests uphold their orthodoxy. But perhaps too many of its doctrines are taken on faith. By John Rapley Its moral code promises salvation, its high priests uphold their orthodoxy. But perhaps too many of its doctrines are taken on faith. By John Rapley How economics became a religion Share on Facebook Share on Twitter Share via Email View more sharing options Share on LinkedIn Share on Pinterest Share on Google+ Share on WhatsApp Share on Messenger Close

Tuesday 11 July 2017 01.00 EDT Last modified on Tuesday 11 July 2017 11.20 EDT A lthough Britain has an established church, few of us today pay it much mind. We follow an even more powerful religion, around which we have oriented our lives: economics. Think about it. Economics offers a comprehensive doctrine with a moral code promising adherents salvation in this world; an ideology so compelling that the faithful remake whole societies to conform to its demands. It has its gnostics, mystics and magicians who conjure money out of thin air, using spells such as "derivative" or "structured investment vehicle". And, like the old religions it has displaced, it has its prophets, reformists, moralists and above all, its high priests who uphold orthodoxy in the face of heresy.

Over time, successive economists slid into the role we had removed from the churchmen: giving us guidance on how to reach a promised land of material abundance and endless contentment. For a long time, they seemed to deliver on that promise, succeeding in a way few other religions had ever done, our incomes rising thousands of times over and delivering a cornucopia bursting with new inventions, cures and delights.

This was our heaven, and richly did we reward the economic priesthood, with status, wealth and power to shape our societies according to their vision. At the end of the 20th century, amid an economic boom that saw the western economies become richer than humanity had ever known, economics seemed to have conquered the globe. With nearly every country on the planet adhering to the same free-market playbook, and with university students flocking to do degrees in the subject, economics seemed to be attaining the goal that had eluded every other religious doctrine in history: converting the entire planet to its creed.

Yet if history teaches anything, it's that whenever economists feel certain that they have found the holy grail of endless peace and prosperity, the end of the present regime is nigh. On the eve of the 1929 Wall Street crash , the American economist Irving Fisher advised people to go out and buy shares; in the 1960s, Keynesian economists said there would never be another recession because they had perfected the tools of demand management.

The 2008 crash was no different. Five years earlier, on 4 January 2003, the Nobel laureate Robert Lucas had delivered a triumphal presidential address to the American Economics Association. Reminding his colleagues that macroeconomics had been born in the depression precisely to try to prevent another such disaster ever recurring, he declared that he and his colleagues had reached their own end of history: "Macroeconomics in this original sense has succeeded," he instructed the conclave. "Its central problem of depression prevention has been solved."

No sooner do we persuade ourselves that the economic priesthood has finally broken the old curse than it comes back to haunt us all: pride always goes before a fall. Since the crash of 2008, most of us have watched our living standards decline. Meanwhile, the priesthood seemed to withdraw to the cloisters, bickering over who got it wrong. Not surprisingly, our faith in the "experts" has dissipated.

Hubris, never a particularly good thing, can be especially dangerous in economics, because its scholars don't just observe the laws of nature; they help make them. If the government, guided by its priesthood, changes the incentive-structure of society to align with the assumption that people behave selfishly, for instance, then lo and behold, people will start to do just that. They are rewarded for doing so and penalised for doing otherwise. If you are educated to believe greed is good, then you will be more likely to live accordingly.

The hubris in economics came not from a moral failing among economists, but from a false conviction: the belief that theirs was a science. It neither is nor can be one, and has always operated more like a church. You just have to look at its history to realise that.


T he American Economic Association, to which Robert Lucas gave his address, was created in 1885, just when economics was starting to define itself as a distinct discipline. At its first meeting, the association's founders proposed a platform that declared: "The conflict of labour and capital has brought to the front a vast number of social problems whose solution is impossible without the united efforts of church, state and science." It would be a long path from that beginning to the market evangelism of recent decades.

Yet even at that time, such social activism provoked controversy. One of the AEA's founders, Henry Carter Adams, subsequently delivered an address at Cornell University in which he defended free speech for radicals and accused industrialists of stoking xenophobia to distract workers from their mistreatment. Unknown to him, the New York lumber king and Cornell benefactor Henry Sage was in the audience. As soon as the lecture was done, Sage stormed into the university president's office and insisted: "This man must go; he is sapping the foundations of our society." When Adams's tenure was subsequently blocked, he agreed to moderate his views. Accordingly, the final draft of the AEA platform expunged the reference to laissez-faire economics as being "unsafe in politics and unsound in morals".

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'Economics has always operated more like a church' Trinity Church seen from Wall Street. Photograph: Alamy Stock Photo

So was set a pattern that has persisted to this day. Powerful political interests – which historically have included not only rich industrialists, but electorates as well – helped to shape the canon of economics, which was then enforced by its scholarly community.

Once a principle is established as orthodox, its observance is enforced in much the same way that a religious doctrine maintains its integrity: by repressing or simply eschewing heresies. In Purity and Danger, the anthropologist Mary Douglas observed the way taboos functioned to help humans impose order on a seemingly disordered, chaotic world. The premises of conventional economics haven't functioned all that differently. Robert Lucas once noted approvingly that by the late 20th century, economics had so effectively purged itself of Keynesianism that "the audience start(ed) to whisper and giggle to one another" when anyone expressed a Keynesian idea at a seminar. Such responses served to remind practitioners of the taboos of economics: a gentle nudge to a young academic that such shibboleths might not sound so good before a tenure committee. This preoccupation with order and coherence may be less a function of the method than of its practitioners. Studies of personality traits common to various disciplines have discovered that economics, like engineering, tends to attract people with an unusually strong preference for order, and a distaste for ambiguity.

The irony is that, in its determination to make itself a science that can reach hard and fast conclusions, economics has had to dispense with scientific method at times. For starters, it rests on a set of premises about the world not as it is, but as economists would like it to be. Just as any religious service includes a profession of faith, membership in the priesthood of economics entails certain core convictions about human nature. Among other things, most economists believe that we humans are self-interested, rational, essentially individualistic, and prefer more money to less. These articles of faith are taken as self-evident. Back in the 1930s, the great economist Lionel Robbins described his profession in a way that has stood ever since as a cardinal rule for millions of economists. The field's basic premises came from "deduction from simple assumptions reflecting very elementary facts of general experience" and as such were "as universal as the laws of mathematics or mechanics, and as little capable of 'suspension'".

Deducing laws from premises deemed eternal and beyond question is a time-honoured method. For thousands of years, monks in medieval monasteries built a vast corpus of scholarship doing just that, using a method perfected by Thomas Aquinas known as scholasticism. However, this is not the method used by scientists, who tend to require assumptions to be tested empirically before a theory can be built out of them.

But, economists will maintain, this is precisely what they themselves do – what sets them apart from the monks is that they must still test their hypotheses against the evidence. Well, yes, but this statement is actually more problematic than many mainstream economists may realise. Physicists resolve their debates by looking at the data, upon which they by and large agree. The data used by economists, however, is much more disputed. When, for example, Robert Lucas insisted that Eugene Fama's efficient-markets hypothesis – which maintains that since a free market collates all available information to traders, the prices it yields can never be wrong – held true despite "a flood of criticism", he did so with as much conviction and supporting evidence as his fellow economist Robert Shiller had mustered in rejecting the hypothesis. When the Swedish central bank had to decide who would win the 2013 Nobel prize in economics, it was torn between Shiller's claim that markets frequently got the price wrong and Fama's insistence that markets always got the price right. Thus it opted to split the difference and gave both men the medal – a bit of Solomonic wisdom that would have elicited howls of laughter had it been a science prize. In economic theory, very often, you believe what you want to believe – and as with any act of faith, your choice of heads or tails will as likely reflect sentimental predisposition as scientific assessment.

It's no mystery why the data used by economists and other social scientists so rarely throws up incontestable answers: it is human data. Unlike people, subatomic particles don't lie on opinion surveys or change their minds about things. Mindful of that difference, at his own presidential address to the American Economic Association nearly a half-century ago, another Nobel laureate, Wassily Leontief, struck a modest tone. He reminded his audience that the data used by economists differed greatly from that used by physicists or biologists. For the latter, he cautioned, "the magnitude of most parameters is practically constant", whereas the observations in economics were constantly changing. Data sets had to be regularly updated to remain useful. Some data was just simply bad. Collecting and analysing the data requires civil servants with a high degree of skill and a good deal of time, which less economically developed countries may not have in abundance. So, for example, in 2010 alone, Ghana's government – which probably has one of the better data-gathering capacities in Africa – recalculated its economic output by 60% . Testing your hypothesis before and after that kind of revision would lead to entirely different results.

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'The data used by economists rarely throws up incontestable answers' traders at the New York Stock Exchange in October 2008. Photograph: Spencer Platt/Getty Images

Leontief wanted economists to spend more time getting to know their data, and less time in mathematical modelling. However, as he ruefully admitted, the trend was already going in the opposite direction. Today, the economist who wanders into a village to get a deeper sense of what the data reveals is a rare creature. Once an economic model is ready to be tested, number-crunching ends up being done largely at computers plugged into large databases. It's not a method that fully satisfies a sceptic. For, just as you can find a quotation in the Bible that will justify almost any behaviour, you can find human data to support almost any statement you want to make about the way the world works.

That's why ideas in economics can go in and out of fashion. The progress of science is generally linear. As new research confirms or replaces existing theories, one generation builds upon the next. Economics, however, moves in cycles. A given doctrine can rise, fall and then later rise again. That's because economists don't confirm their theories in quite the same way physicists do, by just looking at the evidence. Instead, much as happens with preachers who gather a congregation, a school rises by building a following – among both politicians and the wider public.

For example, Milton Friedman was one of the most influential economists of the late 20th century. But he had been around for decades before he got much of a hearing. He might well have remained a marginal figure had it not been that politicians such as Margaret Thatcher and Ronald Reagan were sold on his belief in the virtue of a free market. They sold that idea to the public, got elected, then remade society according to those designs. An economist who gets a following gets a pulpit. Although scientists, in contrast, might appeal to public opinion to boost their careers or attract research funds, outside of pseudo-sciences, they don't win support for their theories in this way.

However, if you think describing economics as a religion debunks it, you're wrong. We need economics. It can be – it has been – a force for tremendous good. But only if we keep its purpose in mind, and always remember what it can and can't do.


T he Irish have been known to describe their notionally Catholic land as one where a thin Christian veneer was painted over an ancient paganism. The same might be said of our own adherence to today's neoliberal orthodoxy, which stresses individual liberty, limited government and the free market. Despite outward observance of a well-entrenched doctrine, we haven't fully transformed into the economic animals we are meant to be. Like the Christian who attends church but doesn't always keep the commandments, we behave as economic theory predicts only when it suits us. Contrary to the tenets of orthodox economists, contemporary research suggests that, rather than seeking always to maximise our personal gain, humans still remain reasonably altruistic and selfless. Nor is it clear that the endless accumulation of wealth always makes us happier. And when we do make decisions, especially those to do with matters of principle, we seem not to engage in the sort of rational "utility-maximizing" calculus that orthodox economic models take as a given. The truth is, in much of our daily life we don't fit the model all that well.

For decades, neoliberal evangelists replied to such objections by saying it was incumbent on us all to adapt to the model, which was held to be immutable – one recalls Bill Clinton's depiction of neoliberal globalisation, for instance, as a "force of nature" . And yet, in the wake of the 2008 financial crisis and the consequent recession, there has been a turn against globalisation across much of the west. More broadly, there has been a wide repudiation of the "experts" , most notably in the 2016 US election and Brexit referendum.

It would be tempting for anyone who belongs to the "expert" class, and to the priesthood of economics, to dismiss such behaviour as a clash between faith and facts, in which the facts are bound to win in the end. In truth, the clash was between two rival faiths – in effect, two distinct moral tales. So enamoured had the so-called experts become with their scientific authority that they blinded themselves to the fact that their own narrative of scientific progress was embedded in a moral tale. It happened to be a narrative that had a happy ending for those who told it, for it perpetuated the story of their own relatively comfortable position as the reward of life in a meritocratic society that blessed people for their skills and flexibility. That narrative made no room for the losers of this order, whose resentments were derided as being a reflection of their boorish and retrograde character – which is to say, their fundamental vice. The best this moral tale could offer everyone else was incremental adaptation to an order whose caste system had become calcified. For an audience yearning for a happy ending, this was bound to be a tale of woe.

The failure of this grand narrative is not, however, a reason for students of economics to dispense with narratives altogether. Narratives will remain an inescapable part of the human sciences for the simple reason that they are inescapable for humans. It's funny that so few economists get this, because businesses do. As the Nobel laureates George Akerlof and Robert Shiller write in their recent book, Phishing for Phools , marketers use them all the time, weaving stories in the hopes that we will place ourselves in them and be persuaded to buy what they are selling. Akerlof and Shiller contend that the idea that free markets work perfectly, and the idea that big government is the cause of so many of our problems, are part of a story that is actually misleading people into adjusting their behaviour in order to fit the plot. They thus believe storytelling is a "new variable" for economics, since "the mental frames that underlie people's decisions" are shaped by the stories they tell themselves.

Economists arguably do their best work when they take the stories we have given them, and advise us on how we can help them to come true. Such agnosticism demands a humility that was lacking in economic orthodoxy in recent years. Nevertheless, economists don't have to abandon their traditions if they are to overcome the failings of a narrative that has been rejected. Rather they can look within their own history to find a method that avoids the evangelical certainty of orthodoxy.

In his 1971 presidential address to the American Economic Association, Wassily Leontief counselled against the dangers of self-satisfaction. He noted that although economics was starting to ride "the crest of intellectual respectability an uneasy feeling about the present state of our discipline has been growing in some of us who have watched its unprecedented development over the last three decades".

Noting that pure theory was making economics more remote from day-to-day reality, he said the problem lay in "the palpable inadequacy of the scientific means" of using mathematical approaches to address mundane concerns. So much time went into model-construction that the assumptions on which the models were based became an afterthought. "But," he warned – a warning that the sub-prime boom's fascination with mathematical models, and the bust's subsequent revelation of their flaws, now reveals to have been prophetic – "it is precisely the empirical validity of these assumptions on which the usefulness of the entire exercise depends."

Leontief thought that economics departments were increasingly hiring and promoting young economists who wanted to build pure models with little empirical relevance. Even when they did empirical analysis, Leontief said economists seldom took any interest in the meaning or value of their data. He thus called for economists to explore their assumptions and data by conducting social, demographic and anthropological work, and said economics needed to work more closely with other disciplines.

Leontief's call for humility some 40 years ago stands as a reminder that the same religions that can speak up for human freedom and dignity when in opposition, can become obsessed with their rightness and the need to purge others of their wickedness once they attain power. When the church retains its distance from power, and a modest expectation about what it can achieve, it can stir our minds to envision new possibilities and even new worlds. Once economists apply this kind of sceptical scientific method to a human realm in which ultimate reality may never be fully discernible, they will probably find themselves retreating from dogmatism in their claims.

Paradoxically, therefore, as economics becomes more truly scientific, it will become less of a science. Acknowledging these limitations will free it to serve us once more.

Main image: Maxian/Getty/iStockphoto/Guardian Design

This is an edited extract from Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong by John Rapley, published by Simon & Schuster on 13 July at £20. To order a copy for £17, go to bookshop.theguardian.com or call 0330 333 6846. Free UK p&p over £10, online orders only. Phone orders min p&p of £1.99.

• Follow the Long Read on Twitter at @gdnlongread , or sign up to the long read weekly email here . Topics The long read

[Jul 04, 2017] Summers as a defender of Flat Earth theory

Highly recommended!
Apr 12, 2017 | economistsview.typepad.com

libezkova said in reply to T... April 12, 2017 at 06:05 AM

"Yes, adding more epicycles will do the trick."

http://personal.lse.ac.uk/reisr/papers/17-wrong.pdf

This guy is funny (and actually rather clueless, Summers is much better ) defender of "Flat Earth" theory:

== quote ==

A related criticism of macroeconomics is that it ignores financial factors. Macroeconomists supposedly failed to anticipate the crisis because they were enamored by models where financial markets and institutions were absent, as all financing was assumed to be efficient (De Grawe, 2009, Skidelsky, 2009). The field would be in denial if it continued to ignore these macro-financial links.

One area where macroeconomists have perhaps more of an influence is in monetary policy. Central banks hire more PhD economists than any other policy institution, and in the United States, the current and past chair of the Federal Reserve are distinguished academic macroeconomists, as have been several members of the FOMC over the years. In any given week, there are at least one conference and dozens of seminars hosted at central banks all over the world where the latest academic research is discussed. The speeches of central bank governors refer to academic papers in macroeconomics more than those by any other policymaker.

... ... ...

A separate criticism of macroeconomic policy advice accuses it of being politically biased. Since the early days of the field, with Keynes and the Great Depression, macroeconomics was associated with aggressive and controversial policies and with researchers that wore other hats as public intellectuals. Even more recently, during the rational expectations microfoundations revolution of the 1970s, early papers had radical policy recommendations, like the result that all systematic aggregate-demand policy is ineffective, and some leading researchers had strong political views. Romer (2016) criticizes modern macroeconomics for raising questions about what should be obvious truths, like the effect of monetary policy on output. He lays blame on the influence that Edward Prescott, Robert Lucas and Thomas Sargent had on field. Krugman (2009) in turn, claims the problem of macroeconomics is ideology, and in particular points to the fierce battles between different types of macroeconomists in the 1970s and 1980s, described by Hall (1976) in terms of saltwater versus freshwater camps.

...Macroeconomists, instead, are asked to routinely produce forecasts to guide fiscal and monetary policy, and are perhaps too eager to comply.

Reply Wednesday, April 12, 2017 at 08:26 AM

djb said...

"Is something really wrong with macroeconomics? - Ricardo Reis"

I appreciate that the author thinks the solution is to have young people look at economics with fresh eyes to bring up new approaches this is a quote when describing how they pick fresh young economists to go on a tour and present their findings:

"the choices are arguably not biased in the direction of a particular field, although they are most likely all in the mainstream tradition"

unfortunately the mainstream tradition is full of biase and restrictions about what is allow to be considered and what is not so if all you allow are people who are expanding on the "mainstream tradition" I think you are severely restricting yourself further a lot of good ideas from the past have been discarded, not allowed, ridiculed, not really analyzed or expanded upon.... presented or taught or represented by people who have never studied the ideas directly got them third hand or 5th hand , from people who misrepresent the ideas in the first place

want fresh new ideas? go back to the beginning of economics, understand over and over what the founds say , go read Adam Smith directly, read the generally theory by Keynes directly don't just assume the verion samuelson gave us of Keynes represents what he actually said, or Hansen or hicks, or what ever nonsense they are passing along today as "what Keynes said" reevaluation the who field over and over

And yea, study over and over the current teachings so you really understand it intuitively don't allow magical thinking to let you "pretend" you got it don't accept that its impossible to really understand it and "that's just what the equations show" understand the limitations, figure out when our fearless leaders and "great minds" and elder statesman of economics are "overplaying their hand" and concluding more than they can this is hard work and it takes dedication and don't assume that econometrics is the only real economics and that theory is "unprovable" or "always subjective" because without theory there is no econometrics, there is just a bunch of meaningless numbers

so yea we can use fresh young minds taking a new look at things but we will nowhere if all we allow is that "they are most likely all in the mainstream tradition"

[Jul 04, 2017] Almost every time I see a "Phillips Curve", I'm reminded how badly understood it is and how poorly economics performs as a scientific discipline

Jul 04, 2017 | www.nakedcapitalism.com

Wisdom Seeker , July 3, 2017 at 2:23 pm

I'm not a professional economist, but almost every time I see a "Phillips Curve", I'm reminded how badly understood it is and how poorly economics performs as a scientific discipline. This area needs a complete rethink. This article above is not that rethink, though I great appreciated the discussion about the perilous state of workers' rights prior to the 20th century.

There is a Phillips Curve but it's probably not what you think. For the U.S. at least, there's empirical evidence that the true relationship is between unemployment and subsequent REAL wage inflation (not nominal). Even here one must be careful, for the link is not that strong. And real wage growth could also be productivity-related… but productivity growth itself might also be a function of labor scarcity. When a population desires to get more work done with fewer hands, innovation favors productivity.

For some charts showing various examples of valid and invalid "Phillips Curves", including a persuasive graph of the unemployment/real wage inflation curve, see these links:

http://www.hussmanfunds.com/wmc/wmc110404.htm

http://www.hussman.net/wmc/wmc131104.htm

Darn , July 4, 2017 at 8:08 am

Also of interest I hope, "Why NAIRU is zOMG hyperinflation" https://www.concertedaction.com/2017/02/19/why-nairu-is-zomg-hyperinflation/

[Jul 04, 2017] Critical Realism: Mathematics versus Mythematics in Economics

Notable quotes:
"... I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone. ..."
"... A lady in the audi­ence named Barb Jacobson suggested that using the name Neo-Classical gives it a cer­tain degree of cache and wants you guys to start call­ing it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? ..."
Oct 02, 2015 | www.debtdeflation.com

This is the brief talk I gave at a conference celebrating 25 years of the Critical Realist seminar series at Cambridge University. Critical realists argue against the use of mathematics in economics; I argue here that it's the abuse of mathematics by Neoclassical economists -- who practice what I have dubbed "Mythematics" rather than Mathematics--and that some phenomena are uncovered by mathematical logic that can't be discovered by verbal logic alone.

I give the example of my own model of Minsky's Financial Instability Hypothesis, which revealed the possibility of a "Great Moderation" preceding a "Great Recession" before either event had happened.

David Milburn, September 12, 2015 at 9:38 am

Steve,

Last week Prof Bill Mitchell was in London where he gave a talk on re-framing the language used in the media that carried on the myth of the main­stream groupthink. A lady in the audi­ence named Barb Jacobson suggested that using the name Neo-Classical gives it a cer­tain degree of cache and wants you guys to start call­ing it for what it is: "Scorched Earth Economics." What a great name to use and doesn't it ring true? Barb Jacobson is spot on!

Sue Madden, September 13, 2015 at 8:28 am

Hi Steve,
I was really amused to see an inter­view a while back in the New Sci­en­tist, with the "research chief" (!!) at the B of E. If you haven't seen it, you really must:

Opinion Interview with Andy Haldane: "Sackcloth and Ashes on Thread needle Street" New Scientist 25 March 2015

Corbyn was elected leader!!!! Now the sparks will fly. At least a pub­lic debate wor­thy of the name might at last be heard in our sad country.

Thanks for your work in trying to enlighten us!!
Sue.

[Jul 04, 2017] We should reject masked by mathiness typical neoclassical junk that is mainstream now.

Notable quotes:
"... That is exactly what makes macro a pseudoscience (as Cassidy called it "Utopian economics".) You can't talk about economics ignoring existence of finance, because finance is an elephant in the room. A church of efficient stochastic equilibrium and an invisible hand that drives economics to it (the hand of God) is junk science, and always was. ..."
Mar 03, 2017 | economistsview.typepad.com
libezkova : March 02, 2017 at 07:14 PM , 2017 at 07:14 PM
"macro rightly got a lot of stick by largely ignoring the role of finance,"

That is exactly what makes macro a pseudoscience (as Cassidy called it "Utopian economics".) You can't talk about economics ignoring existence of finance, because finance is an elephant in the room. A church of efficient stochastic equilibrium and an invisible hand that drives economics to it (the hand of God) is junk science, and always was.

As much as I admire the mathematics, its use in macro is perverted and unscientific because it relies on unrealistic assumptions. Its all pure mathiness.

Most of terminology that neoclassical economy introduced smells "fraud" or at least is detached from reality. "Output gap" and related notion "potential output" can serve as an example. Look at WWII production. For example, even potential output of a single plant (let's say three shift work and full utilization of equipment) is pretty convoluted notion as there is a high level of dependence on suppliers and somewhere typically "bottleneck" exists that prevent the factory achieving this input. Still Hjalmar Schacht achieved wonders during WWII by just ordering German factories to continue producing without waiting for orders to come.

Also it looks like Simon Wren-Lewis equalizes Keynes with Paul Samuelson simplification (or perversion if you wish) of Keynes thoughts ( http://econ.bus.utk.edu/department/emeritus/samuelson'sarrogance100%20final.pdf )

== quote ==
Moreover, Keynes [1936, p. 177, 179] had denounced Walras's approach as wrong when he wrote "Now the analysis of the previous chapters [of The General Theory] made it plain that this account [in Walras] of the matter must be erroneous .this [Walrasian system] is a nonsense theory".
== end of quote ==

And even worse, like most neoliberal economists, he tends to ignore Hyman Minsky important contribution to understanding of source of instability in capitalist economics.

That fact alone IMHO makes his lectures junk science.

libezkova -> libezkova... , March 02, 2017 at 07:14 PM
I remember that during 2008 events somebody called Bernanke not a specialist on Great Depression, but a charlatan, who tried to explain Great Depression using neoclassic economics.

I think that was an apt definition.

Mr. Bill : , March 02, 2017 at 10:21 PM
"I acknowledge that macro rightly got a lot of stick by largely ignoring the role of finance, but I also point out that the poor recovery has involved a vindication of the core macro model: austerity is a bad idea at the ZLB, QE was not inflationary and interest rates on government debt did not rise but fell."

No shit Dick Tracy. Look at the devastation of the US of O (The United States of Oligarchy). Let's join the Military in defending the shipping lanes, 3 hots and a cot.

I'm glad the core macro-model has been vindicated.

Sanjait : , March 02, 2017 at 11:29 PM
Is it my imagination or are the crazies around here getting crazier, and becoming increasingly unable to even begin talking about macro in a serious way.

I mean, I don't mind a bit of vituperation or even limited amounts of incoherence and insanity, if it is accompanied by at least earnest attempts to have substantive discussions. But it just feels like the essential substance has become increasingly rare.

libezkova -> Sanjait... , -1
"Is it my imagination or are the crazies around here getting crazier, and becoming increasingly unable to even begin talking about macro in a serious way."

If you think that neoliberal economists and their low-level supporters like some members of this blog are crazy you are wrong. They are corrupt the same way as Mafia members are corrupt. That's why they are unable to discuss economics in a serious way. Only "religious dogma" based way is permitted.

Neoliberal Jesuits will defend their "flat earth" theory and ostracize heretics as long as financial oligarchy is in power, because their well being is dependent on it, and they are paid by financial oligarchy to do the job.

When neoliberalism was hatched it deliberately emulated methods of influence used by Communists (and Austrians were intimately aware of them, because the country experienced communist revolution, which failed) in trying to expand their influence at university departments and by creating think tanks. Those subversive methods proved way too successful and they are now really entrenched: neoclassic economic thinking permeates the society to the same or higher degree as Marx political economy in the USSR.

See LSE discussion "Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics "

https://www.youtube.com/watch?v=ehrjP2_ffPc

libezkova : , March 03, 2017 at 08:48 AM
I think that that one of the few better and more productive pathway of discussing economic events is the one that stems from Hyman Minsky work with its idea of positive feedback loops in economics with one from financial system that periodically destabilizes the capitalist economy and create a financial crisis.

The neoclassical concept of equilibrium is way too primitive and attempts to build economics as branch of physics. It should be discarded for good, as the way it is used now is close to pure charlatanism.

We also have an uncertainty principle here as even the suggestion of the intervention can change the dynamics of the system (look at "Fed talk" )

The role of the state now is so huge that any talk about the economy achieving equilibrium by itself is fraud outside few special cases. And actually the introduction of neoliberalism was the "revolution from above" -- a coup d'état, if you wish.

== quote ==

In microeconomic theory, cost-minimization by consumers and by firms implies the existence of supply and demand correspondences for which market clearing equilibrium prices exist, if there are large numbers of consumers and producers. Under convexity assumptions or under some marginal-cost pricing rules, each equilibrium will be Pareto efficient: In large economies, non-convexity also leads to quasi-equilibria that are nearly efficient.

However, the concept of market equilibrium has been criticized by Austrians, post-Keynesians and others, who object to applications of microeconomic theory to real-world markets, when such markets are not usefully approximated by microeconomic models. Heterodox economists assert that micro-economic models rarely capture reality.
== end of quote ==

Steve Keen in one who uses and try to develop further Minsky concepts and he was one of the few who predicted the financial crash on 2008. IMHO he should get more respect and coverage at the expense of neoliberal stooges like Krugman.

Ha-Joon Chang, Philip Mirowski, Joseph Stiglitz, Richard Koo, Yanis Varoufakis, Noam Chomsky all have interesting and IMHO more realistic ideas about how the modern economy really function and what can be more appropriate ways to model it.

We should reject masked by mathiness typical neoclassical junk that is mainstream now.

[Jun 26, 2017] Dangerous debt level increases: these obvious tidbits never saw the light of day because they did not fit the fantasies of FIRE executives

Notable quotes:
"... Most of the debt before the crisis was taken on by the 45+. They are 10 years older now and not about to re-leverage themselves. The growth will have to come from the younger group but they are full of student and car debt. Will they be able to buy houses for which prices have returned to pre-crisis levels? ..."
"... This leverage game depends on housing but it looks like we will be forced into a change of paradigm. ..."
"... Very well put. The ' leverage game ' comprises the whole neo-liberal paradigm which as you say depends on housing . ..."
"... Here in the UK until the last fifteen years or so, apart from a small number of very top end residential properties there was a ' property ladder ' we used to say . The meaning was that you could start at the bottom and if you chose to, could move up, and even though property prices moved up your wages were likely to increase, but your debt was being eroded bit by bit by inflation which kept the whole thing in sync. ..."
"... In a recession, a debt-burdened corporate sector behaves much as households do, cutting back particularly on capital investment. Government goes the opposite way, hiking debt during a recession to fund automatic stabilizers. But heavy gov't debt, like household debt, is a drag on consumption after a lag of several years. ..."
"... Focusing on household debt alone is of questionable value, when much broader debt aggregates are available. What's clear from the chart comparing household debt in six countries is that Canada and Australia are up to their necks in debt, largely owing to mortgage debt supported by their housing bubbles. ..."
"... When these housing bubbles burst - as bubbles invariably do - these two resource-oriented economies are going to be sucking wind. Unfortunately, in 2014 USgov started applying US income taxation to Canadians who stay 182 days a year or more in the US. Refugees from the Great White North who flee south will face a whole new level of pain when the US IRS works them over with a rubber hose. ..."
Jun 26, 2017 | www.nakedcapitalism.com
Moneta , June 26, 2017 at 7:29 am

For some reason, many economists still don't see it!

Now the general meme is that after 10 years, balance sheets have slowly been repaired as if these household would be about to remake the same debt mistakes.

Most of the debt before the crisis was taken on by the 45+. They are 10 years older now and not about to re-leverage themselves. The growth will have to come from the younger group but they are full of student and car debt. Will they be able to buy houses for which prices have returned to pre-crisis levels?

This leverage game depends on housing but it looks like we will be forced into a change of paradigm.

skippy , June 26, 2017 at 8:02 am

Wages and productivity divergence, crapifiction of long term credit risk, concentration of wealth and assets .

disheveled and the sound track chorus – because markets – all sung by Milton, Rubin, Greenspan, et al but yeah the debt sigh

templar555510 , June 26, 2017 at 8:35 am

Very well put. The ' leverage game ' comprises the whole neo-liberal paradigm which as you say depends on housing .

Here in the UK until the last fifteen years or so, apart from a small number of very top end residential properties there was a ' property ladder ' we used to say . The meaning was that you could start at the bottom and if you chose to, could move up, and even though property prices moved up your wages were likely to increase, but your debt was being eroded bit by bit by inflation which kept the whole thing in sync.

Those days are long gone and I think it is dawning on a lot of us that the game is finally up for this paradigm and there is no going back. Hence the certain air of melancholy which pervades the atmosphere.

I went to a little drinks party on Saturday evening and it was interesting how the room of twenty or so people divided between those stuck in the status quo and those beginning to perceive of a future beyond the status quo .

Jim Haygood , June 26, 2017 at 12:10 pm

Globally, household debt is the smallest of the four commonly used categories of Household, Corporate [non-financial], Government, and Financial. Chart:

http://tinyurl.com/zwqah7t

In a recession, a debt-burdened corporate sector behaves much as households do, cutting back particularly on capital investment. Government goes the opposite way, hiking debt during a recession to fund automatic stabilizers. But heavy gov't debt, like household debt, is a drag on consumption after a lag of several years.

Focusing on household debt alone is of questionable value, when much broader debt aggregates are available. What's clear from the chart comparing household debt in six countries is that Canada and Australia are up to their necks in debt, largely owing to mortgage debt supported by their housing bubbles.

When these housing bubbles burst - as bubbles invariably do - these two resource-oriented economies are going to be sucking wind. Unfortunately, in 2014 USgov started applying US income taxation to Canadians who stay 182 days a year or more in the US. Refugees from the Great White North who flee south will face a whole new level of pain when the US IRS works them over with a rubber hose.

[Jun 26, 2017] From a class conflict perspective, the economics field is responsive to its constituency: the 1%. As Marx and others have pointed out, the ideological necessity of making what is unjust appear as "There Is No Alternative" is the unstated core mandate of the economists

Notable quotes:
"... Ann Pettifor has become so disgusted with all of this "gee, we didn't know" and other incompetencies that she has written a piece demanding that the government take a hard look at the economics profession in a first step to making it responsive and responsible to the people. This is the UK, and we should definitely do it here, US, too. ..."
Jun 26, 2017 | www.nakedcapitalism.com
Susan the other , June 26, 2017 at 11:45 am

Ann Pettifor has become so disgusted with all of this "gee, we didn't know" and other incompetencies that she has written a piece demanding that the government take a hard look at the economics profession in a first step to making it responsive and responsible to the people. This is the UK, and we should definitely do it here, US, too.

DanB , June 26, 2017 at 12:42 pm

From a class conflict perspective, the economics field is responsive to its constituency: the 1%. As Marx and others have pointed out, the ideological necessity of making what is unjust appear as "There Is No Alternative" is the unstated core mandate of the economists. Therefore, despite the ludicrousness of this analysis, I find it another chink in the armor of the dominant ideology that the obvious is now being so gingerly discussed by mainstream economists, the chief ideological propagandists of the 1%.

cocomaan , June 26, 2017 at 5:40 am

When households take on long-term debt, they increase current spending power but commit to a pre-specified path of future debt service (interest payments and amortisations).

How much are these people paid to come up with these thrilling and original conclusions?

[Jun 18, 2017] Economic bungee jumping without cord: Comment on Simon Wren-Lewis on 'Raising the inflation target'

Notable quotes:
"... The argument for a higher inflation target is NOT straightforward, once you understand two things. First interest theory is axiomatically false.#1 Because of this monetary policy never had sound scientific foundations. Second the same holds for fiscal policy.#2 ..."
"... The argument AGAINST higher inflation is that it REDUCES employment. Given the overall situation, the ONLY sensible policy is to increase the average wage rate, such that the rate of change of the wage rate is greater than the rate of change of productivity, because this increases employment. This is a SYSTEMIC necessity and has NOTHING to do with social policy. Employment is co-determined by the relationship between average wage rate, price and productivity. This relationship should automatically produce full employment but does not. ..."
Jun 18, 2017 | economistsview.typepad.com

Egmont Kakarot-Handtke, June 17, 2017 at 08:31 AM

Economic bungee jumping without cord: Comment on Simon Wren-Lewis on 'Raising the inflation target'

You say: "The argument for a higher inflation target is straightforward, once you understand two things. First the most effective and reliable monetary policy instrument is to influence the real interest rate in the economy, which is the nominal interest rate less expected inflation. Second nominal short term interest rates have a floor near zero (the Zero Lower Bound, or ZLB)."

The argument for a higher inflation target is NOT straightforward, once you understand two things. First interest theory is axiomatically false.#1 Because of this monetary policy never had sound scientific foundations. Second the same holds for fiscal policy.#2

Let us assume for a moment that, for whatever reasons, neither monetary nor fiscal policy is applicable. So, given investment expenditures of the business sector and the expenditure ratio of the household sector, the only alternative left is to directly influence the macroeconomic price mechanism.#3

The argument AGAINST higher inflation is that it REDUCES employment. Given the overall situation, the ONLY sensible policy is to increase the average wage rate, such that the rate of change of the wage rate is greater than the rate of change of productivity, because this increases employment. This is a SYSTEMIC necessity and has NOTHING to do with social policy. Employment is co-determined by the relationship between average wage rate, price and productivity. This relationship should automatically produce full employment but does not.

Standard employment theory is false.#4 The proposal to get the economy going by increasing price inflation is the direct result of the complete lack of understanding how the market economy works.

Egmont Kakarot-Handtke

#1 See 'The Emergence of Profit and Interest in the Monetary Circuit'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1973952

#2 See 'Austerity and the utter scientific ignorance of economists'
http://axecorg.blogspot.de/2015/12/austerity-and-utter-scientific.html

#3 For more details see 'Think deeper'
http://axecorg.blogspot.de/2017/06/think-deeper.html

#4 For details of the bigger picture see cross-references Employment
http://axecorg.blogspot.de/2015/08/employmentphillips-curve-cross.html

[Jun 17, 2017] Varoufakis explains why economics is not science

Notable quotes:
"... Russell Brand discusses with Yanis Varoufakis what happens when you take on the political, financial and media elite, and how radical reform can occur. Through accounts of his confrontations with the IMF, European institutions and the German government they examine where true power lies and how it is wielded. ..."
"... The 'gurus' of the dominant economic system 'teach' us how economy should be treated, based on mathematical models that assume standard conditions that, essentially, do not exist in the real world. This kind of peculiar 'determinism' in economics is already considered obsolete in other scientific fields. ..."
"... Mainstream economics, dominated by the neoliberal perception, is full of assumptions that are not applicable in the real world, yet being used to justify the satisfaction of the interests of the elites. ..."
"... Almost everywhere, neoliberal policies imposed through IMF have brought unprecedented disaster. Despite the obvious failure, financial technocrats assume that all cases are similar, imposing the same recipe in every region. Their models are full of assumptions in every level and that's why the fail miserably. Yet, despite the obvious disaster, the neoliberal priesthood demands from societies to adopt its models through simple faith. ..."
Jun 17, 2017 | failedevolution.blogspot.gr
globinfo freexchange

Russell Brand discusses with Yanis Varoufakis what happens when you take on the political, financial and media elite, and how radical reform can occur. Through accounts of his confrontations with the IMF, European institutions and the German government they examine where true power lies and how it is wielded.

In a particular part of the interview, Varoufakis explains simply why economics is not science:

I call it organized religion with equations, superstition. The only way to become free of superstition is through overcoming. But you need to study. I've always pissed off my academic colleagues and other economists who actually believe that is real science what they are doing.

Our mathematical models of the weather can be judged by objective reality. If I am a meteorologist and come up with a prediction that tomorrow there is going to be a heatwave in Leicester square, all we have to do is to wait until tomorrow to see if I'm right or wrong. The weather will either confirm or junk my theories about it.

And by the way, this is exactly the process of how real science progress. Try – fail - come with an improved idea, and so on. Real scientists abolish old theories even if they work well with new ones that explain better the nature, the world, etc.

Varoufakis continues:

Let's say that I have the same kind of computer model and actual machine and data mining that the meteorologist does, but instead of using it to predict the weather I use it to predict the stock exchange. And suppose that I was somebody very highly respected as a predictor of stock exchange changes and let's say that today, I were to predict that tomorrow is going to be a major crash in the stock exchange. There might be because I predicted it! In society and in the economy, our beliefs about the phenomenon under study are part of the phenomenon under study.

https://www.youtube.com/embed/BX7JDLkYMWc

The last paragraph above depicts soundly why mainstream economics are far from the concept of modern science. The 'gurus' of the dominant economic system 'teach' us how economy should be treated, based on mathematical models that assume standard conditions that, essentially, do not exist in the real world. This kind of peculiar 'determinism' in economics is already considered obsolete in other scientific fields.

In Quantum Mechanics, for example, Heisenberg's uncertainty principle not only acknowledges that the observer affects the final situation of a physical system but also embeds this interference mathematically. As a consequence, the final situation of a physical system can be determined only in statistical terms.

Mainstream economics, dominated by the neoliberal perception, is full of assumptions that are not applicable in the real world, yet being used to justify the satisfaction of the interests of the elites.

Almost everywhere, neoliberal policies imposed through IMF have brought unprecedented disaster. Despite the obvious failure, financial technocrats assume that all cases are similar, imposing the same recipe in every region. Their models are full of assumptions in every level and that's why the fail miserably. Yet, despite the obvious disaster, the neoliberal priesthood demands from societies to adopt its models through simple faith.

Which shows that the only and real target of the mainstream economics, is simply retain the domination of a small elite on the top of the economic hierarchy, at the expense of the majority of the people.

[Jun 14, 2017] Krugman as a less then necessary additional singer in the shrill liberal chorus

Jun 14, 2017 | economistsview.typepad.com

anne, June 13, 2017 at 12:18 PM

https://krugman.blogs.nytimes.com/2017/06/12/macroeconomics-the-simple-and-the-fancy/

June 12, 2017

Macroeconomics: The Simple and the Fancy

By Paul Krugman

Noah Smith has a nice summation * of his critique of macroeconomics, which mainly comes down, as I read it, as an appeal for researchers to stay close to the ground. That's definitely good advice for young researchers.

But what about economists trying to provide useful advice, directly or indirectly, to policy makers, who need to make decisions based on educated guesses about the whole system? Smith says, "go slow, allow central bankers to use judgment and simple models in the meantime." That would be better than a lot of what academic macroeconomists do in practice, which is to castigate central bankers and other policymakers for not using elaborate models that don't work. But is there really no role for smart academics to help out in this process? And if so, what does this say about the utility of what the profession does?

The thing is, those simple models have done pretty darn well since 2008 - and central bankers who used them, like Ben Bernanke, did a lot better than central bankers like Jean-Claude Trichet who based their judgements on something else. So surely at least part of the training of macroeconomists should prepare them to be helpful in applying simple models, maybe even in making those simple models better.

Reading Smith, I found myself remembering an old line ** from Robert Solow in defense of "fancy" economic theorizing:

"In economics I like a man to have mastered the fancy theory before I trust him with simple theory because high-powered economics seems to be such an excellent school for the skillful use of low-powered economics."

OK, can anyone make that case about modern macroeconomics? With a straight face? In practice, it has often seemed that expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics, largely IS-LM and its derivatives.

I don't want to make a crude functional argument here: research that advances knowledge doesn't have to provide an immediate practical payoff. But the experience since 2008 has strongly suggested that the research program that dominated macro for the previous generation actually impaired the ability of economists to provide useful advice in the moment. Mastering the fancy stuff made economists useless at the simple stuff.

A more modest program would, in part, help diminish this harm. But it would also be really helpful if macroeconomists relearned the idea that simple aggregate models can, in fact, be useful.

* http://noahpinionblog.blogspot.fr/2017/06/summing-up-my-thoughts-on-macroeconomics.html

** https://books.google.com/books?id=7ABgM8-ExXsC&pg=PA44&lpg=PA44&dq=solow+simple+fancy+economics+trust&source=bl&ots=XflZaM5HLV&sig=vsqDgLLShG5gBda-NBTxyjmclI0&hl=en&sa=X&ved=0ahUKEwjSxZ6ShLnUAhVMNT4KHW9VBIUQ6AEIOjAE#v=onepage&q=solow%20simple%20fancy%20economics%20trust&f=false

Christopher H. - , June 13, 2017 at 12:20 PM
I don't understand why you feel the need to put a link from today's link list into a comment, without any comment from you.
Paine - , June 13, 2017 at 02:05 PM
Often we can't activate the articles because we don't have a NYT sub
Or have used up our free monthly quota

Besides this blog post on macro
Is a gem --

Worth a thousand copies

Christopher H. - , June 13, 2017 at 02:58 PM
fair enough.
$mart $$$$ Behind The Curve - , June 14, 2017 at 04:37 AM
https://www.leg.state.nv.us/Session/79th2017/Bills/AB/AB374_EN.pdf
anne - , June 13, 2017 at 12:50 PM
https://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium

Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.

Paine - , June 13, 2017 at 02:11 PM
Too general

some variants include different assumptions
But common assumptions include

No banks
No nominal prices
Micro founding with a single representative agent
An infinite time horizon
A fixed inter temporal fiscal budget
Continuous market clearance
No private debt

On and on one must go

anne - , June 13, 2017 at 04:15 PM
DGSE:

Too general

some variants include different assumptions
But common assumptions include

No banks
No nominal prices
Micro founding with a single representative agent
An infinite time horizon
A fixed inter temporal fiscal budget
Continuous market clearance
No private debt

[ Perfect. ]

anne - , June 13, 2017 at 12:51 PM
http://en.wikipedia.org/wiki/IS%E2%80%93LM_model

The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that demonstrates the relationship between interest rates and real output, in the goods and services market and the money market (also known as the assets market). The intersection of the "investment–saving" (IS) and "liquidity preference–money supply" (LM) curves is the "general equilibrium" where there is simultaneous equilibrium in both markets. Two equivalent interpretations are possible: first, the IS–LM model explains changes in national income when the price level is fixed in the short-run; second, the IS–LM model shows why the aggregate demand curve shifts. Hence, this tool is sometimes used not only to analyse the fluctuations of the economy but also to find appropriate stabilisation policies.

The model was developed by John Hicks in 1937, and later extended by Alvin Hansen, as a mathematical representation of Keynesian macroeconomic theory. Between the 1940s and mid-1970s, it was the leading framework of macroeconomic analysis. While it has been largely absent from macroeconomic research ever since, it is still the backbone of many introductory macroeconomics textbooks.

anne - , June 13, 2017 at 02:00 PM
http://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/

October 9, 2011

IS-LMentary
By Paul Krugman

A number of readers, both at this blog and other places, have been asking for an explanation of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among insiders, and probably a bit baffling to normal human beings (which is why I have been labeling my posts "wonkish").

[IS-LM stands for investment-savings, liquidity-money -- which will make a lot of sense if you keep reading.]

So, the first thing you need to know is that there are multiple correct ways of explaining IS-LM. That's because it's a model of several interacting markets, and you can enter from multiple directions, any one of which is a valid starting point.

My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible views about what determines interest rates. One view says that the interest rate is determined by the supply of and demand for savings – the "loanable funds" approach. The other says that the interest rate is determined by the tradeoff between bonds, which pay interest, and money, which doesn't, but which you can use for transactions and therefore has special value due to its liquidity – the "liquidity preference" approach. (Yes, some money-like things pay interest, but normally not as much as less liquid assets.)

How can both views be true? Because we are at minimum talking about *two* variables, not one – GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds and liquidity preference hold at the same time....

Paine - , June 13, 2017 at 02:04 PM
Yes yes yes

U admonished my humble self
For blasting krugman as a less then necessary additional singer in the shrill liberal chorus

But here is where he belongs

This is a giant strike at the last generation
Of the on going macro theorist academic clique

Mr and ms university
Tear down that model


That is the new classical model and it's pitiful off spring new Keynesianism

[Jun 14, 2017] IS-LM stands for investment-savings, liquidity-money and is a junk model

Notable quotes:
"... Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles. ..."
"... expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics, largely IS-LM and its derivatives. ..."
Jun 14, 2017 | economistsview.typepad.com
anne , June 12, 2017 at 03:01 PM
http://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/

October 9, 2011

IS-LMentary
By Paul Krugman

A number of readers, both at this blog and other places, have been asking for an explanation of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among insiders, and probably a bit baffling to normal human beings (which is why I have been labeling my posts "wonkish").

[IS-LM stands for investment-savings, liquidity-money -- which will make a lot of sense if you keep reading.]

So, the first thing you need to know is that there are multiple correct ways of explaining IS-LM. That's because it's a model of several interacting markets, and you can enter from multiple directions, any one of which is a valid starting point.

My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible views about what determines interest rates. One view says that the interest rate is determined by the supply of and demand for savings – the "loanable funds" approach. The other says that the interest rate is determined by the tradeoff between bonds, which pay interest, and money, which doesn't, but which you can use for transactions and therefore has special value due to its liquidity – the "liquidity preference" approach. (Yes, some money-like things pay interest, but normally not as much as less liquid assets.)

How can both views be true? Because we are at minimum talking about *two* variables, not one – GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds and liquidity preference hold at the same time.

Start with the loanable funds side. Suppose that desired savings and desired investment spending are currently equal, and that something causes the interest rate to fall. Must it rise back to its original level? Not necessarily. An excess of desired investment over desired savings can lead to economic expansion, which drives up income. And since some of the rise in income will be saved – and assuming that investment demand doesn't rise by as much – a sufficiently large rise in GDP can restore equality between desired savings and desired investment at the new interest rate.

That means that loanable funds doesn't determine the interest rate per se; it determines a set of possible combinations of the interest rate and GDP, with lower rates corresponding to higher GDP. And that's the IS curve.

Meanwhile, people deciding how to allocate their wealth are making tradeoffs between money and bonds. There's a downward-sloping demand for money – the higher the interest rate, the more people will skimp on liquidity in favor of higher returns. Suppose temporarily that the Federal Reserve holds the money supply fixed; in that case the interest rate must be such as to match that demand to the quantity of money. And the Fed can move the interest rate by changing the money supply: increase the supply of money and the interest rate must fall to induce people to hold a larger quantity.

Here too, however, GDP must be taken into account: a higher level of GDP will mean more transactions, and hence higher demand for money, other things equal. So higher GDP will mean that the interest rate needed to match supply and demand for money must rise. This means that like loanable funds, liquidity preference doesn't determine the interest rate per se; it defines a set of possible combinations of the interest rate and GDP – the LM curve.

And that's IS-LM:

[Graph]

The point where the curves cross determines both GDP and the interest rate, and at that point both loanable funds and liquidity preference are valid.

What use is this framework? First of all, it helps you avoid fallacies like the notion that because savings must equal investment, government spending cannot lead to a rise in total spending – which right away puts us above the level of argument that famous Chicago professors somehow find convincing. And it also gets you past confusions like the notion that government deficits, by driving up interest rates, can actually cause the economy to contract.

Most spectacularly, IS-LM turns out to be very useful for thinking about extreme conditions like the present, in which private demand has fallen so far that the economy remains depressed even at a zero interest rate. In that case the picture looks like this:

[Graph]

Why is the LM curve flat at zero? Because if the interest rate fell below zero, people would just hold cash instead of bonds. At the margin, then, money is just being held as a store of value, and changes in the money supply have no effect. This is, of course, the liquidity trap.

And IS-LM makes some predictions about what happens in the liquidity trap. Budget deficits shift IS to the right; in the liquidity trap that has no effect on the interest rate. Increases in the money supply do nothing at all.

That's why in early 2009, when the Wall Street Journal, the Austrians, and the other usual suspects were screaming about soaring rates and runaway inflation, those who understood IS-LM were predicting that interest rates would stay low and that even a tripling of the monetary base would not be inflationary. Events since then have, as I see it, been a huge vindication for the IS-LM types – despite some headline inflation driven by commodity prices – and a huge failure for the soaring-rates-and-inflation crowd.

Yes, IS-LM simplifies things a lot, and can't be taken as the final word. But it has done what good economic models are supposed to do: make sense of what we see, and make highly useful predictions about what would happen in unusual circumstances. Economists who understand IS-LM have done vastly better in tracking our current crisis than people who don't.

anne - , June 12, 2017 at 03:02 PM
https://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium

Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.

Paine - , June 13, 2017 at 01:50 PM
This on academic macro since the seventies

Is the Paul krugman I respect

His hysterics about the trump menace ?

Not so useful

Paul leave that rote tub thumping to hacks

Paine - , June 13, 2017 at 01:50 PM
"expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics, largely IS-LM and its derivatives."

Amen

[Jun 14, 2017] Brad Delong is peddling his insane neoliberal nonsense again.

Jun 14, 2017 | economistsview.typepad.com

Paine , June 14, 2017 at 08:26 AM

Btw

Brad has a fine little logic ox calculation
This is his best side
The deflection point in his zero lower bound graph
That shows a fed helpless as the real rate climbs as the deflation rate climbs ...
and his little set of equations that generate
A run away deflation
Using a Harmless looking Taylor rule
with too low...for his logic toy system...
(2%) A target inflation rate

If

The neutral rate of the system is dwelling down around one percent

Paine - , June 14, 2017 at 08:29 AM
Brad has his uses for sure

Recall the similar logical toy system he built and manipulated for his mentor Larry Summers

That showed
The benefits of public investment in a period of private doldrums

Paine - , June 14, 2017 at 08:32 AM
Delong, J. Bradford, and Lawrence H. Summers. 2012. "Fiscal Policy in a Depressed Economy." Brookings Papers on Economic Activity 44 (1)


Very much a fun little gadget

Paine - , June 14, 2017 at 08:36 AM
Abstract

In a depressed economy, with short-term nominal interest rates
at their zero lower bound, ample cyclical unemployment, and excess capacity,
increased government purchases would be neither offset by the monetary
authority raising interest rates nor neutralized by supply-side bottlenecks.
Then even a small amount of hysteresis-even a small shadow cast on future
potential output by the cyclical downturn-means, by simple arithmetic, that
expansionary fiscal policy is likely to be self-financing. Even if it is not, it is
highly likely to pass the sensible benefit-cost test of raising the present value
of future potential output. Thus, at the zero bound, where the central bank
cannot or will not but in any event does not perform its full role in stabilization
policy, fiscal policy has the stabilization policy mission that others have
convincingly argued it lacks in normal times. Whereas many economists
have assumed that the path of potential output is invariant to even a deep
and prolonged downturn, the available evidence raises a strong fear that
hysteresis is indeed a factor. Although nothing in our analysis calls into question
the importance of sustainable fiscal policies, it strongly suggests the need
for caution regarding the pace of fiscal consolidation.

Yes yes my fellow home makers
If macro conditions are right ...
even a small Amount of hysteresis can turn the project into a self financing gig

anne - , June 14, 2017 at 11:36 AM
https://www.brookings.edu/bpea-articles/fiscal-policy-in-a-depressed-economy/

March, 2012

Fiscal Policy in a Depressed Economy
By J. Bradford DeLong and Lawrence H. Summers

Abstract

In a depressed economy, with short-term nominal interest rates at their zero lower bound, ample cyclical unemployment, and excess capacity, increased government purchases would be neither offset by the monetary authority raising interest rates nor neutralized by supply-side bottlenecks. Then even a small amount of hysteresis-even a small shadow cast on future potential output by the cyclical downturn-means, by simple arithmetic, that expansionary fiscal policy is likely to be self-financing. Even if it is not, it is highly likely to pass the sensible benefit-cost test of raising the present value of future potential output. Thus, at the zero bound, where the central bank cannot or will not but in any event does not perform its full role in stabilization policy, fiscal policy has the stabilization policy mission that others have convincingly argued it lacks in normal times. Whereas many economists have assumed that the path of potential output is invariant to even a deep and prolonged downturn, the available evidence raises a strong fear that hysteresis is indeed a factor. Although nothing in our analysis calls into question the importance of sustainable fiscal policies, it strongly suggests the need for caution regarding the pace of fiscal consolidation.

anne - , June 14, 2017 at 11:46 AM
Thus, at the zero bound, where the central bank cannot or will not but in any event does not perform its full role in stabilization policy, fiscal policy has the stabilization policy mission that others have convincingly argued it lacks in normal times....

-- DeLong and Summers

[ I find such a rationale for fiscal policy to foster growth only convincing in a limited and possible even politically self-defeating way, and would argue the rationale importantly undervalues fiscal policy as a growth driver. The paper is clear and important though as a beginning rationale for fiscal policy use. ]

anne - , June 14, 2017 at 11:52 AM
Correcting:

I find such a rationale for fiscal policy to foster growth only convincing in a limited and possibly even politically self-defeating way, and would argue the rationale importantly undervalues fiscal policy as a growth driver. The paper is clear and important though as a beginning rationale for fiscal policy use.

Tom aka Rusty - , June 14, 2017 at 09:20 AM
Brad is peddling his insane nonsense again.

http://www.bradford-delong.com/2017/06/no-it-is-really-not-harder-to-make-the-case-for-free-trade-these-days.html#more

Both members of a family must be injured by trade for there to be an injury - stupid.

Poorly paid service workers are ok because they can buy cheap Chinese merchandise (like that makes up for poor benefits and no retirement).

His neoliberal freak flag is showing some wear - and even Krugman knows better.

[Jun 13, 2017] Can anyone make the case doe neoclassical macroeconomics? With a straight face?

Notable quotes:
"... the experience since 2008 has strongly suggested that the research program that dominated macro for the previous generation actually impaired the ability of economists to provide useful advice in the moment. Mastering the fancy stuff made economists useless at the simple stuff. ..."
Jun 13, 2017 | economistsview.typepad.com

anne, June 12, 2017 at 03:23 PM

https://krugman.blogs.nytimes.com/2017/06/12/macroeconomics-the-simple-and-the-fancy/

June 12, 2017

Macroeconomics: The Simple and the Fancy
By Paul Krugman

Noah Smith has a nice summation * of his critique of macroeconomics, which mainly comes down, as I read it, as an appeal for researchers to stay close to the ground. That's definitely good advice for young researchers.

But what about economists trying to provide useful advice, directly or indirectly, to policy makers, who need to make decisions based on educated guesses about the whole system? Smith says, "go slow, allow central bankers to use judgment and simple models in the meantime." That would be better than a lot of what academic macroeconomists do in practice, which is to castigate central bankers and other policymakers for not using elaborate models that don't work. But is there really no role for smart academics to help out in this process? And if so, what does this say about the utility of what the profession does?

The thing is, those simple models have done pretty darn well since 2008 - and central bankers who used them, like Bernanke, did a lot better than central bankers like Trichet who based their judgements on something else. So surely at least part of the training of macroeconomists should prepare them to be helpful in applying simple models, maybe even in making those simple models better.

Reading Smith, I found myself remembering an old line ** from Robert Solow in defense of "fancy" economic theorizing:

"In economics I like a man to have mastered the fancy theory before I trust him with simple theory because high-powered economics seems to be such an excellent school for the skillful use of low-powered economics."

OK, can anyone make that case about modern macroeconomics? With a straight face? In practice, it has often seemed that expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics, largely IS-LM and its derivatives.

I don't want to make a crude functional argument here: research that advances knowledge doesn't have to provide an immediate practical payoff. But the experience since 2008 has strongly suggested that the research program that dominated macro for the previous generation actually impaired the ability of economists to provide useful advice in the moment. Mastering the fancy stuff made economists useless at the simple stuff.

A more modest program would, in part, help diminish this harm. But it would also be really helpful if macroeconomists relearned the idea that simple aggregate models can, in fact, be useful.

* http://noahpinionblog.blogspot.fr/2017/06/summing-up-my-thoughts-on-macroeconomics.html

** https://books.google.com/books?id=7ABgM8-ExXsC&pg=PA44&lpg=PA44&dq=solow+simple+fancy+economics+trust&source=bl&ots=XflZaM5HLV&sig=vsqDgLLShG5gBda-NBTxyjmclI0&hl=en&sa=X&ved=0ahUKEwjSxZ6ShLnUAhVMNT4KHW9VBIUQ6AEIOjAE#v=onepage&q=solow%20simple%20fancy%20economics%20trust&f=false

anne, June 12, 2017 at 03:24 PM
https://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium

Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.

libezkova -> anne... , June 12, 2017 at 09:39 PM
Dynamic stochastic general equilibrium is a pseudoscience.

The problem with most neoclassical economics is that they are very bad mathematicians :-)

See, for example an interesting discussion at:

Why Neoclassical Economists Didnt See the Great Recession Coming by Prof Steve Keen

Uploaded on Jul 12, 2011

Mainstream "Neoclassical" Economists famously did not see the Great Recession coming, and when you look at their theories, it's no wonder. Their favourite model prior to the crisis goes by the name of "Dynamic Stochastic General Equilibrium", or DSGE. These models imagined that the entire economy could be modeled as a single individual. Yet neoclassical researchers proved decades ago that even a single market can't be modeled that way. I explain this proof while outlining the fundamental truth that "Neoclassical Economists Don't Understand Neoclassical Economics".

https://www.youtube.com/watch?v=1L6-loOZYLc

anne, June 12, 2017 at 03:25 PM
https://en.wikipedia.org/wiki/IS%E2%80%93LM_model

The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that shows the relationship between interest rates and real output, in the goods and services market and the money market (also known as the assets market). The intersection of the "investment–saving" (IS) and "liquidity preference–money supply" (LM) curves is the "general equilibrium" where there is simultaneous equilibrium in both markets. Two equivalent interpretations are possible: first, the IS–LM model explains changes in national income when the price level is fixed in the short-run; second, the IS–LM model shows why the aggregate demand curve shifts. Hence, this tool is sometimes used not only to analyse the fluctuations of the economy but also to find appropriate stabilisation policies.

[Jun 12, 2017] 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

Notable quotes:
"... What supply-demand-equilibrium economists never understood is that the price mechanism DESTABILIZES the economy. The sequence is as follows: price up - rhoF down - employment down - wage rate down - rhoF down - employment down - and so on. In other words, the market economy is inherently unstable. ..."
Jun 12, 2017 | economistsview.typepad.com

Egmont Kakarot-Handtke

, June 10, 2017 at 08:13 AM
Think deeper
Comment on Bradford DeLong on 'RETHINK 2%'

"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)

The fact of the matter is that economists do NOT have the true theory. More precisely, economists do not know how the price- and profit mechanism works. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got profit wrong.

Because of this economic policy guidance never had sound scientific foundations. This holds also for the RETHINK 2% letter to the Federal Reserve Board of Governors#1 which in turn is based on Josh Bivens's article.#2

Note for a start that Josh Bivens does not mention profit ― the pivotal variable of economics ― once. From this follows that his underlying profit theory is false. And from this in turn follows that his whole argument is false. ALL models that do not explicitly define macroeconomic profit are false.

The elementary version of the correct objective, systemic, behavior-free, macrofounded employment equation is shown on Wikimedia.#3 This equation says ― among other things ― that an increase of the factor cost ratio rhoF=W/PR leads to higher employment. The ratio rhoF embodies the price mechanism.

In order to focus on the crucial point imagine the FED has the means to directly influence the price P and increases it by 2%, all other variables unchanged. The correct macroeconomic employment equation tells us that employment falls. Bad move.

Next try. The FED sets the change of price to zero and instead increases the wage rate W by 2 %. The correct macroeconomic employment equation tells us that employment rises. Good move.

What supply-demand-equilibrium economists never understood is that the price mechanism DESTABILIZES the economy. The sequence is as follows: price up - rhoF down - employment down - wage rate down - rhoF down - employment down - and so on. In other words, the market economy is inherently unstable.

#4 Standard employment theory is false. The proposal to get the economy going by increasing price inflation is the direct result of the complete lack of understanding how the market economy works.

Egmont Kakarot-Handtke

#1 Letter to the Federal Reserve Board of Governors
http://www.bradford-delong.com/2017/06/rethink-2.html

#2 Josh Bivens 'Is 2 percent too low?'
http://www.epi.org/publication/is-2-percent-too-low/

#3 Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png
For details see 'Keynes' Employment Function and the Gratuitous Phillips Curve Disaster'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421

#4 See also 'How Wicksell and the rest got inflation/deflation wrong'
http://axecorg.blogspot.de/2016/05/how-wicksell-and-rest-got.html

[Jun 09, 2017] Mr. Trump may be wrecking the state but only after Paul Krugman has wrecked economics

economistsview.typepad.com

Egmont Kakarot-Handtke , June 09, 2017 at 10:32 AM

Jun 09, 2017 | economistsview.typepad.com
Just another wreck
Comment on Paul Krugman on 'Wrecking the Ship of State'

Mr. Trump may be wrecking the state but only after Paul Krugman has wrecked economics.*

Egmont Kakarot-Handtke

* Krugman and the scientific implosion of economics
http://axecorg.blogspot.de/2016/02/krugman-and-scientific-implosion-of.html

Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856

Krugman is not an economist
http://axecorg.blogspot.de/2016/09/krugman-is-not-economist.html

The Krugman curse
http://axecorg.blogspot.de/2017/04/the-krugman-curse.html

[Jun 09, 2017] Mr. Trump may be wrecking the state but only after Paul Krugman has wrecked economics.

Jun 09, 2017 | economistsview.typepad.com

Egmont Kakarot-Handtke , June 09, 2017 at 10:32 AM

Just another wreck
Comment on Paul Krugman on 'Wrecking the Ship of State'

Mr. Trump may be wrecking the state but only after Paul Krugman has wrecked economics.*

Egmont Kakarot-Handtke

* Krugman and the scientific implosion of economics
http://axecorg.blogspot.de/2016/02/krugman-and-scientific-implosion-of.html

Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856

Krugman is not an economist
http://axecorg.blogspot.de/2016/09/krugman-is-not-economist.html

The Krugman curse
http://axecorg.blogspot.de/2017/04/the-krugman-curse.html

[Jun 04, 2017] Our politicians have been brainwashed by neoliberal economists.

Actually the reverse is true ;-)
Notable quotes:
"... Economics is a corrupt pseudo-science that gives a pseudo-scientific justification for the greed and rapacity of One Percenters. Its methodological flaws are glaring. It's time economists went back to the social science faculty, where they belong. ..."
www.unz.com

greenwichite , 27 Apr 2017 06:44

Our politicians have been brainwashed by neoliberal economists.

These economists produce models that factor-in all the upsides to globalisation, but fail to model any of the crippling, expensive-to-treat consequences of shutting down entire towns in places like Michigan or Lancashire.

They assume people live frictionless lives; that when the European ship-building industry moves to Poland, riveters in Portsmouth can just up-sticks and move to Gdansk with no problem. They encourage a narrative that implies such an English riveter are lazy if he fails to seize this opportunity.

(Let's drop a few economists in Gdansk with £100 in their pockets, and see how their families do.)

Economics is a corrupt pseudo-science that gives a pseudo-scientific justification for the greed and rapacity of One Percenters. Its methodological flaws are glaring. It's time economists went back to the social science faculty, where they belong.

[May 31, 2017] Economics needs to be holistic

Notable quotes:
"... The Wealth of Nations ..."
"... James Stoner is Professor in the Department of Political Science at Louisiana State University. He sits on the editorial board of ..."
"... . The papers presented at the Natural Law and Economics Conference can be found on-line at the conference website . ..."
Jun 02, 2009 | www.thepublicdiscourse.com

Natural Law and Economics Total Strangers or Separated Lovers

Relations between the disciplines have not always been so distant. Scholastic natural lawyers trained in the tradition of Aristotle and Aquinas developed defenses of private property and free trade that influenced authors such as Grotius, who in the seventeenth century laid the groundwork of the modern law of nations and thus the basis of modern trade. John Locke subsequently wrote an incisive account of the natural right to property as the source of economic prosperity, and Adam Smith, who wrote a treatise of moral philosophy before authoring The Wealth of Nations , described what he called a system of natural liberty as the matrix of genuine wealth. Although in the nineteenth century both moral philosophy and economics in the English-speaking world developed under the influence of utilitarianism, contemporary theory in both natural-law moral philosophy and economics emphasizes the centrality of the human person and the practical choices he makes concerning human goods or values. In this regard, the question of the relation of natural law to economics is on the one hand the extent to which economic calculations can be based on notions of objective good established by practical moral reason, and on the other hand the extent to which practical judgments by individuals about their good can be informed by an awareness of global consequences.

Philosophy of Economics

"Philosophy of Economics" consists of inquiries concerning

(a) rational choice,

(b) the appraisal of economic outcomes, institutions and processes, and

(c) the ontology of economic phenomena and the possibilities of acquiring knowledge of them.

Although these inquiries overlap in many ways, it is useful to divide philosophy of economics in this way into three subject matters which can be regarded respectively as branches of action theory, ethics (or normative social and political philosophy), and philosophy of science.

Economic theories of rationality, welfare, and social choice defend substantive philosophical theses often informed by relevant philosophical literature and of evident interest to those interested in action theory, philosophical psychology, and social and political philosophy.

Economics is of particular interest to those interested in epistemology and philosophy of science both because of its detailed peculiarities and because it possesses many of the overt features of the natural sciences, while its object consists of social phenomena.

https://plato.stanford.edu/entries/economics/
Reply Friday, May 26, 2017 at 07:19 AM

James Stoner is Professor in the Department of Political Science at Louisiana State University. He sits on the editorial board of Public Discourse . The papers presented at the Natural Law and Economics Conference can be found on-line at the conference website .

RGC said... [Economics needs to be holistic]: May 26, 2017 at 07:19 AM

Humans exist in, for all practical purposes, a closed system - the earth.

There are resources available within that system and various means for humans to avail themselves of those resources.

Economics is supposed to be the study of the management of available resources in the most adventageous manner.

To do that properly, economics must start with the examination of the whole system.]

Natural Law and Economics: Total Strangers or Separated Lovers?
by James Stoner

"A recent conference at Princeton University asked whether in the midst of current economic challenges natural law philosophy might not provide a better foundation for the practice of economics than the utilitarian account of value that currently underwrites it.

"Relations between the disciplines have not always been so distant. Scholastic natural lawyers trained in the tradition of Aristotle and Aquinas developed defenses of private property and free trade that influenced authors such as Grotius, who in the seventeenth century laid the groundwork of the modern law of nations and thus the basis of modern trade. John Locke subsequently wrote an incisive account of the natural right to property as the source of economic prosperity, and Adam Smith, who wrote a treatise of moral philosophy before authoring The Wealth of Nations, described what he called a system of natural liberty as the matrix of genuine wealth. Although in the nineteenth century both moral philosophy and economics in the English-speaking world developed under the influence of utilitarianism, contemporary theory in both natural-law moral philosophy and economics emphasizes the centrality of the human person and the practical choices he makes concerning human goods or values. In this regard, the question of the relation of natural law to economics is on the one hand the extent to which economic calculations can be based on notions of objective good established by practical moral reason, and on the other hand the extent to which practical judgments by individuals about their good can be informed by an awareness of global consequences."

http://www.thepublicdiscourse.com/2009/06/213/
......................................................
Philosophy of Economics

"Philosophy of Economics" consists of inquiries concerning (a) rational choice, (b) the appraisal of economic outcomes, institutions and processes, and (c) the ontology of economic phenomena and the possibilities of acquiring knowledge of them. Although these inquiries overlap in many ways, it is useful to divide philosophy of economics in this way into three subject matters which can be regarded respectively as branches of action theory, ethics (or normative social and political philosophy), and philosophy of science. Economic theories of rationality, welfare, and social choice defend substantive philosophical theses often informed by relevant philosophical literature and of evident interest to those interested in action theory, philosophical psychology, and social and political philosophy. Economics is of particular interest to those interested in epistemology and philosophy of science both because of its detailed peculiarities and because it possesses many of the overt features of the natural sciences, while its object consists of social phenomena.

https://plato.stanford.edu/entries/economics/

[May 29, 2017] Neoliberal ideology postulated that there is nothing about the economy that cannot be improved by wage cuts and redistributing wealth upwards

May 29, 2017 | economistsview.typepad.com
Christopher H. - May 27, 2017 at 05:26 AM Good points by both djb and NDd.

"The quandary is, why is somebody continuing to make use of an obviously failed model?"

And why is the New York Times printing this?

XXX, May 27, 2017 at 01:28 PM

[And why is the New York Times printing this?]

Parable: A friend stopped by at a small forest service museum in the great northwest. From the informational displays about forest management, there is nothing about a forest that cannot be improved by cutting down trees.

With economics there is nothing about the economy that cannot be improved by wage cuts and redistributing wealth upwards.

[May 29, 2017] There is no property without a government

May 29, 2017 | economistsview.typepad.com

jonny bakho , May 28, 2017 at 07:40 AM

As General Sherman aptly observed:
"There is no property without a government."
The rules for our "Market Economy" are not divine nor set in stone.
In the US, the rules are the product of we the people.
We the people have control over the rules that govern rights to property and obligations to society.
If DeLong's view is correct, that under current rules wealth will become concentrated into the hands of a few, then it is up to we the people to modify the rules to produce a more equitable, just and economically viable set of rules
djb , May 28, 2017 at 08:33 AM
the message to take from this, is that as long the economy is viewed as ideally implemented when people and firms selfishly acquire as much wealth as possible with no consideration for the plight of their fellow humans, ...then that the economy will decay and many people will suffer

it is truly the job of the government to manage the economy in such a way as to maximize utility for all

it is truly to job of economists to advise on how to do this

[May 21, 2017] The Connection Between Finance and Politics Has Been Under-Researched for Years by ProMarket writers

Notable quotes:
"... GR: Then in the beginning of the 2000s comes the beginning of your work with Professor Raghuram Rajan on "rules of the game." You looked at who's setting the rules of the game, who is influencing the rules ofthe game, and what we learn. ..."
"... GR: For decades, economists and other scholars dedicated a lot of intellectual energy to look at the relationship between companies, shareholders and executives, and between shareholders and boards. Maybe there's not enough intellectual energy going into the question of who sets the rules of the game that determine the outcomes and the dynamics in finance? ..."
"... GR: When it comes to politics, many times data aremuch more complicated and debatable, and ambiguous in many ways. When you deal with numbers and with asset prices, maybe it's easier to go with the data than when you go into the realms of politics. ..."
"... GR: Let's talk a little bit about the research that will be presented in this conference. I'll start with the most politically-sensitive paper that we have, a very interesting paper looking into the Obama administration and more than 2,000 meetings that President Obama and his chief aides had with businessmen over the last eight years. I don't know if you could call it crony capitalism, but whatever is happening out there didn't start in the Trump administration. ..."
"... GR: Another paper looks again at the United States and the way that decisions on bailouts of banks were decided after the financial crisis. Can you elaborate a bit on that? ..."
"... GR: When you're ignoring politics, the outcome many times would be to give more power in the market of ideas and in policies to vested interests, to the powerful? ..."
"... GR: Luigi Zingales, thank you very much. ..."
May 19, 2017 | promarket.org

Ahead of the Stigler Center'sconference on the political economy of finance, we interviewed Stigler Center Director Luigi Zingales about the motivation behind the first-of-its-kind conference.

On June 1-2, the Stigler Center will host a first-of-its-kind conference focusing on the role of politics in finance research. In the last twenty years, political considerations have played an increasingly important role in financial economics: from the design of the rules that make financial markets viable to politically-motivated changes in bankruptcy law, from political connections in firms to the effects of political uncertainty on investments. Yet up until now, no conference has been dedicated to it.

Ahead of this conference, we interviewed University of Chicago Booth School of Business Professor and Stigler Center Director Luigi Zingales [also, one of the editors of this blog] about the motivation behind it and the political economy of finance.

https://www.youtube.com/embed/jB1b2T0QtFk

The following is a transcript of the interview, slightly edited for clarity:

Guy Rolnik: I was surprised to understand that, actually, there are not many conferences on the politics of finance.

GR: Why is it that there aren't many conferences on the political economy of finance? You would think that politics has a lot to do with finance.

LZ: I think historically, people have not looked at that aspect a lot. I would like to divide the brief history of the academic field of finance into three periods: I would call the first one-that started in the late '50s-the Modigliani and Miller period. Modigliani and Miller, to simplify to the extreme, said that the way you slice a pizza does not change the size of the pizza. This is a period in which basically finance is irrelevant, and the only frictions that matter are probably only tax frictions.

Then, starting with the '70s, people realized: "Wait a second. If you start to divide a pizza before you produce the pizza, maybe this will have some impact on how the pizza is produced." This is what in jargon goes under "agency," or "asymmetric information." Essentially, the way you allocate the cash flows of the firm has some impact on the way the firm is run.

However, all this is in the context of, "The external rules are fixed. We're in a very predetermined society and the rules are fixed. That's what we do."

Starting with the '90s and then the 2000s, people realized that the rules are not fixed, that actually the changing nature of the rules is very important, and of course, political gain is what makes the rules change.

GR: So this is where the 2008 financial crisis comes in, and after the financial crisis people started to develop a lot of interest in the role of politics in financial crises and the role of politics in finance.

LZ: To be honest, I think things started before the financial crisis. I think probably the intellectual origin of all this is the theory of incomplete contracts developed by Grossman and Hart, where because the cash flow is bargain ex post, then the rules are more fluid. Then this call for renegotiation, or re-discussion, which is to a large degree about politics, comes into the game.

One of the early papers about this is a paper by Patrick Bolton and Howard Rosenthal-a finance guy and a political scientist-looking at how renegotiation of debt and the rules for bankruptcy change dramatically with the business cycle. Every major financial crisis in the United States had the bankruptcy rules restated to some extent, or reshaped.

Traditionally, finance people thought about bankruptcy as a given. Now [they] realize it is not a given, that the rules change. How do they change? They're politically determined. Of course, for the misbeliever, the financial crisis brought this to an attention that could not be ignored.

We've seen the work by Amir Sufi and Atif Mian and Francesco Trebbi looking at the political determinants of the intervention on TARP, and the work that Amit Seru and co-authors have done on the politics around regulation and how ineffective regulation is because of political constraints.

I think that by the beginning of the second decade of the 21st century, politics has become mainstream and was overdue to have a conference dedicated to it.

GR: Then in the beginning of the 2000s comes the beginning of your work with Professor Raghuram Rajan on "rules of the game." You looked at who's setting the rules of the game, who is influencing the rules ofthe game, and what we learn.

LZ: I think that in the late '90s and early 2000, there was a big interest inwhy countries are not more financially developed. Thanks to the work of Andrei Shleifer and Robert Vishny and others, there was this importance of the law as a major factor.

Raghuram and I asked the very simple question: if it is as simple as importing a code from another country, why don't more countries do it? It cannot be just a lack of technical expertise. Lawyers are expensive but can be imported. In fact, Russia did import the best lawyers from the United States. I'm not sure it was a big success.

The conclusion was, no, it's lack of political will. We started to open the debate for, say, "Look, finance does benefit most people, but hurts others." So there is a political economy even with [the] introduction of financial laws.

GR: For decades, economists and other scholars dedicated a lot of intellectual energy to look at the relationship between companies, shareholders and executives, and between shareholders and boards. Maybe there's not enough intellectual energy going into the question of who sets the rules of the game that determine the outcomes and the dynamics in finance?

LZ: I think that the role of conferences like the one here at the Stigler Center is to bring together scholars who work in a certain area, and also give confidence that this area is important, and attract more research.

You're absolutely right, people tend to research where the data are. The famous old joke about economists, that they look where the light is, not where they lost the key, has some element of truth. In finance, there are things that we can observe very well and compensation is one. You're going to have a lot of papers about managerial compensation.

But I think what is important is that even data are endogenous, in a sense. Compustat ExecuComp, which is the primary data source to study this stuff, was created in the early '90s as a result of academic interest in executive compensation.

Going back in history, CRSP, the Center for Research in Security Prices here at Chicago, which is the main data source for security prices research, was created by Jim Lorie, a faculty here, who saw people like Eugene Fama and others interested in this topic and said, "We have to create a data set to analyze."

The role of academia is, in a sense, to open new avenues and then have a data provider follow.

GR: When it comes to politics, many times data aremuch more complicated and debatable, and ambiguous in many ways. When you deal with numbers and with asset prices, maybe it's easier to go with the data than when you go into the realms of politics.

LZ: There are two aspects: one, there are fewer data coming from thepolitical world than from the asset pricing world, even from corporate finance. Even those data tend not to be disclosed and available as much as data on companies. Data on lobbying now start to be widely available. Data on campaign contributions start to be available. The data on corporate donations tend to be more difficult. They're not as established.

Then there is a more difficult problem to tackle: in a sense, politics is much more fluid. Whenever data are available, the deals move somewhere else. As researchers, we're always fighting the last war because we look at what happened in the past, but politics run ahead.

GR: Let's talk a little bit about the research that will be presented in this conference. I'll start with the most politically-sensitive paper that we have, a very interesting paper looking into the Obama administration and more than 2,000 meetings that President Obama and his chief aides had with businessmen over the last eight years. I don't know if you could call it crony capitalism, but whatever is happening out there didn't start in the Trump administration.

LZ: Certainly. I think it's actually very healthy, and one of the goals of this conference is to bring this research from analyzing foreign countries to analyzing the United States. It's much easier to point fingers toward other people. When Ray Fisman wrote the first paper on the political connections of Suharto, everybody clapped. Why? Because it's Indonesia and corruption in Indonesia is something that we think is granted.

Now, when people apply the same technique to the United States of America, a lot of people [are] up in arms and say, "Oh, it's impossible. This is not corruption." But if it worked as a technique for Suharto, why can't it work for Trump, or for Obama, or for people before?

I don't think that these results are specific to the Obama administration. I think that the data are better in recent years, and so, the paper analyzed that rather than analyzing George W. Bush, or Bill Clinton.

GR: Another paper looks again at the United States and the way that decisions on bailouts of banks were decided after the financial crisis. Can you elaborate a bit on that?

LZ: Again, I think that it's not surprising to international scholars that the allocation of aid, the allocation of credit, and particularly the allocation of bailout credit to banks is very politically-determined.

This research is showing that surprise, surprise, without a doubt, in the United States the same happens. I think it's a good example [that]what we've learned analyzing countries around the world can be applied to the United States.

GR: We do look internationally at this conference, and we have an interesting paper on Chile. Chile is a very interesting case for many reasons. One of them, of course, is that for many decades, Chile was the "poster child" of a successful market economy in South America. Recently, people have been looking into the details of what's happening in this economy, and they see some other perspectives on Chile that were not as salient as before.

LZ: I will distinguish two things: First of all, I think that Chile is a fantastic example of the difference between being pro-market and being pro-business. I think that Chile has been very much pro-business, but there is no doubt that it was a huge success in terms of growth. On the other hand, I think there is not enough antitrust policies, or attention to political connections. The result is that the income distribution is extremely unequal, and this really puts, in my view, bounds on future growth.

I think one needs to reconsider the limitations of looking only at micro-measures of market flexibility, and not at the political economy of the country.

In addition, like in many countries, [in Chile] we have a phenomenon where privatizations on the one hand improved efficiency-because the government is not very good at running things-but were probably done to the benefit of some people. One of the major mines was sold to the then son-in-law of Pinochet who now, ironically, was found to [have] actually [paid] money to the son of the current president, [Michelle] Bachelet. This shows that it's not right or left, it is basically crony capitalism.

GR: And China?

LZ: China is a phenomenal example. There is a very exciting paper looking at the way loans are made, and the political incentives, not only the economic incentives, that are present in China.

We tend to look at China with too much of a Western view, not realizing that in China, in every major company there is a representative of the Communist Party who basically oversees the company. These guys tend to have political incentives that are different than the standard market incentives. I think understanding better the interaction between the two is a fascinating topic.

GR: To sum up our discussion: politics is key when it comes to finance, and we should research the relationship between the political world and finance more. Are there any specific things that you think are under-researched today, or over-researched? From a societal point of view, what would be the right research agenda when it comes to finance today?

LZ: First of all, it's very difficult to ask an academic what is the right research agenda because most of the people will answer what they're doing this moment, so I don't want to fall into this trap. In general, the connection between finance and politics has been under-researched for years, and the goal of this conference is precisely to motivate more research. I think there is a need to apply more creative and different approaches.

I think that generally in academia, what tends to be overdone is research that's based on data that areeasily available, with techniques that are fairly well-established, because the cost of production is low, the value added is also low, but also, the risks tend to be low.

I think that what good researchers should do is to be more ambitious, take more risks-especially after you get tenure, there is no justification not to take more risks.

GR: Do economists need help from other disciplines when they're going into the realm of political economy of finance?

LZ: I think economists need help in other disciplines regardless. There was a long period in which economists were sort of colonialists, and they were moving to other fields, ignoring, or not really understanding the other fields, but just trying to grab some of those questions.

I think that those times, by and large, are gone. I think there is a lot of good research interacting psychology with economics. I think that is less so, for example, in sociology. I think that sociologists and economists tend to not interact a lot, and I think there are great opportunities there.

I think also with political scientists, there are more economists acting as political scientists-there is a bit less of an integration. I think that would be helpful, especially in areas like finance. I think if you are in the political economy section of an economics department, you naturally interact with political scientists.

When you come to business school, and you do finance, or you do IO, you tend to be less well-integrated.

GR: Some economists shy away from politics for many reasons, but correct me if I'm wrong: the deeper we go into the political economy of finance, we'll see that politics has a lot of influence on the outcomes of the financial markets, and it will force us to think much more about politics.

LZ: I would also say the opposite. I think that economists, and academics in general, have a huge impact on what happens in the political world. Not immediately, not individually, as they had in academia by themselves, but the academic thinking isa crucial part in shaping politics.

It's very hard to do lobbying without some ideas to support the lobbying. My fear is that academics are not sufficiently aware of their impact. Jean-Paul Sartre used to say you cannot not choose because not choosing is choosing not to choose. I would like to paraphrase and say you cannot ignore politics because ignoring politics is choosing a particular political perspective of ignoring it. You are announcing a particular view, you're not abstaining from it.

The attitude of many academics that say "I do science, I have nothing to do with politics"-they are doing politics in another way.

GR: When you're ignoring politics, the outcome many times would be to give more power in the market of ideas and in policies to vested interests, to the powerful?

LZ: I think that that could be an outcome. It's not necessarily an outcome, but that could be an outcome. I'm just saying that you should be aware of the consequences of your actions because not acting is an action.

GR: Luigi Zingales, thank you very much.

LZ: You're welcome.

Disclaimer: The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy .

[May 21, 2017] The Connection Between Finance and Politics Has Been Under-Researched for Years

May 21, 2017 | economistsview.typepad.com

likezkova, May 20, 2017 at 11:22 AM

A very interesting and important article: The Connection Between Finance and Politics Has Been Under-Researched for Years (https://promarket.org/connection-finance-politics2/ )

That was my point for a long time. Inability to challenge the underlying assumptions of the neoclassical economics and current neoliberal polices (such as Washington consensus) sooner of later backfire both in economics and politics, because politics and economics are intrinsically connected.

to the extent that "pure economics" is a pseudo-science (with bunch of complex mathematical masturbations, much like geocentric theory of movement of planets; which actually did predicted certain movements of plants accurately. using overcomplicated math stuff -- epicycles)

But political posturing often prevent such a reevaluation, even when people understand that something is wrong with the current state of economics.

Much like that fact that the USA pretentions of the world hegemony make deviations from pre-existing policies a sign of "weakness". But is a dialectical way, the obsessive desire to project strength is a serious weakness in itself ;-)

And it looks like this inability and lack of desire to challenge the fundamental assumptions is a very serious problem not only with the US elite, but with the American society as a whole.

http://www.imdb.com/title/tt0104257/quotes

Col. Jessep: [from the witness stand] *You want answers?*

Kaffee: *I want the truth!*

Col. Jessup: [from the witness stand] *You can't handle the truth!*

Emong other things it led to the economic policies that on "being disastrous" scale are probably close the policies that led to Iraq war (remember neocons boasting before this war that we will be greeted with flowers and the cost will be minimal and democracy will flourish in Iraq). The results of outsourcing of manufacturing is very similar to the real result obtains due to the Iraq war.

So there is an important question that the article missed. Can the American elite face the truth?

That answer is: "No". That's why neoclassical economics while discredited as a theory remain dominant as a civil religion of neoliberalism, indoctrination into which is a prerequisite to obtaining an academic degree, and students are indoctrinated into this this bunch of mathiness each year. Compare with Steve Keen "Debunking economics" ( https://www.amazon.com/Debunking-Economics-Revised-Expanded-Dethroned/dp/1848139926 ). Much like Marxism was obligatory in the USSR and can't graduate without passing exams on Marxist political economy.

But, truth be told, neoclassical economics has a strong political undercurrent because historically it emerged (like neoliberalism in late 30th early 40th) as an alternative to Marxism. And to certain extent it did has its value while Marxism and Marxist theory of value were not discredited (that means up to late 40th, early 60th).

Another point is that the US neoliberal elite demonstrated willingness and ability to engage in self-defeating behavior because they do not want to look weak or challenge the postulated of neoliberalism. That's the same behavior the Politburo was engaged in the USSR.

I would shy from using the term "decline od neoliberalism" because it has a flavor of "doom and gloom" (and haw we can speak about decline if a realistic alternative does not exist?), but neoliberalism really faces the crisis of confidence. Neoliberal myths such a "Greed is good", "Casino capitalism is virtuous", "Entrepreneurship is the ultimate value and the source of material reward", "free market", "free trade", "labor market", "poor are guilty of their own fate because they lack responsibility", "rising stock market tide lifts all boats", etc are dispelled.

Promises of "prosperity for all" are not delivered (at least to the lower 80% of population.)

Basically the same situation that existed with Brezhnev socialism in the USSR with the communist ideology stating with 70th.

Instead of the USSR alcoholism epidemic we have opioids and meth epidemic with the same or similar social roots.

Add to this several wars (or more correctly occupations of the countries) going on and resources wasted on those (mostly unwinnable) wars (with the recent myth that "counterinsurgency" tactics will bring the USA the success in Afghanistan -- David Petraeus' myth -- http://www.truth-out.org/news/item/12997-how-petraeus-created-the-myth-of-his-success, https://www.scribd.com/document/67519776/Puncturing-the-Counterinsurgency-Myth-Britain-and-Irregular-Warfare-in-the-Past-Present-and-Future ) which also nobody in the establishment has the courage of challenging and you get the picture. It's not pretty.

That worldview had derived from this conviction that American power implies commitment to global hegemony, and this commitment expressed the nation's enduring devotion to its founding ideals of freedom and democracy.

That also means that election of Trump will not result in proper actions that can change the course of "battleship America" and can rectify the current difficulties. Much like the election of Barack Obama before him.

[May 18, 2017] Hayek and Neoclassicals Meet Information Theory and Fail

Notable quotes:
"... By Jason Smith, a physicist who messes around with economic theory. He graduated from the University of Texas at Austin with a degree in math and a degree in physics, and received his Ph.D. from the University of Washington in theoretical physics. Follow him on Twitter: @infotranecon. Originally published at Evonomics ..."
"... The New Industrial State ..."
"... I think the tradition of economic thinking has been really influential. I think it's actually a thing that people on the left really should do - take the time to understand all of that. There is a tremendous amount of incredible insight into some of the things we're talking about, like non-zero-sum settings, and the way in which human exchange can be generative in this sort of amazing way. Understanding how capitalism works has been really, really important for me, and has been something that I feel like I'm a better thinker and an analyst because of the time and reading I put into a lot of conservative authors on that topic. ..."
May 18, 2017 | www.nakedcapitalism.com
Posted on May 17, 2017 by Yves Smith By Jason Smith, a physicist who messes around with economic theory. He graduated from the University of Texas at Austin with a degree in math and a degree in physics, and received his Ph.D. from the University of Washington in theoretical physics. Follow him on Twitter: @infotranecon. Originally published at Evonomics

The inspiration for this piece came from a Vox podcast with Chris Hayes of MSNBC. One of the topics they discussed was which right-of-center ideas the left ought to engage. Hayes says:

The entirety of the corpus of [Friedrich] Hayek, [Milton] Friedman, and neoclassical economics. I think it's an incredibly powerful intellectual tradition and a really important one to understand, these basic frameworks of neoclassical economics, the sort of ideas about market clearing prices, about the functioning of supply and demand, about thinking in marginal terms.

I think the tradition of economic thinking has been really influential. I think it's actually a thing that people on the left really should do - take the time to understand all of that. There is a tremendous amount of incredible insight into some of the things we're talking about, like non-zero-sum settings, and the way in which human exchange can be generative in this sort of amazing way. Understanding how capitalism works has been really, really important for me, and has been something that I feel like I'm a better thinker and an analyst because of the time and reading I put into a lot of conservative authors on that topic.

Putting aside the fact that the left has fully understood and engaged with these ideas, deeply and over decades (it may be dense writing, but it's not exactly quantum field theory), I can hear some of you asking: Do I have to?

The answer is: No.

Why? Because you can get the same understanding while also understanding where these ideas fall apart ‒ that is to say understanding the limited scope of market-clearing prices and supply and demand – using information theory.

Prices and Hayek

Friedrich Hayek did have some insight into prices having something to do with information, but he got the details wrong and vastly understated the complexity of the system. He saw market prices aggregating information from events: a blueberry crop failure, a population boom, or speculation on crop yields. Price changes purportedly communicated knowledge about the state of the world.

However, Hayek was writing in a time before information theory. (Hayek's The Use of Knowledge in Society was written in 1945, a just few years before Claude Shannon's A Mathematical Theory of Communication in 1948.) Hayek thought a large amount of knowledge about biological or ecological systems, population, and social systems could be communicated by a single number: a price. Can you imagine the number of variables you'd need to describe crop failures, population booms, and market bubbles? Thousands? Millions? How many variables of information do you get from the price of blueberries? One. Hayek dreams of compressing a complex multidimensional space of possibilities that includes the state of the world and the states of mind of thousands or millions of agents into a single dimension (i.e. price), inevitably losing a great deal of information in the process.

... ... ...

The market as an algorithm

The picture above is of a functioning market as an algorithm matching distributions by raising and lowering a price until it reaches a stable price. In fact, this picture is of a specific machine learning algorithm called Generative Adversarial Networks (GAN, described in this Medium article or in the original paper ) that has emerged recently. Of course, the idea of the market as an algorithm to solve a problem is not new. For example one of the best blog posts of all time (in my opinion) talks about linear programming as an algorithm, giving an argument for why planned economies will likely fail, but the same argument implies we cannot check the optimality of the market allocation of resources, therefore claims of markets as optimal are entirely faith-based. The Medium article uses a good analogy using a painting, a forger, and a detective, but I will recast it in terms of the information theory description.

Instead of the complex multidimensional distributions, here we have blueberry buyers and blueberry sellers. The "supply" ( B from above) is the generator G , the demand A is the "real data" R (the information the deep learning algorithm is trying to learn). Instead of the random initial input I - coin tosses or dice throws - we have the complex, irrational, entrepreneurial, animal spirits of people. We also have the random effects of weather on blueberry production. The detector D (which is coincidentally the terminology Fieltiz and Borchardt used) is the price p . When the detector can't tell the difference between the distribution of demand for blueberries and the distribution of the supply of blueberries (i.e. when the price reaches a relatively stable value because the distributions are the same), we've reached our solution (a market equilibrium).

Note that the problem the GAN algorithm tackles can be represented by the two-player minimax game from game theory. The thing is that with the wrong settings, algorithms fail and you get garbage. I know this from experience in my regular job researching machine learning, sparse reconstruction, and signal processing algorithms. Therefore depending on the input data (especially data resulting from human behavior), we shouldn't expect to get good results all of the time. These failures are exactly the failure of information to flow from the real data to the generator through the detector – the failure of information from the demand to reach the supply via the price mechanism.

When asked by Quora what the recent and upcoming breakthroughs in deep learning are, Yann LeCun, director of AI research at Facebook and a professor at NYU, said:

The most important one, in my opinion, is adversarial training (also called GAN for Generative Adversarial Networks). This is an idea that was originally proposed by Ian Goodfellow when he was a student with Yoshua Bengio at the University of Montreal (he since moved to Google Brain and recently to OpenAI).

This, and the variations that are now being proposed is the most interesting idea in the last 10 years in ML, in my opinion.

Research into these deep learning algorithms and information theory may provide insight into economic systems.

An Interpretation of Economics for the Left

So again, Hayek had a fine intuition: prices and information have some relationship. But he didn't have the conceptual or mathematical tools of information theory to understand the mechanisms of that relationship - tools that emerged with Shannon's key paper in 1948, and that continue to be elaborated to this day to produce algorithms like generative adversarial networks.

The understanding of prices and supply and demand provided by information theory and machine learning algorithms is better equipped to explain markets than arguments reducing complex distributions of possibilities to a single dimension, and hence, necessarily, requiring assumptions like rational agents and perfect foresight. Ideas that were posited as articles of faith or created through incomplete arguments by Hayek are not even close to the whole story, and leave you with no knowledge of the ways the price mechanism, marginalism, or supply and demand can go wrong. Those arguments assume and (hence) conclude market optimality. Leaving out the failure modes effectively declares many social concerns of the left moot by fiat. The potential and actual failures of markets are a major concern of the left, and are frequently part of discussions of inequality and social justice.

The left doesn't need to follow Chris Hayes' advice and engage with Hayek, Friedman, and neoclassical economics. The left instead needs to engage with a real world vision of economics that recognizes the limited scope of ideal markets and begins with imperfection as the more useful default scenario. Understanding economics in terms of information flow is one way of doing that.

JULIA WILLE , May 17, 2017 at 8:28 am

Is this just my lack of formal education or is this article very complicated? Honestly I did not understand it at all. Is there any way to explain this different? ( a link to a different way of describing informationtheory / free market theory)
Thanks Julia

PKMKII , May 17, 2017 at 10:23 am

To put it in more layman-friendly terms: price settings are based on information the suppliers gather regarding the market, both demand side and supply side (sales forecasts, commodity pricing, consumer confidence number, focus group information, etc). Demanders do the same. However, they can never have absolute, complete information for either side. So prices, and idea of what prices should be, in a free market never represent a true optimal price, but rather a best guess.

This pokes a few holes in neoclassical economic assumptions:

– Most obviously, prices cannot be optimal in a free market.
– Supply and demand changes cannot account entirely for changes in price, as refinements to the information flow can affect them as well.
– Information asymmetry corrupts prices, and can be used to exploit consumers.
– Information is dependent on a large enough sample size, so neoclassical economics is useless in markets with limited transactions. An easy example of this are those kind of items on shows like Antique Roadshow, where there's so few of the items out there that the expert says, "This is a guess, but really it could go for almost any amount at auction."

So the Left can use this to argue for non-market price controls (to account for the lack of free market price optimization) and for forcing corporations to have better fiscal transparency and more strict anti-trust laws (to increase information flow and to prevent information asymmetry).

JTMcPhee , May 17, 2017 at 11:04 am

Local prices for gasoline look a lot more like looting and chaos to me than any kind of correspondence to "markets." Yesterday at the RaceTrac at the end of my street, "regular" dropped four cents from morning to evening, reflecting the pricing at the two other "service stations" at the intersection. A month or so ago (I got tired of keeping a little record of the changes) the price jumped 25 cents overnight. None of these moves seemed to correspond with the stuff I was reading about in the market conditions around the planet and just in the US - supply and demand? More like the Useless Looters at BP and Shell and others just spin an arrow on a kid's game board to pick the day's price point (that sick phrase), or somebody in the C-Suite decided the "Bottom Line" needed a goose to pump the bonus generator up a bit.

The fraud is everywhere, the looting and scamming too. Seems to me that searching for some "touchstone" to make sense of It All is an exercise in futility.

PKMKII , May 17, 2017 at 11:47 am

Gasoline runs into a different limitation with free market economics, which is that consumers need to be able to freely enter and leave the market in question in order for the free market to function (which is why privatized healthcare doesn't work). Outside of a few urban areas with robust public transportation, most Americans are immediately dependent on gasoline in order to survive. Even those who do have access to a Metro are still dependent on the shipping that uses gasoline. So they can raise prices with a greater confidence that the number of consumers will not drop off as significantly as with other industries.

rn , May 17, 2017 at 12:54 pm

"This pokes a few holes in neoclassical economic assumptions:"

In neoclassical economics, these "holes" are pretty much understood as the prerequisites for "perfect competition", as opposed to imperfect competition or monopolies.

When politics is mixed with economics, these are ignored, as they are in the interest of the ruling class.

HBE , May 17, 2017 at 2:37 pm

Thank you for the laymans version PKMKII. I read it twice, but it only clicked after reading your comment.

LT , May 17, 2017 at 4:01 pm

https://aeon.co/essays/how-the-cold-war-led-the-cia-to-promote-human-capital-theory/

Vastydeep , May 17, 2017 at 11:00 am

PKMKII said it very well, and here's another way to look at it: Centrally-planned economies (say, some Politburo minister in the former Soviet Union) fail because a central bureaucrat cannot possibly guess the demand and distribution for all products (say, metal bathtubs) across an economy in a given year. He guesses, poorly, and either the shortages or the oversupply make our history books.

Market economics makes a better guess, because pricing gives a dynamic estimate of what the supply and demand really are. That this estimate is generally *better* has been (mis)represented as that this estimate is somehow PERFECT - the best estimate that can possibly exist! As the article describes, this assessment (that only a market economy can generate maximal wealth and optimal wealth distributions) is FALSE.

The economics underlying communist central planning failed because they couldn't provide the optimization that comes from valid pricing function. With Shannon's information theory and advanced analytics, it is possible to create a more optimal economy than our current, simplistic market/pricing function provides.

Ever since Samuelson's Economics in 1948, we've worshipped a market god based on scanty math. The first step in moving beyond Samuelson is recognizing that progress is indeed still possible, and then making the choice and determining the steps to pursue it.

Mel , May 17, 2017 at 11:22 am

Not just communist central planning. John Kenneth Galbraith's The New Industrial State makes a special space in society for industries in The Planning Sector. These were the very large businesses that worked with huge capital bases, long lead times, populations comparable to small nations. Planning, both input and output, was key to these businesses because there was too much at stake to risk losing it to the whims of any market. Communist societies were extreme examples, as they were betting the entire national economy, but the parallels with huge "private" firms were quite exact.
The Planning Sector businesses failed when they had to slough off all the activities that were too hard to plan; then they morphed into the Finance/Insurance/Real Estate Sector.

Brian G , May 17, 2017 at 11:15 am

I don't think it is a lack of formal education. It is simply written in a way that is not easy to understand. I have my master's in engineering, and I'm still not sure exactly what this passage is trying to say:
"If you randomly generated thousands of messages from the distribution of possible messages, the distribution of generated messages would be an approximation to the actual distribution of messages. If you sent these messages over your noisy communication channel that met the requirement for faithful transmission, it would reproduce an informationally equivalent distribution of messages on the other end."
From that point on I simply skimmed it and, if I'm not mistaken, the author also assigns positions to Hayek that seem to be a little more extreme than the positions he actually held.

I.D.G , May 17, 2017 at 1:14 pm

Will try to break that:

If you randomly generated thousands of messages from the distribution of possible messages, the distribution of generated messages would be an approximation to the actual distribution of messages.

You can only get to the true distribution assuming an infinite number of samples, everything else is asymptotic approximation to the true posterior distribution. This is true for any mathematical function approximated numerically were closed solutions are not possible to find (ie. not integrable). But this is relevant to the second phrase because:

If you sent these messages over your noisy communication channel that met the requirement for faithful transmission, it would reproduce an informationally equivalent distribution of messages on the other end.

A noisy communication channel introduces random bits of information which are not part of the original distribution, but because that noise is random, you would get a message that is an approximation of the true distribution of the original message being transmitted (is informationally equivalent) as the noise is distributed 'randomly' .

However, this is only true when the number of information bits approach infinity (for large numbers), BE WARE! Indeed that randomness can be very skewed for small samples. this is relevant and interesting because complex systems were you have a large number of variables are not easy to converge with, even when you are aware of the whole system variables (is a mathematically intractable problem).

You can think as market pricing (in an ideal world free of politics and power games, which is not) as a convergence to a complex multidimensional problem, and even though we know that we are NOT aware of all the variables at play for a given product, hence this supposedly God like attributes of market price discovery are unwarranted.

Synoia , May 17, 2017 at 8:23 pm

Looking at the signal gives you both information and a probability of being correct. Now we get to significance, which is defined as 95% probability.

When you get to 95% probability depends on the signal to noise ratio.

Any guesses as to the signal to noise ratio of the News Media?

Tim , May 17, 2017 at 3:27 pm

Actually that's just poor writing.

Jim Haygood , May 17, 2017 at 8:49 am

"Because the information flow from A can never be greater than A's total information, and will mostly be less than that total, the observed prices in a real economy will most likely fall below the ideal market prices."

Surely not. Post-industrial economies feature an asymmetry: individual consumers, catered to predominantly by large nationwide publicly-traded suppliers.

Because of the superior knowledge possessed by suppliers, further leveraged by advertising and publicity which exploits human psychological foibles such as peer pressure and herding, prices in the economy are almost certainly too high versus the ideal of complete information flow (while the price of labor is almost certainly too low).

Nowhere are prices higher than in the nonnegotiable, monopoly services of government. Not only does it charge astronomical property taxes which mean that there's really no such thing as secure property title without income, but also it compels hapless working schmoes to "invest" 15.3% of their income for their entire working lives at approximately zero return.

Mr Trump tear down these prices .

Synoia , May 17, 2017 at 8:26 pm

Nowhere are prices higher than in the nonnegotiable, monopoly services of government.

Really? Care to discuss an example?

Such as the UK NHS v the US Health Care System? Better outcome at nearly half the cost.

Now how is your " prices higher monopoly services of government" doing?

Please post a counter example.

TG , May 17, 2017 at 9:34 am

With respect, it is not empirically incorrect that immigration lowers wages. The historical experience is quite clear, that when governments force population growth, whether through increased immigration or via incentives to increase the local fertility rate, wages for the many fall and profits for the few increase.

Sure more workers means more competition for jobs, but can also result in an increase in the number of jobs – BUT ONLY OVER TIME AND ONLY IF NEEDED INVESTMENTS ARE MADE AND THERE IS ENOUGH MARGINAL CAPACITY TO INVEST AND TECHNOLOGY AND RESOURCES ARE NOT ENTERING THE AREA OF DIMINISHING RETURNS. Which is not guaranteed, especially if the immigration level is massive and constantly increasing.

The United States from around 1929 to 1970 had very low immigration, and, starting from a low level, wages soared. Starting in 1970, the borders to the overpopulated third world have been progressively opened, and wages have started to diverge from productivity and are now starting to decline in absolute terms. Other nations that recently increased the rate of immigration and have seen significant falls in wages are: South Africa, the Ivory Coast, England, Australia, and Singapore – and even some provinces of India, where immigration from Bangladesh has been used to make certain that wages stay near subsistence. Yes immigration was not the only thing going on there, but when rapid forced increases in the supply of labor are always followed by falls in wages, well, the empirical evidence is hardly to be dismissed out of hand.

Remember, no society in all of history has run out of workers. When the headlines say that immigrants are needed to end a labor 'shortage' what is really meant is a 'shortage' of workers who have no option but to accept low wages. However, the only reason that workers can get high wages is that there is a 'shortage' of workers forced to take low wages. It is thus essentially tautological that when immigration is said to eliminate a labor shortage, it is lowering wages, because a labor 'shortage' is in fact what high wages are based on.

PKMKII , May 17, 2017 at 10:31 am

They're arguing that you can't empirically say that immigration decreases wages, because there are simply too many variables in an economy to be able to say definitively if it's a cause or a correlation, i.e. does the immigration decrease wages, or does another socio-economic factor simultaneously decrease wages and cause an influx of immigrants? This is why economics is treated as a soft science, as you can't remove variables in a lab setting the way you can with other sciences.

Ignacio , May 17, 2017 at 11:46 am

"BUT ONLY OVER TIME AND ONLY IF NEEDED INVESTMENTS ARE MADE AND THERE IS ENOUGH MARGINAL CAPACITY TO INVEST AND TECHNOLOGY AND RESOURCES ARE NOT ENTERING THE AREA OF DIMINISHING RETURNS."

Nope. Once immigrants arrive, demand increases instantly, even before they get a job.

H. Alexander Ivey , May 17, 2017 at 9:59 am

Wow. Just wow. A complete, through, and total BS assertion of some kind of economic theory. I am simply stunned at his verbal density of discourse, blithe refusal to explain, and simply name dropping facts, ideas, and concepts that are absolutely not related except in being part of the English language.

I know this is close to an ad hominum attack; I haven't given any specific rebuttal. But I don't have the tools at my disposal right now to avenge what I see as an assault on my analytic abilities.

Good night and good luck.

Synoia , May 17, 2017 at 1:02 pm

Perhaps you should do some reading or studying of math?

Vastydeep , May 17, 2017 at 1:46 pm

If not a specific rebuttal, what *kinds* of things in the article do you disagree with? Perhaps this posting is just a step to some greater knowing. Neoclassical Economics has been taught as "factual and beyond dispute" my whole career - I'm sure that Alchemy and Leechbooks were taught similarly in earlier ages. How might you suggest that we move forward to something better?

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." ~ Mark Twain

skippy , May 17, 2017 at 3:44 pm

"Wow. Just wow. A complete, through, and total BS assertion of some kind of economic theory. I am simply stunned at his verbal density of discourse, blithe refusal to explain, and simply name dropping facts, ideas, and concepts that are absolutely not related except in being part of the English language."

Yeah that is a pretty good summation of my experience wrt Austrians over almost 2 decades in a nutter shell[ ] kudos.

Now if only the neoclassicals would abandon the individual and consider vectors in distribution and how groups affect information.

disheveled .. throws toys out of play pen and hurrumphs away . victoriously .

Abate Magic Thinking but NOT Money , May 17, 2017 at 10:39 am

In my limited experience the prices we accept are more to do with contentment than information. We are aware that we can never have perfect information; bounded rationality being our situation*. So as buyers, we end up going with contentment or at least convenience; price too high, content to leave it on the shelf. Price too low and the reaction might be the same because it is too good to be true, or of suspect quality. You can have a bargain staring you in the face and, but you are content because of lack of interest or knowledge.

Good luck to those who try to quantify contentment!

.And then there is the tyranny of choice; not content!

Pip Pip!

* When it comes to the prices people are prepared to pay for products such as cosmetics and super-cars the rule seems to be unbounded irrationality, but hopefully contentment is achieved anyway.

Synoia , May 17, 2017 at 1:12 pm

Please do not confuse commodity price with perceived value.

Perceived value is clearly a signal injection into the information stream (an engineers view of marketing)

huh? , May 17, 2017 at 10:40 am

when it comes to the political application of this 'theoretical' argument I think it will be easily dismissed as more leftist academic pedantry, 'immanentizing the eschaton'- all the comments reflecting the advantages of imperfect information evidence.

SouthLooper , May 17, 2017 at 10:52 am

This is a wonderful, cogent explanation of a very mathematically complex subject, which is Information Theory, that has been used to make profound contributions well beyond telephonic communication for which Claude Shannon developed it, when he discovered it trying to code the English language, and which he failed to do.

R.A. Fisher was also brilliant. His work has had implications in probability, and statistics, economics, and perhaps most profoundly in genetics.

PKMKII , May 17, 2017 at 11:37 am

The neoclassical analysis also doesn't account for single supplier, multiple demand market situations. If blueberries both have the consumer market, but also an industrial market (dye purpose, maybe), then the blueberry supplier has to balance both of those demands, which may end up favoring one or the other, or some state that isn't ideal for either demand market. The universal example is the private property of the business itself. The owner isn't just in the market of whatever service or widget they make, but also in the commercial real estate market. This is especially problematic with housing, as high rents + vacancies create the impression of scarcity and value to prospective buyers.

Synoia , May 17, 2017 at 11:41 am

Good work. Now add the delays in information transfer, and fear and greed buying motivations based on multiple information streams, coupled with information conflicts (injected noise), and you are getting closer to the real world.

Information conflicts are the differing explanations of the Trump/Corey affair. There is much noise in the information stream.

Mel , May 17, 2017 at 12:47 pm

The example seems very sketchy:

Stable prices mean a balance of crop failures and crop booms (supply), population declines and population booms (demand), speculation and risk-aversion (demand)

This is a good example because it's easy to understand appealing, I fear, to our neoclassical prejudices.
It's a bad example because it doesn't seem very multidimensional; appealing to our neoclassical prejudices it collapses easily into "How many blueberry buyers?" and "How many blueberries?"
Trying to imagine something more multidimensional there might be a preference for big blueberries because they're big there might be a preference for small blueberries because people think that they're wild, so they must be tastier. If the markets were segregated, there could be a market-clearing price for big blueberries, and another for small blueberries. But the markets probably aren't segregated, and the prices would play back and forth against each other.
Maybe good too in dealing with prices of different goods, not just The Price. Neoclassical prices are meant to be the information that tells me whether to buy dish soap or a new overcoat instead.

Synoia , May 17, 2017 at 1:25 pm

Stable prices mean a balance of crop failures and crop booms (supply), population declines and population booms (demand), speculation and risk-aversion (demand)

There are no stable prices. With this analysis, the steps to include feedback is clear, and if the feedback is non-linear, non-linear feedback is a characteristic of chaotic systems.

Temporary stability only in a non-linear system, with tipping points etc.

UserFriendly , May 17, 2017 at 1:34 pm

Thank you for this, I found it very helpful.

Plenue , May 17, 2017 at 3:12 pm

Chris Hayes is an idiot. What kind of person can repeatedly visit the post-industrial wasteland of the rust belt for town halls with Bernie Sanders and then say "what we need more of is the philosophy of free-markets"?

But even with that being said, Hayes somehow is still by far the most worthwhile personality on MSNBC.

Left in Wisconsin , May 17, 2017 at 3:41 pm

I think the tradition of economic thinking has been really influential. I think it's actually a thing that people on the left really should do - take the time to understand all of that. There is a tremendous amount of incredible insight into some of the things we're talking about, like non-zero-sum settings, and the way in which human exchange can be generative in this sort of amazing way. Understanding how capitalism works has been really, really important for me, and has been something that I feel like I'm a better thinker and an analyst because of the time and reading I put into a lot of conservative authors on that topic.

While I agree with much of the argument Hayes is making – know thy enemy, etc. – he gets one huge thing wrong here that is very troubling: equating capitalism with markets. "Understanding how capitalism works has been really, really important for me " I'm amazed at how often this trips up otherwise smart people. There is no capitalism in mainstream neoclassical economics (no government either, and you can't have capitalism without government). And get any business person talking freely and they will tell you that everyone in business hates super-competitive markets of the kind fetishized by economists, and that profitability is all about finding niches and other ways to avoid competition.

LT , May 17, 2017 at 4:00 pm

https://aeon.co/essays/how-the-cold-war-led-the-cia-to-promote-human-capital-theory
"Friedman had discovered in human capital theory more than just a means for boosting economic growth. The very way it conceptualised human beings was an ideological weapon too "

Ellis , May 17, 2017 at 4:30 pm

I think it's important to recognize where information theory and the principle of maximum entropy does succeed in economics and that is as a method of doing statistical inference in economics. For those interested, I would recommend looking at the increasing amount of information theoretic research coming out of the Economics Department at the New School for Social Research and UMKC. You can find many good working papers by myself, Duncan Foley, Paulo dos Santos, Gregor Semieniuk, and others on the NSSR Repec page https://ideas.repec.org/s/new/wpaper.html .

Larry Y , May 17, 2017 at 4:56 pm

At Bell Labs, plaques and a statue of Shannon occupy places of honor, in more prominent places than the tributes to other prominent people (including 8 Nobel Prize winners in science).

Here's a presentation by Prof. Christopher Sims of Princeton, at Bell Labs. "Information Theory in Economics" https://youtu.be/a8jt_TmwQ-U – critique of the optimizing rational behavior models, noting people are bandwidth limited ("Rational Inattention"). Non-gaussian! Brings up example of monopolist of with no high capacity limit vs. customers.

J ,

[May 18, 2017] We need to attack and defeat the neoliberal belief that markets are information processors that can know more than any person could ever know and solve problems no computer could ever solve

Notable quotes:
"... But making the observation that there are no markets as defined makes little dint on a faith-based theory like neoliberalism, especially a theory whose Church encompasses most university economics departments, most "working" economists, numerous well-funded think tanks, and owns much/most of our political elite and so effectively promotes the short-term interests of our Power Elite. ..."
May 18, 2017 | www.nakedcapitalism.com
Jeremy Grimm , May 17, 2017 at 5:59 pm

Phillip Mirowski challenged the left to directly attack and defeat the neoliberal belief that markets are information processors that can know more than any person could ever know and solve problems no computer could ever solve.

[Prof. Philip Mirowski keynote for 'Life and Debt' conference https://www.youtube.com/watch?v=I7ewn29w-9I ]

Sorry for the long quote - I am loathe to attempt to paraphrase Hayek

"This is particularly true of our theories accounting for the determination of the systems of relative prices and wages that will form themselves on a well functioning market. Into the determination of these prices and wages there will enter the effects of particular information possessed by every one of the participants in the market process – a sum of facts which in their totality cannot be known to the scientific observer, or to any other single brain.

It is indeed the source of the superiority of the market order, and the reason why, when it is not suppressed by the powers of government, it regularly displaces other types of order, that in the resulting allocation of resources more of the knowledge of particular facts will be utilized which exists only dispersed among uncounted persons, than any one person can possess.

But because we, the observing scientists, can thus never know all the determinants of such an order, and in consequence also cannot know at which particular structure of prices and wages demand would everywhere equal supply, we also cannot measure the deviations from that order; nor can we statistically test our theory that it is the deviations from that "equilibrium" system of prices and wages which make it impossible to sell some of the products and services at the prices at which they are offered."
[Extract from Hayek's Nobel Lecture]

This just hints at Hayek's market supercomputer idea -- I still haven't found a particular writing which exposits the idea -- so this will have to do.

Sorry - another quote from the Hayek Nobel Lecture [I have no idea how to paraphrase stuff like this!]:

"There may be few instances in which the superstition that only measurable magnitudes can be important has done positive harm in the economic field: but the present inflation and employment problems are a very serious one. Its effect has been that what is probably the true cause of extensive unemployment has been disregarded by the scientistically minded majority of economists, because its operation could not be confirmed by directly observable relations between measurable magnitudes, and that an almost exclusive concentration on quantitatively measurable surface phenomena has produced a policy which has made matters worse."

I can't follow Hayek and I can't follow Jason Smith. The first quote above sounds like a "faith based" theory of economics as difficult to characterize as it is to refute. The second quote throws out Jason Smith's argument with a combination of faith based economics and a rejection of the basis for Smith's argument - as "scientistically minded."

I prefer the much simpler answer implicit in Veblen and plain in "Industrial Prices and their Relative Inflexibility." US Senate Document no. 13, 74th Congress, 1st Session, Government Printing Office, Washington DC. Means, G. C. 1935 - Market? What Market? Can you point to one? [refer to William Waller: Thorstein Veblen, Business Enterprise, and the Financial Crisis (July 06, 2012)

[https://archive.org/details/WilliamWallerThorsteinVeblenBusinessEnterpriseAndTheFinancialCrisis ]

It might be interesting if Jason Smith's information theory approach to the market creature could prove how the assumed properties of that mythical creature could be used to derive a proof that the mythical Market creature cannot act as an information processor as Mirowski asserts that Hayek asserts.

So far as I can tell from my very little exposure to Hayek's market creature it is far too fantastical to characterize with axioms or properties amenable to making reasoned arguments or proofs as Jason Smith attempts. Worse - though I admit being totally confused by his arguments - Smith's arguments seem to slice at a strawman creature that bears little likeness to Hayek's market creature.

The conclusion of this post adds a scary thought: "The understanding of prices and supply and demand provided by information theory and machine learning algorithms is better equipped to explain markets than arguments reducing complex distributions of possibilities to a single dimension, and hence, necessarily, requiring assumptions like rational agents and perfect foresight." It almost sounds as if Jason Smith intends to build a better Market as information processor religion -- maybe tweak the axioms a little and bring in Shannon. Jason Smith is not our St. George.

But making the observation that there are no markets as defined makes little dint on a faith-based theory like neoliberalism, especially a theory whose Church encompasses most university economics departments, most "working" economists, numerous well-funded think tanks, and owns much/most of our political elite and so effectively promotes the short-term interests of our Power Elite.

[May 08, 2017] Goods and services in Russia are considerably less expensive than in the West (and this includes the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator than is nominal GDP

Some interesting notes about difficulty of comparing GDP of various countries, in this case the USA and Russia.
Notable quotes:
"... Russia's overall GDP PPP places it slightly below Germany - 6th place in the world ..."
"... But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests. ..."
"... Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget. ..."
"... [AKA "SmoothieX12"] ..."
"... No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. ..."
"... In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition. ..."
Apr 17, 2017 | www.unz.com

Anonymous , April 17, 2017 at 5:31 am GMT

Russia spent almost 5.4% of GDP on military spending. The US last year spent 3.3% and with Trump's proposed increase this number will increase by a few decimal points.

Russia is a middle income country while the US is a rich country, in the top 10 of GDP per capita. If oil prices don't substantially improve and Russia continues to spend the way it does on the military it will simply go broke.

Sources: https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita (Russia is between Mexico and Suriname)

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

@AP
Goods and services in Russia are considerably less expensive than in the West (and this includes the cost of producing fighter jets or rockets), so for such purposes GDP PPP is a better indicator than is nominal GDP. In terms of GDP PPP, Russia is of course not on par with the United States but is considerably higher than Mexico. It is in the same neighborhood as places such as Hungary.

Russia's overall GDP PPP places it slightly below Germany - 6th place in the world :

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

@Lewl42
Russia is a middle income country while the US is a rich country, in the top 10 of GDP per capita.

But the US GDP is of an different structure. Compared it is overblown with pure financial sales and "hedonistic adjustments". More is blown by the culture. In the US much more everyday things relies on money. In case of case they are all worth nothing. Furthermore, if it comes to conflicts than the whole US Infrastructure has to be "revalued", and i doubt that it can withheld some stress tests.

If oil prices don't substantially improve and Russia continues to spend the way it does on the military it will simply go broke

No country that relies on oil ( Russia do not) has made substantial improvements. Normally they are problem states where the problems made by oil are solved by money.

So from my point of view the opposite is true. Russia has made the big mistake to open itself to the west and was bitten. Now they readjust (with a border to china). Thank's to the US Oligarchs which thrown away that chance for they're primitive Neanderthal tribe thinking.

@Carlton Meyer
Over the years, the Pentagon encouraged Congress to move parts of national security spending out of its budget to the extent that almost half is found outside the DOD. The USA really spends over a trillion dollars a year. For example, nuclear weapons research, testing, procurement, and maintenance is found in the Dept of Energy budget.

http://www.pogo.org/straus/issues/defense-budget/2016/americas-1-trillion-national-security-budget.html

And as others have noted, GDP is a measure of activity, not prosperity. For example, mortgage refinancing creates lots of GDP, but no real wealth. Hurricanes and arson are good for GDP too!

@5371

Stupid beyond belief. Countries can't go broke doing something, if they control the natural and human resources they need to accomplish it. In addition, you apparently did not read Smoothie's explanation of why just comparing the sums spent is silly.
@Joe Wong
"Russia is a middle income country while the US is a rich country, in the top 10 of GDP per capita." this is very funny, how about the 20 trillions of US national debt and it is skyrocketing fast? If you only count asset without counting liability US maybe in the top 10 GDP per capita, but if you count net asset the US is in the negative GDP per capita, a broke nation. Perhaps it is American Exceptionalism logic, claiming credit where credit is not due, living in a world detached from reality.

"If oil prices don't substantially improve and Russia continues to spend the way it does on the military it will simply go broke." this is even funnier, Russian does not use USD in Russia, nor Russian government pay its MIC in USD, meanwhile Russian Central Bank can print Ruble thru the thin air just like the Fed, why does oil price have any relationship with Russian internal spending? Another example of "completely triumphalist and detached from Russia's economic realities" which is defined by meaningless Wall Street economic indices and snakeoil economic theories and rhetoric taught in the western universities.

Andrei Martyanov [AKA "SmoothieX12"] , Website

... ... ...

P.S. No serious analyst takes US GDP as 18 trillion dollars seriously. A huge part of it is a creative bookkeeping and most of it is financial and service sector. Out of very few good things Vitaly Shlykov left after himself was his "The General Staff And Economics", which addressed the issue of actual US military-industrial potential.

Then come strategic, operational and technological dimensions. You want to see operational dimension -- look no further than Mosul which is still, after 6 months, being "liberated". Comparisons to Aleppo are not only warranted but irresistible.

In general, overall power of the state (nation) is not only in its "economic" indices. I use Barnett's definition of national power constantly, remarkably Lavrov's recent speech in the General Staff Academy uses virtually identical definition.

[Apr 20, 2017] Against False Arrogance of Economic Knowledge

Notable quotes:
"... By Amit Bhaduri, Professor Emeritus, Jawaharlal Nehru University and Visting Professor, Council for Social Development. Originally published at the New Economic Perspectives website ..."
"... why do we accept the artificial devolution of political economy into economics and politics? ..."
"... gets interest from ..."
"... Economics should be transferred to the divinity school. Then it will be untouchable! ..."
Apr 19, 2017 | www.nakedcapitalism.com
Yves here. I'm using the original headline from INET even though "false arrogance" seems like rhetorical overkill. After all, arrogance and hubris are closely related phenomena (my online thesaurus list "arrogance" as the first synonym for "hubris"). But in Greek tragedies, the victims of hubris were all legitimately accomplished, yet let their successes go to their heads. Thus the use of "false arrogance" presumably means that economists' high opinion of themselves is not warranted.

By Amit Bhaduri, Professor Emeritus, Jawaharlal Nehru University and Visting Professor, Council for Social Development. Originally published at the New Economic Perspectives website

The problem of any branch of knowledge is to systematize a set of particular observations in a more coherent form, called hypothesis or 'theory.' Two problems must be resolved by those attempting to develop theory: (1) finding agreement on what has been observed; (2) finding agreement on how to systematize those observations.

In economics, there would be more agreement on the second point than on the first. Many would agree that using the short-hand rules of mathematics is a convenient way of systematizing and communicating knowledge - provided we have agreement on the first problem, namely what observations are being systematized. Social sciences face this problem in the absence of controlled experiments in a changing, non-repetitive world. This problem may be more acute for economics than for other branches of social science, because economists like to believe that they are dealing with quantitative facts, and can use standard statistical methods. However, what are quantitative facts in a changing world? If one is dealing with questions of general interest that arise in macroeconomics, one has to first agree on 'robust' so-called 'stylized' facts based on observation: for example, we can agree that business cycles occur; that total output grows as a long term trend; that unemployment and financial crisis are recurring problems, and so on.

In the view of the economic world now dominant in major universities in the United States - with its ripple effect around the world - is these are transient states, aberrations from a perfectly functioning equilibrium system. The function of theory, in this view, is to systematize the perfectly functioning world as a deterministic system with the aid of mathematics. One cannot but be reminded of the great French mathematician Laplace, who claimed with chilling arrogance, two centuries after Newton, that one could completely predict the future and the past on the basis of scientific laws of motion - if only one knew completely the present state of all particles. When emperor Napoleon asked how God fitted into this view, Laplace is said to have replied that he did not need that particular hypothesis. Replace 'God' by 'uncertainty', and you are pretty close to knowing what mainstream macro-economists in well-known universities are doing with their own variety of temporal and inter-temporal optimization techniques, and their assumption of a representative all knowing, all-seeing rational agent.

Some find this extreme and out-dated scientific determinism difficult to stomach, but are afraid to move too far away, mostly for career reasons. They change assumptions at the margin, but leave the main structure mostly unchallenged. The tragedy of the vast, growing industry of 'scientific' knowledge in economics is that students and young researchers are not exposed to alternative views of how problems may be posed and tackled.

This exclusion of alternative views is not merely a question of vested interest and the ideological view that we live in the best of all possible worlds where optimum equilibria rule, except during transient moments. It stems, also, from a misplaced notion of the aesthetics of good theory: Good theory is assumed to be a closed axiomatic system. Its axioms can, at best, be challenged empirically - e.g. testing the axiom of individual rationality by setting up experimental devices - but such challenges hardly add up to any workable alternative way of doing macro-economics.

There is however an alternative way, or, rather, there are alternative ways. We must learn to accept that when undeniable facts stare us in the face and shake up our political universe - e.g. growing unemployment is a problem, and money and finance have roles beyond medium of payment in an uncertain world shaken by financial crises - they are not transient problems; they are a part of the system we are meant to study. It is no good saying my axiomatic system does not have room for them. Instead, the alternative way is to take each problem and devise the best ways in which we are able to handle them analytically. Physicist Feynman (economist Dow (1995) made a similar distinction) had made a distinction between the Greek way of doing mathematics axiomatically, and the Babylonian way, which used separate known results (theorems) without necessarily knowing the link among them. We must accept this Babylonian approach to deal with macro-economic problems, without pretending that it must follow from some grand axiom.

Awareness of history must enter economic theory by showing that concepts such as cost, profit, wage, rent, and even commercial rationality have anthropological dimensions specific to social systems. The humility to accept that economic propositions cannot be universal would save us from self-defeating arrogance.

8 0 0 1 0 This entry was posted in Guest Post , Ridiculously obvious scams , Science and the scientific method , The dismal science on April 19, 2017 by Yves Smith .
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Subscribe to Post Comments 63 comments fresno dan , April 19, 2017 at 10:03 am

I can't tell you how much I agree with the article.
For example, what CRITERIA are used that something is a "good" job. Before you even start to debate the "facts" at least set up the criteria by which you will evaluate them. It seems evident to me (pension, "good" – what is "good" health care) but apparently, one of the "pre-eminent" economists, at least according to another economist, thinks part time jobs are just as good as retail .

http://cepr.net/blogs/beat-the-press/paul-krugman-gets-retail-wrong-they-are-not-very-good-jobs?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+beat_the_press+%28Beat+the+Press%29

Cujo359 , April 19, 2017 at 1:10 pm

It works for me as an executive summary, but almost every paragraph would probably require a similarly-sized essay to explain it. I agree with its judgment that too many economists view the world as being governed by some sort of universal economic law (or "laws"), when in reality those laws work in very limited circumstances. Whether it's possible there could be such laws some day, I don't have an opinion one way or another, and nothing in this article sheds much light on that issue.

Benedict@Large , April 19, 2017 at 1:20 pm

It's my experience that the overwhelming number of economists don't know squat about employment/ unemployment, including why and employer hires and why people look for and accept jobs. I assume this is because all of these things are rare event in the personal lives of economists, who spend little time looking for or between jobs. An economist is either employed, or he/she is not an economist, and so once they gain experience with the above, they are no longer in a position where they can speak about it among others still in the field.

jrs , April 19, 2017 at 2:19 pm

pension + black lung = good job? I mean if we're saying coal mining is a "good job" now noone who can do better wants it though, that's what a "good job" it is. Compensation matters but so do working conditions, and by the way externalities matter, and "coal mining" as a good job certainly doesn't account for that and the whole community being a cancer cluster etc.

Moneta , April 20, 2017 at 8:20 am

The thing is that there are an awful lot of bad jobs that need to be done and will never go away.

Dead Dog , April 19, 2017 at 5:24 pm

As an economist, now semi retired (author, handyman, carer ), I can speak of my own experiences.

I think one aspect of my degree course was a lack of normative studies and not enough, 'well that is the mainstream theory, now this is what we observe in practice' (and why eg control fraud, captured political interests)

We were also mispoken to about how private banks create money, taxes fund government spending and so on.

My choice to study economics was regretted years later, yet it gave me a lift up career-wise.

It now seems sad that the profession has become mis-trusted and denigrated. We don't all think alike.

Moneta , April 20, 2017 at 8:36 am

When I studied economics, I realized how absurd a lot of it was so I answered according to what the prof wanted to see.

However, I'm under the impression that my education in a Cdn university was way less dogmatic than in the US.

Externalities were discussed, as was the dubious quality of GDP growth. I had a book on the history of the Cdn financial system. It explained very well how we went from gold standard to current system.. and how the leading countries used devaluations (France, UK, US) to their advantage.

The problem with objective economists is that they realize that there exists something called the law of unintended consequences. Once you realize there are too many variables to control, you become a leaf in the wind. And no one likes ambivalent people. They want leaders who KNOW the answers. So leaders who appear to have answers are chosen.

Eric Anderson , April 20, 2017 at 2:10 pm

Well said. I always appreciated having my undergraduate economic theory class delivered by an active duty Marine Corp Major. A hardened realist with a talent for illuminating theory.

sgt_doom , April 19, 2017 at 6:51 pm

No offense to Dean Baker, but what doesn't Krugman NOT get wrong? His public disagreement with Real Economist, Steve Keen, would have been hilarious had it not been so pathetic in demonstrating either what a sheer idiot he is, or professional liar, whatever the case may be. (Krugman was claiming that banks do not create credit as Krugman has no understanding of that rather simple fractional reserve banking system. I once wrote to Krugman to correct him on his supply-and-demand theory as to the cause of that incredible spiking upwards of oil/energy costs around 2008, even though the Baltic Exchange Index ad pretty much collapsed, with an incredible number of oil tankers floating off the coasts of Singapore and Malaysia, in an inactive state – – attempting to explain to him about Goldman Sachs and Morgan Stanley, et al., speculating up the prices on ICE via commodity futures speculation or wash sales, and he didn't get that either!)

But this reminds me of a local (Seattle) witless talk show (KIRO radio station: the John and Curley Show) where the two snarky hosts, as ignorant as can be, go on and on about their love of globalization, scoffing at those who don't understand that offshoring manufacturing (they ignored all the other categories) jobs to China and elsewhere was most clever, and "freed up America to manufacture high-end goods" - evidently ignorant of the fact as to where most chip fabs are located, and that 70% to 100% of many auto parts and aircraft parts are manufactured overseas, shipped back to America only for assembling purposes.

That ultra-boondoggle, the F-35, is manufactured across 9 foreign countries plus America - wonder why it's such a cluster screw-up, huh?

JustAnObserver , April 19, 2017 at 10:16 am

In Greek tragedy wasn't hubris always followed by nemesis as the Gods took their revenge on the upstart humans ?

witters , April 19, 2017 at 6:03 pm

A further aside: I don't see all Greek tragedies as turning on hubris. Where is the hubris, say, of Oedipus? He is the King, there is a plague, the people call on him for help, he helps. And the plague is vanquished (mind you, he and his family – the ones still living – are in a mess. But that – Sophocles seems to be saying – is Life).

RBHoughton , April 19, 2017 at 8:22 pm

The important thing according to the Greek scholar Michael Scott is to recognize that Greek theater and Greek democracy are joined at the hip. The former educated the electorate in the difficult choices they would have to make as managers of their own political existence. We have political theater today but no-one considers it instruction in one's civic duty.

JTMcPhee , April 19, 2017 at 10:18 am

"We" here can say it to each other, over and over, in different and ever-better-documented ways, that almost all economics and the "findings" it generates, and almost all economists and their credentials, are BS, MS, Ph.D (bullish!t, more sh!t, piled higher and deeper). But how to reach a larger, and large enough, set of people who actually have votes that count and can "call bullsh!t" and demand and get an end to the "policies" that are built on and gather "legitimacy" from the "findings" of all those faux 'economists?" Who after all do have those (feedback-loop-granted) "credentials," and so many sous-chefs to keep pumping out the mega-gallons of Bernays sauce to make the sh!t sandwiches seem au courant, de rigeur, and somehow palatable?

washunate , April 19, 2017 at 10:35 am

Agreed, I think that's the issue. Debating whether or not economics is a science plays right into the prevailing power structure. Rather, the question is why do we accept the artificial devolution of political economy into economics and politics? There are lots of quantitative (and qualitative) "facts" in the world about economics; it can be a scientific discipline like any other. The important civic debate is the political part: what values should guide our interpretation and implementation of those economic understandings?

nycTerrierist , April 19, 2017 at 11:28 am

x1000!

Left in Wisconsin , April 19, 2017 at 7:11 pm

why do we accept the artificial devolution of political economy into economics and politics?

This is the right question if we change "why to we accept" to "how is it that we now have" – that is, if we ask an empirical, historical question and not a metaphysical or psychological question. In an academic sense, I would say the answer has to do with a long battle within economics that was decisively won in the 50s or 60s by one "school" to the extent that they could ostracize and ignore alternative "schools" without much effective criticism, and an implicit "bargain" with sociology and political science to craft an academic division of labor. And then, inertia and serious pushback against any and all challengers.

In the non-academic world, the answer has to do with a certain confluence of interest between neoclassical economics and existing social and economic power.

a different chris , April 19, 2017 at 8:15 pm

(never mind, I seem to have missed half of your good post)

Ulysses , April 19, 2017 at 11:16 am

"But how to reach a larger, and large enough, set of people who actually have votes that count and can "call bullsh!t" and demand and get an end to the "policies" that are built on and gather "legitimacy" from the "findings" of all those faux 'economists?"

I think one method, to move in that direction, is to make a very small number of very specific demands. Single payer healthcare, and a living wage. We demand them!! Why don't we have them??!!

When the "economists" tie themselves up into illogical pretzels, trying to "explain" why we can't have these nice things, they destroy their credibility– to the point where their dogma is revealed as false and inhuman. Then, we can shake off their dead hand and begin to build a new society on more rational and humane principles.

dontknowitall , April 19, 2017 at 1:02 pm

I understand and share your frustration with a brand of economics being used as a cudgel to tell us we cannot have nice things even as each individual US state's GDP is the equivalent to that of (at least) a medium EU nation which individually can afford far better health insurance schemes than we do. It should be the economists' job to smooth the way, to find ways so that we can have nice things not just leave it at can't.

I disagree with washunate that to engage with economists who are failing is a waste of time that plays into the hands of the prevailing power structure. Neoliberal economists should be hearing from us that they are not scientists no matter how much math they dress their pet theories with. The greatest glory of a science is the predictive powers of its foundational theories and in that regard neoliberal economics fails spectacularly. It is not by any definition a science and they should hear it as often as possible. Of course they know this in their bones but their theories give their funders significant political cover as they seek more undeserved goods for themselves. It is our job to remind everyone who will hear that neoliberal theories are fiction not science.

steelhead23 , April 19, 2017 at 7:15 pm

Why don't we have universal health care? Sadly, I think the answer is quite simple – the elasticity of demand for health is infinite as the alternative is death. Hence, Genentech can and does charge $20,000 for a round of rituxan, which is very effective on non-Hodgkins lymphoma. Is it worth it? Of course it is – lymphoma is deadly.

My point is that while the social benefit of universal health care is high, so is the opportunity cost to the healthcare industry. And since the industry is free to bribe politicians (sans a quid pro quo of course) we are unlikely to ever get it. As discussed above, economics divorced from politics is useless.

a different chris , April 19, 2017 at 8:20 pm

wow pretty awesome that Europe/Great Britain and Japan don't have politicians . just teasing you, how though did those countries manage to get around your problem is the question//

AbateMagicThinking but Not money , April 20, 2017 at 12:22 am

The British learned from the washout of the first world war that the usual politicians could not be trusted to produce a country fit for heroes as was promised, so they voted for socialism.

As for the Japanese, my memory is that the US set their health system up! Dang!

AbateMagicThinking but Not money , April 20, 2017 at 12:49 am

The British polititician who lost out big time in that election that brought the Labour Party's version of socialism into power, was Winston Churchill – after the end of World War Two.
It goes to show that you might need one kind of leader in existential-wartime, and another for peacetime. However, nowadays how do you know whether the there is an existential struggle or not?

Katharine , April 19, 2017 at 10:38 am

Yes, hubris was the tragic flaw. Treating it as a mere synonym for arrogance is a fine example of why to avoid thesaurusi. A good dictionary with synonymies is more reliable.

Katharine , April 19, 2017 at 11:34 am

That was supposed to be a reply to JustAnObserver. Don't know what happened.

sgt_doom , April 19, 2017 at 6:57 pm

Speaking of hubris, there's a recently published book by a "professor of national security" (good luck with that one!!!), Tom Nichols, titled: The Death of Expertise , and it's a real hoot!

Not because the author got anything right, he got almost everything completely wrong, and simply for that reason!

At one point in this garbage book by Nichols, he is repeating an exchange between a political appointee whom he believes to be an "expert" and a grad student concerning Reagan's spaced-based missile defense {SDI or Star Wars - in this case I believe it was the space-based platform} of which much of it turned out to be a hoax meant to mislead the Soviets – – and historically we know the grad student was correct, and Jastrow, if I recall his name correctly, was most incorrect – – but you would never know it from this author! -- !

(If you observe any American space-based missile platforms, please be sure to let me know!)

flora , April 19, 2017 at 8:40 pm

Hubris: "My theory, divorced from reality, supersedes reality."

CD , April 19, 2017 at 11:09 am

Besides acknowledging that economic theory is bound to time and society, it would also be good to give some fresh thought to familiar economic concepts we take as Bible-given.

Let's re-examine the ideas of interest [can we do without it], growth [can we have a no-growth economy], and differential pay [need we pay a much higher salary for "higher" work],

I would go on to look at profit [should there be profit in all economic activities, such as health care, education, and others], oligopolies [is it good to have very large corporations], and competition [should we promote competition is all aspects of life].

Some of these have been questioned in these pages, such as the question of oligopoly. I encourage raising more and continued questioning, as we've done here.

JTMcPhee , April 19, 2017 at 1:00 pm

It tends to draw fire when I mention it, but "Sharia or Islamic banking and finance" is supposed to be done without any interest. And the system (now under assault by Western interest-holders, by physical violence and subversion of many types, and co-optation via corruption) kind of relies on actual trust and risk-sharing. Here's some details for anyone "interested:" http://www.islamic-banking.com/islamic_banking_principle.aspx

So there is a model to look toward, though there will be all kinds of nationalist and kleptocratic resistance, http://www.wnd.com/2015/07/major-u-s-city-poised-to-implement-islamic-law/ . Though of course because Muslims have money, our banksters are adapting and even bringing semi-pseudo-Sharia banking and finance inside Western borders, https://www.usatoday.com/story/money/business/2014/10/11/shariah-compliant-islamic-financing-usa-europe/16828599/ .

Once again, "we" need to look at what "we" means - hardly a collective with any mass or teeth, mostly just an aspirational conversation tic.

Larry Motuz , April 19, 2017 at 1:29 pm

Thank you for your first reference, JTMcPhee, from the Institute of Islamic Banking. It makes a great deal of sense that lenders bear risk along with borrowers when we are talking about financing entrepreneurship. In this view, the lender has an interest in rather than gets interest from . [I very much suspect that the former meaning became detached from the latter very early on in human history, which is why the latter was condemned as 'usury', a result itself of an imbalance of power leading to coercive lending.]

I wonder, however, about 'consumer lending' where there is clearly no entrepreneurial risk.

Do you have a useful reference about how this 'consumer lending' occurs without 'interest' in the Islamic world?

JTMcPhee , April 19, 2017 at 1:36 pm

Try this: http://news.bbc.co.uk/2/hi/business/8401421.stm
It's not easy being halal Not when all that "green" is floating around

fresno dan , April 19, 2017 at 11:14 am

https://www.theguardian.com/global-development-professionals-network/2017/apr/06/kate-raworth-doughnut-economics-new-economics

In 1955, the economist Simon Kuznets thought he had found such a law of motion, one that determined the path of income inequality in a growing economy. The scant data that he could gather together seemed to suggest that, as a nation's GDP grows, inequality first rises, then levels off, and ultimately starts to fall. Despite Kuznets' explicit warnings that his work was 5% empirical, 95% speculation and "some of it possibly tainted by wishful thinking", his findings were soon touted as an economic law of motion, immortalized as "the Kuznets Curve"– resembling an upside-down U on the page – and has been taught to every economics student for the past half century.

As for the curve's message? When it comes to inequality, it has to get worse before it can get better, and more growth will make it better. And so the Kuznets Curve became a perfect justification for trickle-down economics and for enduring austerity today in the pursuit of making everyone better off some day.

Forty years later, in the 1990s, economists Gene Grossman and Alan Krueger thought they too had found an economic law of motion, this time about pollution. And it appeared to follow the very same trajectory as Kuznets' curve on inequality: first rising then falling as the economy grows. Despite the familiar caveats that the data were incomplete, and available for local air and water pollutants only, their findings were quickly labeled the "Environmental Kuznets Curve". And the message? When it comes to pollution, it has to get worse before it can get better and – guess what – more growth will make it better. Like a well-trained child, growth will apparently clean up after itself.

Except it doesn't.
===================================================================
More fuel to the fire

MyLessThanPrimeBeef , April 19, 2017 at 2:11 pm

They both seem typical of the human search for knowledge, with or without resorting to the Scientific Method.

Typical in that

1. we fail to recognize our knowledge is always partial and limited
1A. Sometimes with the added arrogance of saying we know it's partial and limited
(Some can't afford that added arrogance, because they have been exposed already, like, say, fortune tellers)

And yet
2. we use that knowledge as if it's complete and applicable everywhere.

Michael Hudson , April 19, 2017 at 11:21 am

The Greek concept of hubris was not merely arrogance, but involved an INJURY to others. (I discuss this in J is for Junk Economics.) The main examples were creditors and land monopolizers - and kings. Nemesis not only fight hubris, but specifically supported the weak and poor who were the main injured parties. The iconography is quite similar to Sumerian Nanshe of Lagash.
So the concept of hubris is linked to affluenza: irresponsibility of wealth, injuring society at large.

HopeLB , April 19, 2017 at 3:31 pm

My Lord! The best economist on the planet is commenting! Our Economist God! (As someone here aptly characterized you a few weeks ago when Yves ran your discussion of Jubilees.)
I'll come right out with it, I'm a Michael Hudson super fan/groupie and after Yves published one of your articles, which of course, I had already read being a big fan/internet tube tracker, I suggested we concerned citizens, get a Michael Hudson fan club going and somehow convince you to take your stellar, economics distilling/demystifying self on the road along with other exemplary economists and some musicians and comedians. Like that stadium event you did in Europe or that Irish Econ Conference, but this would be for the education of the vast citizenry, hence the addition of a bit of music/comedy to entice. A touring TED/Coachella or South by Southwest but for the Economic Edification of the 99%. (You wouldn't neccessarily have to deliver all of your addresses in person. Some could be taped.)
You would be bigger than Bernie if the millenials became familiar with your work, but more importantly, you and other like minded economists, could arm people with the deeper understanding that is essential to overturning the prevailing paradigm.

Thank You For Your Works!
Hope

ps I looked into getting Economic Rock Star as a website but it is taken.

clinical wasteman , April 19, 2017 at 11:53 pm

Yes, 'injury' as in injustice -- Of course that may entail physical damage, but the recent tendency to reduce 'injury' to that narrow sense alone misses most of the point.
Thanks for the connection to 'hubris', concerning which I was Classically clueless until a few minutes ago. If hubris corresponds to injury in the proper sense, perhaps 'arrogance' should be paired with 'insult', i.e. the gratuitous gloating (= self-aggrandizement of the unjust) and gleeful blaming of the injured that at least in living memory seems almost always to be packaged with the injustice?

fresno dan , April 19, 2017 at 11:23 am

https://www.bloomberg.com/view/articles/2017-04-18/california-tries-to-refill-its-biggest-reservoir

None of these practices is new, although their use has expanded over the years. What does seem to be new, as Bettina Boxall of the Los Angeles Times reported this week, is that some California farmers are now experimenting with flooding fields that have grapevines and almond trees growing on them. And in general, people in California are paying a lot more attention to groundwater than they used to.

In 2014, the California Legislature approved a package of groundwater-management laws - long after most other Western states had done so - that are now slowwwwwly beginning to take effect. Local groundwater-management agencies are being formed that will have to come up with plans to reach groundwater sustainability within 20 years.

========================================================
You can look at this optimistically or pessimistically. With the population growing year, after year, after year, it doesn't take high intelligence that water demand will exceed water supply. And yet CA government choose to deal with this freight train coming down the tracks in ..2014.

Arizona Slim , April 19, 2017 at 1:50 pm

And, once again, the elephant in the room is not addressed. Population growth.

Too many people in this world already. We need to question the pro-natalist bias in our culture.

Spring Texan , April 19, 2017 at 2:14 pm

Yes. See this NY Times article from this week. https://www.nytimes.com/2017/04/16/business/fewer-children-in-greece-may-add-to-its-financial-crisis.html

Wisdom Seeker , April 19, 2017 at 3:35 pm

> With the population growing year, after year, after year, it doesn't take high intelligence that water demand will exceed water supply.

Supply is not fixed. A lot of the current "supply" (rainfall) isn't being retained, stored, or used intelligently. So there's still quite a bit of room for population growth, particularly in the northern, wetter parts of the state. Even without artificial restrictions on usage.

On the other had, I agree with the point that humanity should not have as its primary goal the maximization of population on a single finite sphere. And thus economics should not have as its primary goal the maximization of "growth".

flora , April 19, 2017 at 11:30 am

"The problem of any branch of knowledge is to systematize a set of particular observations in a more coherent form, called hypothesis or 'theory.' Two problems must be resolved by those attempting to develop theory: (1) finding agreement on what has been observed; (2) finding agreement on how to systematize those observations."

How will modern economists agree to agree on anything real now that post-modernist thought and critique has entered the economics field?

"But Foucault had belatedly spotted that post-modernism and "neo-liberal" free-market economics, which had developed entirely independently of each other over the previous half-century, pointed in much the same direction. "
http://www.economist.com/node/8401159

Thanks for this post.

flora , April 19, 2017 at 1:00 pm

adding: The economists who use a post-modernist approach( all is uncertain and events are transient and therefore immaterial to the core theory) to defend a scientific determinist* core theory are engaging in double-think. I'm not an economist so maybe there's a there there I cannot see.

*
"Popper insisted that the term "scientific" can only be applied to statements that are falsifiable. Popper's book The Open Universe: An Argument For Indeterminism defines scientific determinism as the claim that any event can be rationally predicted, with any desired degree of precision, if we are given a sufficiently precise description of past events, together with all the laws of nature, a notion that Popper asserted was both falsifiable and adequately falsified by modern scientific knowledge.

"In his book, A Brief History of Time, Hawking claims that predictability is required for 'scientific determinism' (start of chapter 4). He defines 'scientific determinism"" as meaning: 'something that will happen in the future can be predicted.' "

http://psychology.wikia.com/wiki/Scientific_determinism

fresno dan , April 19, 2017 at 11:37 am

https://www.bloomberg.com/view/articles/2017-04-18/why-social-networks-are-becoming-too-viral

By measures that register actual human engagement – rather than fake accounts and bot activity - Facebook does not seem to be growing at all. In 2016, its users generated about 25 percent less original content than in 2015. The time users spend on Facebook dropped from 24 hours in mid-2015 to 18.9 hours in February, Comscore reported.

========================================
One can only hope.
I am only on Facebook because a friend and co-worker signed me up (without my knowledge or consent, but I think most people looked upon it like getting a greeting card) back in the day when the Facebook fad was at its peak. And I was interested in it as a social and economic phenomenon.

My own anecdotal experience is that the most ardent users (multi daily postings) have declined by 95%. The occasional 2 or 3 times weekly posters are down to once monthly, and so on.
And the response to postings seems to have had even greater declines. Even good friends who I used to TRY and keep up with postings, I scarcely ever bother now – and when I do open one, people who used to get near 100 "looks" have 2 or 3 – maybe once in a while for something real (somebody died, instead this is a picture of a meal I eated) , maybe 5.

Woolworths used to be a juggernaut – so was Sears. Who remembers "My Space" ???

Arizona Slim , April 19, 2017 at 1:55 pm

The Presidential election of 2016 did it for me.

I saw too many people turning into Trump Fraidy Cats before the election ("Vote for Hillary because Trump! He's so awful!") or Vote Shamers ("You're voting third party? Shame on you!").

After the election, Facebook seemed like a psych ward. Too many sobbing, crying, and raving loons for my taste.

Cutting back on Facebook is part of my larger goal of spending less time on social media and more time in social reality.

Cujo359 , April 19, 2017 at 2:00 pm

I had a similar experience on Twitter, which is why I stopped going there. Too depressing.

Kalen , April 19, 2017 at 11:49 am

Bravo, another critical issue absent from MSM or even worse purposefully being confused.

It would help a lot if people take time to understand the money in itself that permeates every aspect of life since it is a central feature of any financial system under any economic system ancient or contemporary.

Here is an simple essay that explains without financial jargon what money is in itself as a social construct and whom in reality it serves:

https://contrarianopinion.wordpress.com/2015/04/14/plutus-and-the-myth-of-money/

Disturbed Voter , April 19, 2017 at 12:41 pm

Economics isn't economical, it is political-economics. Politics first, economics second. Politics is the art, not the science, of sharing out the wealth, power and fame in a society in an organized way. If your politics is corrupt, then your economics will be corrupt also.

Blame Pythagoras. From Pythagoras and Croesus, we got the idea that value was a number, and that everything had a value, and that a market (aka city state) is where the hidden hand determined the relationship between prices, goods and services. The actual "cost" per capita, of running a subsistence agrarian society hasn't changed since the days of Babylon. We simply have more technical bookkeeping (and accounting). A shekel was the weight of 180 grains of dried barley seed. The Babylonians didn't have a primitive society they had monarchy, theocracy, militarism and receipts. A thing might be valued in so many shekels of silver, but the receipt accomplished what a coin would have, because it was honored. Clay money instead of paper money. You got your receipt for your socialist food dole, went to the temple granary to pick it up (this was long before Rome), visited the temple prostitutes (way better than Roman games), then went home. And as has been pointed out, this was a clay fiat and honesty was just as vanishing then as now. And yes, it was a debt system, not a credit system. The US and the world has moved from a credit system to a debt system in the last 100 years. The Great Whore, Babylon is still awaiting her destiny.

"Daniel reads the words MENE, MENE, TEKEL, PARSIN and interprets them for the king: MENE, God has numbered the days of your kingdom and brought it to an end; TEKEL, you have been weighed and found wanting; and PERES, the kingdom is divided and given to the Medes and Persians."

Paul Greenwood , April 19, 2017 at 1:19 pm

Having once held a 1776 edition of Wealth of Nations in my hand I recall Smith was a Moral Philosopher and that Economics was a branch of Moral Philosophy choosing between Goods and Bads and seeing Utility Functions as Demand Curves.

Then I recall Keynes, the Mathematician, writing beautiful prose in The General Theory. Somewhere the Reduced Form Equation boys started to play with Stochastic Variables to make the R2 fit Deterministic equations replaced Moral choices and an obsession with Beta proceeded to ignore Alpha.

Economics is something of an academic joke. Steve Keen has introduced some life into a dead subject with his Hyman MInsky analysis since so much of Economic Theory as propounded is simply a Java Box running inside the main system

Hope Larkin-Begley , April 19, 2017 at 5:35 pm

Steve Keen is great like Michael Hudson. Did you read this hilarious post;

http://eprints.kingston.ac.uk/36353/

flora , April 19, 2017 at 6:18 pm

+1. Moral philosophy. Yes.

Cujo359 , April 19, 2017 at 1:23 pm

We must learn to accept that when undeniable facts stare us in the face and shake up our political universe - e.g. growing unemployment is a problem , and money and finance have roles beyond medium of payment in an uncertain world shaken by financial crises - they are not transient problems; they are a part of the system we are meant to study.

I think studying some of these things might be better left to psychologists. I emphasized the phrase about unemployment as a case in point – it could be argued that we have the unemployment we have right now thanks to telling ourselves, collectively, that we can't employ people. Anyone who chooses to look around and observe can find things we could be paying people to do, like fixing our streets and bridges, educating our young, exploring space and advancing science, providing medical care to the significant portion of our population who don't have access, but we are told that this would be bad for some reason, and many of us seem to believe this.

I don't know if that confirms the author's ideas or not, but as several of us have observed now in these comments, our economic problems have less to do with the dismal science (or lack of it) and more to do with what people are inclined to believe is true, regardless of the facts.

PKMKII , April 19, 2017 at 2:15 pm

Economics needs to think of itself as a branch of sociology, and not money physics.

Justicia , April 19, 2017 at 3:05 pm

Actually, economics is more like a branch of medieval scholasticism. It's about forcing reality to fit dogma by imposing methodological and epistemological gag rules on its practitioners so that they're blinded to substance by form - and the non-expert public is bamboozled into mute acquiescence. Econned, as Yves would say.

Andrew Baker , April 20, 2017 at 7:46 am

+ 1

Spring Texan , April 19, 2017 at 2:18 pm

Yes, I'm baffled that we hear all this about oh jobs are going away becuz robots and maybe UBI and on and on when there are SO MANY UNFILLED JOBS staring us in the face where filling them would be of enormous benefit to all. Are they looking around at ALL?

Thanks, Cujo349

Cujo359 , April 19, 2017 at 2:59 pm

As you can see, I'm baffled, too. UBI might be a good idea, and various forms of technology have certainly eliminated jobs over the years, but when so much work remains to be done, I don't see how you can argue that we've reached an age where most of us are truly unemployable.

FTM, what is employment? Put most simply, it is one person or entity who has money paying someone to perform some task(s), possibly to a minimum acceptable quality. There are many forms of work we do that no one wants to pay us to do. My work at an amateur theatre falls into that category, as does the work of the people in the food bank/soup kitchen next door. Maybe our concept of what constitutes useful work needs to change, too.

Cujo359 , April 19, 2017 at 3:06 pm

Let me revise that to say "most of us who are now unemployed are truly unemployable".

JEHR , April 19, 2017 at 3:27 pm

The place to start paying decent wages is for all kinds of housework, daycare and elder care. All are undervalued and underpaid while that latter two are essential for a healthy community. None of these should be consigned to robots as only human contact can do the job well.

washunate , April 19, 2017 at 3:39 pm

But the irony of basic income is that's one of the things it does. A huge portion of "housework, daycare, and elder care" is better done informally , outside of the GDP-measured formal economy of employers and jobs and wages and benefits, especially given how crappy the formal jobs tend to be in those sectors. Income supports that lack formal work requirements by definition create more time for people to do things in the informal economy.

Left in Wisconsin , April 19, 2017 at 7:18 pm

But wouldn't it be better to pay parents and caregivers for caring? First of all, it's work and deserves to be remunerated like work. Second, keeping care work in the informal economy only "works" if people have other income with which to satisfy their needs and wants. There is no possibility that any basic income grant will provide a single parent with the funds to allow them to work taking care of their children, which is the socially optimal situation in almost all cases.

craazyman , April 19, 2017 at 6:30 pm

pretty funny. that's been standard econ cirricuulum at the University of Magonia for, oh, let's see, 1, 2 3 4 5 6 7 8 9. Nine! Nine years!

Pretty funny. Is this still April 1st? I guess not. Oh well, a day late, a dollar short (no pun intended) is better than a year late and a grand short, or a century late and a million short. There's a pattern there! it goes back to the Testament of Amram, Manuscript B. The Dead Sea Scrolls. That's what we teach in econo 101 during the "money" unit. Money, at the Universtiy of Magonia, is an idea that mediates the boundary wtihin a society between cooperation and conflict.. That's not a theory, it's a reality. Everybody has heard this before in the peanut gallery so I won't reapeat myself.

They should send a delegation from Harvard to the Universtiy of Magonia for a seminar in money and economics. hahahaha. That's pretty funny even to think about. Believe me. They'd learn a few things but they might get ontological shock and end up like MIT mathematical economist Ed Bucks who spent two months in the New Hampshire woods looking at deer through binoculars in search of a theory of economics that could survive a collision with nature AND be deterministic and mathematically rigorous. He pretty much had a nervous breakdown and ended up back at MIT sucking up grant money like a baby at his mamas tits. Many are called, but few are chosen. LOL

wilroncanada , April 19, 2017 at 8:06 pm

Magonia? Isn't that the university that was threatening to move to San Seriffe, because they got a big donation from President Pica?

Expat , April 19, 2017 at 7:10 pm

Economics should be transferred to the divinity school. Then it will be untouchable!

[Apr 17, 2017] In teams, an individuals marginal product is beyond his control

Notable quotes:
"... Secondly, in football there's a high ratio of noise to signal: performances are due in part to luck. This is true not just in football. ..."
"... Thirdly, imagine a top goalkeeper were playing for a better side than Sunderland. His performances would then make a difference to his team's points: a couple of great saves per game would convert losses to draws or wins, rather than 4-0 defeats into 2-0 ones. His marginal product would be higher. ..."
"... This tells us that, in teams, an individual's marginal product is beyond his control: if Pickford had better colleagues, his marginal product would be higher. A similar problem arises in many large firms. As the late Herbert Scarf wrote: ..."
Apr 17, 2017 | economistsview.typepad.com
Peter K. , April 16, 2017 at 08:52 AM
For fans of football/soccer and leftist economics.

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2017/04/against-marginal-product.html

April 16, 2017

AGAINST MARGINAL PRODUCT
by Chris Dillow

David Moyes says Jordan Pickford has been a better player than Dele Alli this season. This set me wondering about marginal productivity theory.

To see my point, think about how we'd test Moyes' claim. We could look at what the two teams did in games which Alli and Pickford missed. But there are too few of these to draw robust inferences, and doing so would be impossible for a player who hadn't missed any games*. Instead, we could compare how Sunderland would have done if Pickford were replaced with a next-best alternative to how S***s would have done with a next-best replacement for Alli. In effect, we're asking: what are their marginal products?

I suspect that Pickford's marginal product consists in converting heavy defeats into narrower ones: this still leaves Sunderland relegated, only with a lesser goal difference. Alli, by contrast, has converted draws or losses into wins. That's a bigger difference.

This, I think, highlights three problems with marginal productivity analysis.

The first is that marginal product is the result of a hypothetical question. For example, in considering my own marginal product, I ask: how would the IC do without me? That's a hypothetical to which we cannot give a precise answer. This is true of much of neoclassical economics. As Noah says:

Demand curves aren't actually directly observable. They're hypotheticals - "If the price were X, how much would you buy?"

In this, he's echoing Sraffa:

The marginal approach requires attention to be focused on change, for without change either in the scale of an industry or in the 'proportions of the factors of production' there can be neither marginal product nor marginal cost. In a system in which, day after day, production continued unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost of a product) would not merely be hard to find - it just would not be there to be found. (Production of Commodities by Means of Commodities, pv)

Secondly, in football there's a high ratio of noise to signal: performances are due in part to luck. This is true not just in football.

Consider two men of equal ability who become CFOs of start-ups. One start-up becomes massive, the other struggles. The man who joined the former will be many times richer than the latter. But that's more to do with fortune than with human capital or marginal product: firms don't usually grow big because they've got a slightly better CFO than the firm down the road. Anyone who's mind isn't befuddled by Randian nonsense will know that our lives and incomes are the product of luck. But we know that people are terrible at distinguishing luck from skill – in part because they suffer from the outcome bias.

Thirdly, imagine a top goalkeeper were playing for a better side than Sunderland. His performances would then make a difference to his team's points: a couple of great saves per game would convert losses to draws or wins, rather than 4-0 defeats into 2-0 ones. His marginal product would be higher.

This tells us that, in teams, an individual's marginal product is beyond his control: if Pickford had better colleagues, his marginal product would be higher. A similar problem arises in many large firms. As the late Herbert Scarf wrote:

If economists are to study economies of scale, and the division of labor in the large firm, the first step is to take our trusty derivatives, pack them up carefully in mothballs and put them away respectfully; they have served us well for many a year. But derivatives are prices, and in the presence of indivisibilities in production, prices simply don't do the jobs that they were meant to do. They do not detect optimality; they aren't useful in comparative statics; and they tell us very little about the organized complexity of the large firm.

For me, flaws such as these mean that marginal product theory doesn't make much sense as an explanation of wage levels. We should abandon it as a mental model in favour of bargaining (pdf) models. In these, matches between workers and jobs lead to surpluses, and the surplus is divided according to the balance of power.

In such models, human capital raises wages insofar as it generates surplus and gives its holders outside options which enhance their bargaining power. But human capital and "marginal product" aren't the whole story. All the things that affect bargaining power, such as technology and unions, also matter. Such models are consistent with the theory that inequality is due to the rise of superstar firms (pdf). They're also consistent with the fact that minimum wages don't destroy many jobs. And they help explain rising CEO pay better than marginal product theory.

What I'm appealing for here is for economists to abandon unscientific just-so stories and to think instead about the real world. In this world, wages are determined not by unobservable entities such as marginal product but by – among other things – power (pdf).

* S***s did well during Harry Kane's injury. Few would say this is evidence that Kane is a poor player, and not should they.

Peter K. -> Peter K.... , April 16, 2017 at 08:56 AM
See Denis Drew. I guess Keynes was in favor of trade unions but Keynesian economists never discuss them. Neither do bloviating, blowhards like EMichael.

PGL used to brag about how Hillary supported striking Verizon workers during the election but that was just a photo-op, like how all of the building trade unions hob-nobbed with Trump. It's BS. Unions have collapsed under the watch of New Democrats. They've done nothing.

In his final speech Obama said we have to beware of automatization. There's no evidence of it. It's an excuse. No, the Democrats have sold us out. So what that they raised taxes on the rich a little. The rich have never had is so good.

Peter K. -> Peter K.... , April 16, 2017 at 09:01 AM
"The first is that marginal product is the result of a hypothetical question. For example, in considering my own marginal product, I ask: how would the IC do without me? That's a hypothetical to which we cannot give a precise answer. This is true of much of neoclassical economics. As Noah says:

Demand curves aren't actually directly observable. They're hypotheticals - "If the price were X, how much would you buy?"

In this, he's echoing Sraffa:

The marginal approach requires attention to be focused on change, for without change either in the scale of an industry or in the 'proportions of the factors of production' there can be neither marginal product nor marginal cost. In a system in which, day after day, production continued unchanged in those respects, the marginal product of a factor (or alternatively the marginal cost of a product) would not merely be hard to find - it just would not be there to be found. (Production of Commodities by Means of Commodities, pv)"

Is this related to the price of airline tickets?

http://www.interfluidity.com/v2/6846.html

Steve Randy Waldman

...

It's a cliché that the government builds "bridges to nowhere" that the private sector never would build. That's true. And it's a credit to the public sector. Bridges to nowhere are what turn nowheres into somewheres. We need many, many more bridges to nowhere.

Finally, I want to express my annoyance at a trope in punditry about air travel that is as common as it is mistaken. Here is Kevin Drum:

So flying sucks because we, the customers, have made it clear that we don't care. We love to gripe, but we just flatly aren't willing to pay more for a better experience. Certain individuals (i.e., the 10 percent of the population over six feet tall) are willing to pay for legroom. Some are willing to pay more for extra baggage. Some are willing to pay more for a window seat. But most of us aren't. If the ticket price on We Care Airlines is $10 more, we click the link for Suck It Up Airlines. We did the same thing before the web too. As usual, the fault lies not in the stars, but in ourselves.

Here is Megan McArdle, in a piece titled (by somebody) "Hate Flying? It's Your Fault":

Ultimately, the reason airlines cram us into tiny seats and upcharge for everything is that we're out there on Expedia and Kayak, shopping on exactly one dimension: the price of the flight. To win business, airlines have to deliver the absolute lowest fare. And the way to do that is . . . to cram us into tiny seats and upcharge for everything. If American consumers were willing to pay more for a better experience, they'd deliver it. We're not, and they don't.

cm -> Peter K.... , April 16, 2017 at 06:35 PM
So it is my fault that for my travel needs, I have very few choices of carriers, if I have a strong preference for few stopovers? As soon as I accept 1-2 additional stops than minimally necessary (and the corresponding doubling or more of travel time, nevermind increased risk of missing flights, delays, etc.), I can find more connections.

My problem, if I pay for the trip, is flight availability. It is usually not an option to pay even twice as much for flying when or how I want or need to.

I know absolutely nothing about the economics of air travel (any experts here?), but how about airport gates and airport passenger/flight processing capacity as bottlenecks, and long-distance flights favoring if not requiring larger aircraft (which cannot use every airport for regular flights). With larger aircraft you have the problem of selling all seats on all flights, which would seem to favor multi-hop trips via major routes, with all the multiple de/boardings, security checks, and as we have recently seen increased chances of "re-accommodation".

cm -> cm... , April 16, 2017 at 06:50 PM
When I travel for business, my choices are further restricted by "appropriate" departure and arrival times. Then it also becomes a multivariate problem - arriving one day earlier leads to one more hotel stay, car rental day, etc.

In my current situation I could "save" the company around a hundred bucks by using a cheaper carrier that has a direct flight from where I am to where I need to go, and for returning, there is a multi-hop flight that takes ~3 hours longer to get home than the hundred bucks more expensive competition (arriving not in the late evening but after midnight), because the first leg of the flight is in the opposite direction of where I need to go. No thanks, if I can avoid it! I take the more "expensive" carrier which has direct flights in both directions.

cm -> cm... , April 16, 2017 at 06:59 PM
It seems to me it may be a similar problem as the debate over public transit experience vs. driving. In public transit, unless your travel endpoints are close to a single route, it is usually the line changes and distance between end stations and the actual destinations that make up half the total time or more.

The problem can be "addressed" by more N-to-N routes, but then the transit agency has a problem with getting enough ridership on every route (and where to store all the transit vessels outside of peak traffic hours, and fleet operation/maintenance overheads, etc.).

reason -> cm... , April 17, 2017 at 08:27 AM
Which is where driverless cars (as taxi alternative) could come in. That is the real potential revolution.

[Apr 13, 2017] personal.lse.ac.uk

Notable quotes:
"... He writes a DSGE model where banks hold sovereign debt, so that bad news about a possible future sovereign default both puts a strain on the funding of banks but also induces them to cut their leverage as a precautionary reaction. ..."
"... This channel for the diabolic loop linking banks and sovereign debt fits reasonably well the behavior of credit spreads across Italian banks and firms, and predicts that the ECB's interventions had a small effect. ..."
Apr 13, 2017 | lse.ac.uk
Luigi Bocola (2014, Penn, Northwestern): Bocola tries to explain the depth of the crisis in Italy after 2011. He writes a DSGE model where banks hold sovereign debt, so that bad news about a possible future sovereign default both puts a strain on the funding of banks but also induces them to cut their leverage as a precautionary reaction.

This channel for the diabolic loop linking banks and sovereign debt fits reasonably well the behavior of credit spreads across Italian banks and firms, and predicts that the ECB's interventions had a small effect.

[Apr 12, 2017] Macroeconomists supposedly failed to anticipate the crisis because they were enamored by models where financial markets and institutions were absent

Apr 12, 2017 | lse.ac.uk

Blanchard (2016), Korinek (2015) and Wren-Lewis (2017) worry that the current standards and editorial criteria in macroeconomics undermine promising ideas, deter needed diversity in the topics covered, and impose mindless work on DSGEs that brings little useful knowledge to policy discussions.

Smith (2016) emphasizes that we have far less data than what we would need to adequately test our models, and Romer (2016) that identification is the perennial challenge for social sciences. Smith (2014) and Coyle and Haldane (2014) characterize the state of economics, not as the perennial glass half full and half empty, but rather as two glasses, one full and the other empty. In their view, applied empirical economists have been celebrating their successes, while macroeconomists lament their losses.

... ... ...

A related criticism of macroeconomics is that it ignores financial factors. Macroeconomists supposedly failed to anticipate the crisis because they were enamored by models where financial markets and institutions were absent, as all financing was assumed to be efficient (De Grawe, 2009, Skidelsky, 2009). The field would be in denial if it continued to ignore these macro-financial links.

One area where macroeconomists have perhaps more of an influence is in monetary policy. Central banks hire more PhD economists than any other policy institution, and in the United States, the current and past chair of the Federal Reserve are distinguished academic macroeconomists, as have been several members of the FOMC over the years. In any given week, there are at least one conference and dozens of seminars hosted at central banks all over the world where the latest academic research is discussed. The speeches of central bank governors refer to academic papers in macroeconomics more than those by any other policymaker.

... ... ...

A separate criticism of macroeconomic policy advice accuses it of being politically biased. Since the early days of the field, with Keynes and the Great Depression, macroeconomics was associated with aggressive and controversial policies and with researchers that wore other hats as public intellectuals. Even more recently, during the rational expectations microfoundations revolution of the 1970s, early papers had radical policy recommendations, like the result that all systematic aggregate-demand policy is ineffective, and some leading researchers had strong political views. Romer (2016) criticizes modern macroeconomics for raising questions about what should be obvious truths, like the effect of monetary policy on output. He lays blame on the influence that Edward Prescott, Robert Lucas and Thomas Sargent had on field. Krugman (2009) in turn, claims the problem of macroeconomics is ideology, and in particular points to the fierce battles between different types of macroeconomists in the 1970s and 1980s, described by Hall (1976) in terms of saltwater versus freshwater camps.

Macroeconomists, instead, are asked to routinely produce forecasts to guide fiscal and monetary policy, and are perhaps too eager to comply. As I wrote in Reis (2010) " by setting themselves the goal of unconditional forecasting of aggregate variables, macroeconomists are setting such a high bar that they are almost sure to fail."

...Forecasting when economic agents themselves are forecasting your forecast to anticipate the policies that will be adopted involves strategic thinking and game theory that goes well beyond the standard statistical toolbox. Very few economists that I know of would defend themselves too vigorously against the frequent criticisms of forecasting failures by economists. As is regularly shown, macroeconomic forecasts come with large and often serially correlated errors.10

...At the same time, the way that forecasts are mis-read and mis-interpreted is part of the problem. As much as economists state that their forecasts are probabilities, and come with confidence bands, they are reported in the media always as point estimates

...Compare how economics does relative to the medical sciences. Analogies across sciences are always very tricky, and must be taken with a large grain of salt. Moreover, surely economists are still far from being as useful as dentists, like Keynes dreamed of, let alone to have made a contribution to human welfare that is close to the one by doctors or biologists. The comparison to make is much more narrow and limited, restricted only to how economic forecasts compare to medical forecasts.

...Currently, the major and almost single public funder for economic research in the United States is the National Science Foundation. Its 2015 budget for the whole of social, behavioral and economic sciences was $276 million. The part attributed to its social and economic sciences group was $98 million.

[Apr 12, 2017] Yes, adding more epicycles will do the trick

Apr 12, 2017 | economistsview.typepad.com
T Read the Reis article and I'm much relieved. State-o'-the-art mascro = which didn't even include financial sectors at the time of the Great Recession (I mean really -how could that be a problem?) - is now on the right track. Yes, adding more epicycles will do the trick. Because as we all know, the sun, moon, planets and stars revolve around the earth. Reply Wednesday, April 12, 2017 at 06:05 AM libezkova -> T... , April 12, 2017 at 08:26 AM
"Yes, adding more epicycles will do the trick."

http://personal.lse.ac.uk/reisr/papers/17-wrong.pdf

This guy is funny (and actually rather clueless, Summers is much better ) defender of "Flat Earth" theory:

== quote ==

A related criticism of macroeconomics is that it ignores financial factors. Macroeconomists supposedly failed to anticipate the crisis because they were enamored by models where financial markets and institutions were absent, as all financing was assumed to be efficient (De Grawe, 2009, Skidelsky, 2009). The field would be in denial if it continued to ignore these macro-financial links.

One area where macroeconomists have perhaps more of an influence is in monetary policy. Central banks hire more PhD economists than any other policy institution, and in the United States, the current and past chair of the Federal Reserve are distinguished academic macroeconomists, as have been several members of the FOMC over the years. In any given week, there are at least one conference and dozens of seminars hosted at central banks all over the world where the latest academic research is discussed. The speeches of central bank governors refer to academic papers in macroeconomics more than those by any other policymaker.
... ... ...
A separate criticism of macroeconomic policy advice accuses it of being politically biased. Since the early days of the field, with Keynes and the Great Depression, macroeconomics was associated with aggressive and controversial policies and with researchers that wore other hats as public intellectuals. Even more recently, during the rational expectations microfoundations revolution of the 1970s, early papers had radical policy recommendations, like the result that all systematic aggregate-demand policy is ineffective, and some leading researchers had strong political views. Romer (2016) criticizes modern macroeconomics for raising questions about what should be obvious truths, like the effect of monetary policy on output. He lays blame on the influence that Edward Prescott, Robert Lucas and Thomas Sargent had on field. Krugman (2009) in turn, claims the problem of macroeconomics is ideology, and in particular points to the fierce battles between different types of macroeconomists in the 1970s and 1980s, described by Hall (1976) in terms of saltwater versus freshwater camps.

...Macroeconomists, instead, are asked to routinely produce forecasts to guide fiscal and monetary policy, and are perhaps too eager to comply.

[Apr 12, 2017] An economics that helps us to live within the doughnut would seek to reduce inequalities in wealth and income.

Apr 12, 2017 | economistsview.typepad.com
reason , April 12, 2017 at 05:36 AM
Sorry if this ends up being a repeat post, but my other attempts to post have been swallowed for some reason. So I'll try again.

A very important post by George Monbiot:
https://www.theguardian.com/commentisfree/2017/apr/12/doughnut-growth-economics-book-economic-model
Reminds me of Hermann Daly. I hope he gets credited.

JohnH -> reason ... , April 12, 2017 at 06:53 AM
Money quote: "An economics that helps us to live within the doughnut would seek to reduce inequalities in wealth and income. Wealth arising from the gifts of nature would be widely shared. Money, markets, taxation and public investment would be designed to conserve and regenerate resources rather than squander them. State-owned banks would invest in projects that transform our relationship with the living world, such as zero-carbon public transport and community energy schemes. New metrics would measure genuine prosperity, rather than the speed with which we degrade our long-term prospects."

Macroeconomists largely stopped paying attention to income distribution and turned their attention to growth decades ago. Even today, folks like Krugman, who are paid handsomely to study inequality, don't like to talk about it much.

[Apr 12, 2017] China validates the general theory

Apr 12, 2017 | economistsview.typepad.com
RGC , April 12, 2017 at 05:16 AM
CHINA VALIDATES THE GENERAL THEORY

Before proceeding, I wish to make it quite clear that in referencing Keynes or Keynesianism, I am referring to John Maynard Keynes of 'The General Theory of Employment, Interest and Money' (GT) and I am not referring to neo Keynesianism or new Keynesianism or any variant of the so-called neo classical synthesis (which, imo, is one of the most dishonest actions ever taken by an academic) devised by Paul Samuelson and others at MIT.

With that said, I would first note that Keynes titled chapter 24 of GT:

"Concluding Notes on the Social Philosophy towards which the General Theory might Lead"

and began the chapter with:

"The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes."

Keynes next remarks on the progress toward equality in Great Britain attained via taxation of income and inheritance taxes and argues that these measures, in conditions of less than full employment, are, contrary to common belief, actually conducive to increased investment:

" Thus our argument leads towards the conclusion that in contemporary conditions the growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is, therefore, removed. "

Keynes particularly approves of taxing inheritances:

"This particularly affects our attitude towards death duties: for there are certain justifications for inequality of incomes which do not apply equally to inequality of inheritances."


Keynes then debunks the theory that interest is a reward for saving:

"The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment.

"I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure"


And then Keynes heralds the "euthanasia of the rentier" and "the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital." because the state can supply adequate capital:

"Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce."


But this "euthanasia" can take place gradually and need not require a revolution:


"I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

"Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward."


Then keynes notes that although his prescription will entail a greater role for the state and "a somewhat comprehensive socialisation of investment" , it will not eliminate the role of individual entrepreneurship:


"In some other respects the foregoing theory is moderately conservative in its implications. For whilst it indicates the vital importance of establishing certain central controls in matters which are now left in the main to individual initiative, there are wide fields of activity which are unaffected. The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community. It is not the ownership of the instruments of production which it is important for the State to assume. If the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialisation can be introduced gradually and without a break in the general traditions of society"


And he proceeds to describe the advantages of individualism:

"Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency - the advantages of decentralisation and of the play of self-interest. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.
"Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative."


And furthermore, not only will the prescribed system be to the advantage of all, it will also forestall the temptation to even more drastic measures and preclude the merchantilist and imperialist temptations of the recent past:

"War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.
"I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account."

https://www.marxists.org/reference/subject/economics/keynes/general-theory/ch24.htm

And how does this relate to China?

The Peoples Republic of China (PRC) began in 1949. Under the leadership of Mao Zedong the PRC introduced Soviet-style Marxism and other "socialization" programs that resulted in famine and other catastrophes, although national sovereignty was established.

Upon Mao's death in 1976 chinese leadership became uncertain. During some transition until roughly 1980 market mechanisms were introduced alongside central planning.

In 1982 Deng Xioping introduced "reform and opening", which meant essentially economic reform internally and a greater focus on foreign trade. And in 1992 he announced a focus on creating a "socialist market economy", which entailed state control of primary industries and banking alongside greater autonomy for secondary commercial enterprises.

Since Deng's reforms, China has far outpaced the rest of the world in economic performance.


Keynes analysed capitalist economies and concluded that "a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. "


The leadership of the PRC analysed and managed the Chinese economy and concluded that a "socialist market economy" was the proper system.


So from opposite directions Keynes and the Chinese arrived at the same destination. Keynes wanted to preserve the market mechanism, the Chinese wanted to preserve Marxist socialism. They each arrived at a centrally-controlled economy with significant market mechanisms.

Perhaps there is a lesson for us there.

[Apr 12, 2017] If you are an economist who believes that the nongovt financial system is basically the only functionary that there should be for the handling the creation of credit in society, you are a shill, not a thoughtful analyst. I doubt you can think outside your blinders.

Apr 12, 2017 | economistsview.typepad.com
JF -> RC AKA Darryl, Ron...

, April 11, 2017 at 09:21 AM
The Chinese do not believe in this stuff, they have read Leviticus though, and plainly understand that they can create credit and erase it anytime they want to do so.

There was an article somwhere here today or yesterday that made points about how the Chinese 'manipulate' affecting the Triffin calculus and domestic pricing trends influencing consumption in order to make a steady growth and transformation of their economic system from where it was in 1980, for a billion plus people. I wish them success.

If you are an economist who believes that the nongovt financial system is basically the only functionary that there should be for the handling the creation of credit in society, you are a shill, not a thoughtful analyst. I doubt you can think outside your blinders.

RC AKA Darryl, Ron said in reply to JF... , April 11, 2017 at 09:28 AM
"The Chinese do not believe in this stuff..."

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

...Specifically, the Triffin dilemma is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the Bretton Woods system. John Maynard Keynes had anticipated this difficulty and had advocated the use of a global reserve currency called 'Bancor'. Currently the IMF's SDRs are the closest thing to the proposed Bancor but they have not been adopted widely enough to replace the dollar as the global reserve currency.

In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China (YES - CHINA) explicitly named the reserve currency status of the US dollar as a contributing factor to global savings and investment imbalances that led to the crisis. As such the Triffin Dilemma is related to the Global Savings Glut hypothesis because the dollar's reserve currency role exacerbates the U.S. current account deficit due to heightened demand for dollars...


...
Implication in 2008 meltdown

In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China explicitly named the Triffin Dilemma as the root cause of the economic disorder, in a speech titled Reform the International Monetary System. Zhou Xiaochuan's speech of 29 March 2009 proposed strengthening existing global currency controls, through the IMF.[1][2]

This would involve a gradual move away from the U.S. dollar as a reserve currency and towards the use of IMF special drawing rights (SDRs) as a global reserve currency.

Zhou argued that part of the reason for the original Bretton Woods system breaking down was the refusal to adopt Keynes' bancor which would have been a special international reserve currency to be used instead of the dollar...


JF -> RC AKA Darryl, Ron... , April 11, 2017 at 11:06 AM
Thanks for sharing. I think the speech was intended to message about the US being part of the problem not to give credit to Triffin. But of course I dont know.

I simply want people to put on different thinking caps, so to speak.

Chris Lowery -> RC AKA Darryl, Ron... , April 11, 2017 at 10:07 AM
Or maybe going to Keynes's bancor?
RC AKA Darryl, Ron said in reply to Chris Lowery ... , April 11, 2017 at 11:03 AM
Something like that sure enough, but a bit more formalized in the area of exchange rates and maybe capital controls as well. In any case a pipe dream in my lifetime. What we are attempting to get that old teaming masses of uneducated voting majority to realize first is that they have been duped. There are tons of alternatives, too many almost. Sovereigns make their own currencies for the most part, tax if they will, and regulate. There are a great many ways to play the game. The idea that industrial policy and capital controls violate some pre-ordained laws of economics is rubbish. OTOH, no nation is free of the external consequences of their economic and currency policies if they must depend upon exchange for any of their necessities.
pgl -> BenIsNotYoda... , April 11, 2017 at 10:32 AM
You sir get what Joan Robinson wrote about this. PeterK? He will never get it as she wrote in the English language.
pgl -> BenIsNotYoda... , April 11, 2017 at 10:31 AM
Exactly! PeterK never got what Expenditure Switching was all about even if Joan Robinson explained it thoroughly.

What we need is more fiscal stimulus globally but these Trumpian nitwits are all banging their heads over Beggar Thy Neighbor nonsense.

Peter K. -> BenIsNotYoda... , April 11, 2017 at 01:54 PM
"everyone who runs a surplus is subtracting from global demand? that is just plain strange."

Depends on how they're doing. Do you understand how they're doing it?

pgl -> BenIsNotYoda... , April 11, 2017 at 07:49 AM
"I can do the accounting with the best of them."

Maybe so. Then do it - and show your homework.

[Apr 12, 2017] The right way forward for macro isn't to go all-in on a hot new theory, or to passionately embrace old paradigms either. The best approach is to adopt more public humility and caution about their theories, while working to understand microeconomics better

Apr 12, 2017 | economistsview.typepad.com
Egmont Kakarot-Handtke , April 11, 2017 at 11:10 AM
Review of the economics troops
Comment on Noah Smith on 'Keynesian Economics Is Hot Again'

There is Orthodoxy with Walrasian microfoundations and it has been nicely defined by Krugman: " most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point."

There is Keynesianism with macrofoundations and they have been nicely defined by Keynes: "Income = value of output = consumption + investment. Saving = income - consumption. Therefore saving = investment."

Both, Walrasian microfoundations and Keynesian macrofoundations are provable false. Methodologically speaking, micro and macro is axiomatically false. It holds, when the premises/axioms/foundational propositions are false or contain nonentities the WHOLE theory/model/analytical superstructure is false. This includes ALL variants of IS-LM from Hicks to Krugman.#1

The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent and all got the pivotal economic concept profit wrong. Because economists lack the true theory their economic policy guidance has NO sound scientific foundation since Adam Smith/Karl Marx.

There is NO use to combine axiomatically false approaches or to periodically alternate between them. What Krugman or Christiano are doing is cargo cultic show biz.

Noah Smith maintains: "The right way forward for macro isn't to go all-in on a hot new theory, or to passionately embrace old paradigms either. The best approach is to adopt more public humility and caution about their theories, while working to understand microeconomics better."

In view of the fact that the profit theory is false since 200+ years, microfoundations are false since 140+ years, and macrofoundations are false since 80+ years, the right way forward for Walrasians and Keynesians is to retire.

Egmont Kakarot-Handtke

#1 For details see 'Mr. Keynes, Prof. Krugman, IS-LM, and the End of Economics as We Know It'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2392856

anne , April 11, 2017 at 12:07 PM
https://www.bloomberg.com/view/articles/2017-04-10/keynesian-economics-is-hot-again

April 10, 2017

Keynesian Economics Is Hot Again
By Noah Smith - Bloomberg

To the growing list of famous mainstream macroeconomists who have publicly criticized their discipline, add another: In a recent essay, * Lawrence Christiano of Northwestern University argues that the Great Recession was an "earthquake" that dramatically changed how researchers think about the U.S. economy.

Christiano is known as a scholar who straddles macroeconomics' great divide. His models adopt the basic form and some of the bedrock assumptions of the New Classicals, the economists who insisted in the 1980s that monetary and fiscal policy can't fight recessions. But he also incorporates some elements of Keynesianism, the idea that aggregate demand shortages exist and can be corrected by the government stimulus. Perhaps as a result of their centrist take on that long-running debate, theories inspired by Christiano's have won pride of place in central banks around the world.

But after the Great Recession, Christiano says, the pendulum should swing decisively in the Keynesian direction:

"The Great Recession was the response of the economy to a negative shock to the demand for goods all across the board. This is very much in the spirit of the traditional macroeconomic paradigm captured by the [simple Keynesian] model The Great Recession seems impossible to understand without invoking shocks in aggregate demand. As a consequence, the modern equivalent of the IS-LM model-the New Keynesian model-has returned to center stage."

Another way of putting this is that Paul Krugman was right. Krugman has long advocated that macroeconomists learn to once again think in terms of simple simple Keynesian theory. And when more fully developed, complex models are needed, Krugman uses the kind of models that Christiano endorses.

As Christiano mentioned, the New Keynesian revolution isn't so new. Even in the 1990s, economists like Greg Mankiw and Olivier Blanchard were arguing that monetary policy had real effects on demand. And at the same time, international macroeconomists were realizing that Japan's post-bubble experience of slow growth, low interest rates and low inflation implied that demand shortages could last for a very long time unless the government rode to the rescue. Krugman, Adam Posen, Lars Svensson, and others were already referring to a Japan-type stagnation as a liquidity trap in the late 1990s, and warning that standard monetary policy of cutting interest rates wouldn't work in that sort of situation.

But the profession didn't listen, and only the smallest deviations from the New Classical orthodoxy were accepted into the mainstream. The idea of fiscal stimulus was still largely taboo. Nobel prizes were awarded to the economists who made theories in which demand shortages can't exist, while no Nobels were given to New Keynesians for suggesting otherwise. When the Great Recession hit, some prominent macroeconomists pooh-poohed the idea that stimulus could help.

Christiano's essay should serve as a needed rebuke to the profession for resisting Keynesian ideas just when they were needed most. But it also raises an uncomfortable question: Why didn't macroeconomists catch on until years after disaster struck?

One explanation is sociological. Perhaps the influence of legendary figures like Robert Lucas, Thomas Sargent and Edward Prescott -- all anti-Keynesians who now have big gold medals from Sweden -- was enough to scare younger economists away Keynesian ideas. Some of macroeconomics' internal critics, such as World Bank chief economist Paul Romer, have suggested as much. Political considerations might have played a role as well -- to many economists on the free-market end of the ideological spectrum, Keynesianism represents unacceptable government meddling.

But these explanations, by themselves, are unsatisfying. In most scientific fields -- biology or astronomy, for example -- the weight of evidence is enough to overcome social fads and political bias. Even in most areas of economics, empirical results gradually push the profession in one direction or another. For example, relatively few economists now believe a $15 minimum wage is likely to reduce employment very much; a plurality is uncertain. The steady drumbeat of papers showing small or zero job losses from minimum-wage hikes probably played a role in altering the expert consensus.

If economists gravitated toward anti-Keynesian theories, it was at least in part because evidence wasn't strong enough to push them in the right direction. It's just very hard to assess the impacts of fiscal stimulus. For example, Japan's tremendous government spending binge in the 1990s looks to a casual observer like it had no effect, since the economy didn't recover until years later -- but government spending might have been the only thing saving the country from a deeper recession.

For a great explanation of why macroeconomic evidence is so weak and subject to multiple interpretations, read this excellent post ** by the University of Oregon's Mark Thoma....

* https://www.minneapolisfed.org/~/media/files/pubs/eppapers/17-1/the-great-recession-a-macroeconomic-earthquake.pdf

** http://economistsview.typepad.com/economistsview/2013/04/empirical-methods-and-progress-in-macroeconomics.html

[Apr 09, 2017] Neoliberals come right up and punch you in the face. Neoclassicals slink around and stab you in the back.

Apr 09, 2017 | economistsview.typepad.com
libezkova -> RC AKA Darryl, Ron... , April 08, 2017 at 12:56 PM
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations of capitalism"

This quote illustrates that there is some difference between neoliberalism and neo-classical economics. Neoliberals do not care about applicability of neo-classical economics or the validity of generalized stochastic equilibrium.

They used neo-classical theories as a ram to destroy New Deal Capitalism and paid "useful idiots" outsized amount of money to keep them in power in economics departments.

RC AKA Darryl, Ron -> libezkova... , April 08, 2017 at 01:02 PM
There is a well known historical narrative which supports your assertion surrounding Austrian economics and the University of Chicago although as you suggest it goes much deeper than that.
RGC -> libezkova... , April 08, 2017 at 01:42 PM
In my view neoliberals are like republicans, in that they make no secret of their allegiances.

I see neoclassicals as even more despicable, because they pretend to be Keynesians and in favor of the working class, while promoting "free market" solutions.

Neoliberals come right up and punch you in the face. Neoclassicals slink around and stab you in the back.

[Apr 08, 2017] Neoliberals do not care about applicability of neo-classical economics or the validity of generalized stochastic equilibrium. They used neo-classical theories as a ram to destroy New Deal Capitalism

Apr 08, 2017 | economistsview.typepad.com
RGC , April 08, 2017 at 06:35 AM
Re: The ideas of Kenneth Arrow - Steven Durlauf
...............
"Yet the theorem trails a dense cloud of caveats, which Arrow himself recognized could be more important than the proof itself. For one, it worked only in a perfect world, far removed from the one humans actually inhabit. Equilibrium is merely one of many conceivable states of that world; there's no particular reason to believe that the economy would naturally tend toward it. Beautiful as the math may be, actual experience suggests that its magical efficiency is purely theoretical, and a poor guide to reality."
...................

"Remarkably, academic macroeconomists have largely ignored these limitations, and continue to teach the general equilibrium model -- and more modern variants with same fatal weaknesses -- as a decent approximation of reality. Economists routinely use the framework to form their views on everything from taxation to global trade -- portraying it as a value-free, scientific approach, when in fact it carries a hidden ideology that casts completely free markets as the ideal."
...........................

"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations of capitalism, and he was prescient in understanding how economic inequality might come to impair the workings of democratic government. Perhaps it would be best to use his own words: "In a system where virtually all resources are available for a price, economic power can be translated into political power by channels too obvious for mention. In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham.""
......................
https://www.bloomberg.com/view/articles/2017-03-09/the-misunderstanding-at-the-core-of-economics

RC AKA Darryl, Ron said in reply to RGC... , April 08, 2017 at 06:48 AM
Excellent.
libezkova -> RC AKA Darryl, Ron... , April 08, 2017 at 12:56 PM
"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations of capitalism"

This quote illustrates that there is some difference between neoliberalism and neo-classical economics. Neoliberals do not care about applicability of neo-classical economics or the validity of generalized stochastic equilibrium.

They used neo-classical theories as a ram to destroy New Deal Capitalism and paid "useful idiots" outsized amount of money to keep them in power in economics departments.

[Apr 08, 2017] Kenneth Arrow and the golden age of neoliberal economic theory

Notable quotes:
"... The inevitable failure of economics started with Jevons/Walras/Menger but Arrow gave the final push with this fundamental methodological specification: "It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories." (Arrow, 1994) ..."
"... The definition of the subject matter translates into the following hard core propositions, a.k.a. axioms: "HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states." (Weintraub, 1985) ..."
"... Obviously, this axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. By consequence, General Equilibrium theory of the Arrow-Debreu type and its offspring until DSGE/RBC/New Keynesianism is scientifically worthless. ..."
Apr 08, 2017 | economistsview.typepad.com
Egmont Kakarot-Handtke , April 08, 2017 at 02:57 AM
How Arrow pushed economics over the cliff
Comment on Steven Durlauf on 'Kenneth Arrow and the golden age of economic theory'

The inevitable failure of economics started with Jevons/Walras/Menger but Arrow gave the final push with this fundamental methodological specification: "It is a touchstone of accepted economics that all explanations must run in terms of the actions and reactions of individuals. Our behavior in judging economic research, in peer review of papers and research, and in promotions, includes the criterion that in principle the behavior we explain and the policies we propose are explicable in terms of individuals, not of other social categories." (Arrow, 1994)

The definition of the subject matter translates into the following hard core propositions, a.k.a. axioms: "HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states." (Weintraub, 1985)

Obviously, this axiom set contains THREE NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains a nonentity is A PRIORI false. By consequence, General Equilibrium theory of the Arrow-Debreu type and its offspring until DSGE/RBC/New Keynesianism is scientifically worthless.

Egmont Kakarot-Handtke

RC AKA Darryl, Ron , April 08, 2017 at 05:33 AM
We are all Luddites now.
RGC , April 08, 2017 at 06:35 AM
Re: The ideas of Kenneth Arrow - Steven Durlauf
...............
"Yet the theorem trails a dense cloud of caveats, which Arrow himself recognized could be more important than the proof itself. For one, it worked only in a perfect world, far removed from the one humans actually inhabit. Equilibrium is merely one of many conceivable states of that world; there's no particular reason to believe that the economy would naturally tend toward it. Beautiful as the math may be, actual experience suggests that its magical efficiency is purely theoretical, and a poor guide to reality."
...................

"Remarkably, academic macroeconomists have largely ignored these limitations, and continue to teach the general equilibrium model -- and more modern variants with same fatal weaknesses -- as a decent approximation of reality. Economists routinely use the framework to form their views on everything from taxation to global trade -- portraying it as a value-free, scientific approach, when in fact it carries a hidden ideology that casts completely free markets as the ideal."
...........................

"This perversion isn't Arrow's fault. He merely helped to prove a mathematical theorem, and was no blind advocate for markets. Indeed, he actually thought the theorem illustrated the limitations of capitalism, and he was prescient in understanding how economic inequality might come to impair the workings of democratic government. Perhaps it would be best to use his own words: "In a system where virtually all resources are available for a price, economic power can be translated into political power by channels too obvious for mention. In a capitalist society, economic power is very unequally distributed, and hence democratic government is inevitably something of a sham.""
......................
https://www.bloomberg.com/view/articles/2017-03-09/the-misunderstanding-at-the-core-of-economics

RC AKA Darryl, Ron -> RGC... , April 08, 2017 at 06:48 AM
Excellent.
RC AKA Darryl, Ron -> RGC... , April 08, 2017 at 09:54 AM
"I Suspect the Major Reason for the Rise in Concentration Is Technological Change, Particularly in IT"
Posted on April 7, 2017 by ProMarket writers

In this installment of ProMarket's interview series on concentration in America, Chicago Booth professor Steven Kaplan discusses the reasons for the rise in concentration. "Overall, the increases in concentration from technology and regulation are positive while the increase from rent seeking is a negative."

https://promarket.org/suspect-major-reason-rise-concentration-technological-change-particularly/


[The article linked above entirely misses "how economic inequality might come to impair the workings of democratic government." Kaplan is very tentative about linking inequality to concentration and is generally less concerned with inequality per se than monopoly rent seeking. As long as all the sharks in the tank are free then everything is OK.]

RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , April 08, 2017 at 09:55 AM
It's getting to be a bad time to be a little fish again.
RGC -> RC AKA Darryl, Ron... , April 08, 2017 at 10:29 AM
Walmart, Home Depot and various chains/licensees are examples of concentration that didn't arise because of network effects. Rather, they used their advantage of overwhelming amounts of capital backing to under-price and/or outlast smaller competitors.

As a result we have wealth moving from the top 20% to the top 0.1%, wealth less geographically disbursed and fly-over country deteriorating.

Peter K. -> RGC... , April 08, 2017 at 10:51 AM
And PGL [hearts] Walmart which bankrolls liberal think tanks like the Center for American Progess.

We wouldn't want the move to the left the Democratic party and younger left-liberals are undergoing to get out of hand would we?!?!?

pgl -> Peter K.... , April 08, 2017 at 11:05 AM
Gee - I heart what? Maybe you missed my Econospeak post where I noted how they abused transfer pricing. Something to do with Hong Kong sourcing affiliates. I'd explain it to you all over again but you would get angry as you usually do when you cannot grasp simple concepts.
cm -> RGC... , April 08, 2017 at 12:17 PM
Network effects? How about economy of scale, not least management at scale enabled by IT? Not just in retail, IT has significantly increased management efficiency, i.e. raised the thresholds of size and complexity where an organization becomes unmanageable (which I would define as taking on more size or complexity leads to a *reduction* or at least no increment in output/profit).
cm -> RGC... , April 08, 2017 at 12:20 PM
According to a number of claims I read long ago, Walmart's power over suppliers derived in large part from the volume they could command. Capital or not, they will not order more volume than they can sell - so they have to be able to sell that much stuff, and profitably, to begin with.
point -> RC AKA Darryl, Ron... , April 08, 2017 at 11:07 AM