Piketty’s response to Mankiw et al.: “and some consume academics.”
January 17, 2015
“We know something about billionaire consumption,” Piketty observed, “but it is hard to measure some of it. Some billionaires are consuming politicians, others consume reporters, and some consume academics.”
Brad DeLong and the true nature of neoclassical economics
January 18, 2015
from Lars SyllI think that modern neoclassical economics is in fine shape as long as it is understood as the ideological and substantive legitimating doctrine of the political theory of possessive individualism. As long as we have relatively-self-interested liberal individuals who have relatively-strong beliefs that things are theirs, the competitive market in equilibrium is an absolutely wonderful mechanism for achieving truly extraordinary degree of societal coordination and productivity. We need to understand that. We need to value that. And that is what neoclassical economics does, and does well. Of course, there are all the caveats to Arrow-Debreu-Mackenzie:1 The market must be in equilibrium. 2 The market must be competitive. 3 The goods traded must be excludable. 4 The goods traded must be non-rival. 5 The quality of goods traded and of effort delivered must be known, or at least bonded, for adverse selection and moral hazard are poison. 6 Externalities must be corrected by successful Pigovian taxes or successful Coaseian carving of property rights at the joints. 7 People must be able to accurately calculate their own interests. 8 People must not be sadistic–the market does not work well if participating agents are either the envious or the spiteful. 9 The distribution of wealth must correspond to the societal consensus of need and desert. 10 The structure of debt and credit must be sound, or if it is not sound we need a central bank or a social-credit agency to make it sound and so make Say’s Law true in practice even though we have no reason to believe Say’s Law is true in theory. Brad DeLongAn impressive list of caveats indeed. Not very much value left of “modern neoclassical economics” if you ask me …
Still — almost a century and a half after Léon Walras founded neoclassical general equilibrium theory — “modern neoclassical economics” hasn’t been able to show that markets move economies to equilibria. We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient. One however has to ask oneself — what good does that do? As long as we cannot show, except under exceedingly special assumptions, that there are convincing reasons to suppose there are forces which lead economies to equilibria — the value of general equilibrium theory is negligible. As long as we cannot really demonstrate that there are forces operating — under reasonable, relevant and at least mildly realistic conditions — at moving markets to equilibria, there cannot really be any sustainable reason for anyone to pay any interest or attention to this theory.A stability that can only be proved by assuming “Santa Claus” conditions is of no avail. Most people do not believe in Santa Claus anymore. And for good reasons. Santa Claus is for kids, and general equilibrium economists ought to grow up. Continuing to model a world full of agents behaving as economists — “often wrong, but never uncertain” — and still not being able to show that the system under reasonable assumptions converges to equilibrium (or simply assume the problem away) is a gross misallocation of intellectual resources and time.
And then, of course, there is Sonnenschein-Mantel-Debreu! So what? Why should we care about Sonnenschein-Mantel-Debreu? Because Sonnenschein-Mantel-Debreu ultimately explains why “modern neoclassical economics” — New Classical, Real Business Cycles, Dynamic Stochastic General Equilibrium (DSGE) and “New Keynesian” — with its microfounded macromodels are such bad substitutes for real macroeconomic analysis!
These models try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality. And — worse still — something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972) , Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equlibrium solution.
Opting for cloned representative agents that are all identical is of course not a real solution to the fallacy of composition that the Sonnenschein-Mantel-Debreu theorem points to. Representative agent models are — as I have argued at length here — rather an evasion whereby issues of distribution, coordination, heterogeneity — everything that really defines macroeconomics — are swept under the rug.
Instead of real maturity, we see that general equilibrium theory possesses only pseudo-maturity. For the description of the economic system, mathematical economics has succeeded in constructing a formalized theoretical structure, thus giving an impression of maturity, but one of the main criteria of maturity, namely, verification, has hardly been satisfied. In comparison to the amount of work devoted to the construction of the abstract theory, the amount of effort which has been applied, up to now, in checking the assumptions and statements seems inconsequential.
Links. Tyler Cowen edition: global warming, economic exams, manure.
January 19, 2015Leave a commentGo to comments
1) On the Marginal Revolution blog, Tyler Cowen links to this post about global warming. The denialist reactions to this link inspired me to tinker a bit with a graph from this post. As far as I can gauge, the hypothesis that medium run global temperatures are well described by a symmetrical thin tailed distribution with an upward shifting mean seems pretty plausible, the only real problem is, roughly, the second part of the 1930’s. I.e.: yes, global warming was and still is real (technical detail: the red and the green line connect highest highs and highest lows, the pink line divides the resulting space in two roughly equal parts, taking account of the 1930’s anomaly, this is inspired by Kuznets ‘freehand regression‘ method). Before I forget: global warming is heating up. 2) He also links to a 1953 Harvard economics exam. And Krugman is right. When you read the exam you will concede that, nowadays, we are indeed living in dark ages of macro-economics and have forgotten a lot. Especially about the fact that much of macro-economics is about the flow of money and spending and monetary relations like wages, profits, interest rates and the like. And economics should, like this exam and as Peter Radford argues, about economies, not about ‘economics’ itself. 3) He also links to a book about the value of manure. More about this totally important subject (before 1900, and even afterwards, manure influenced the fate of regions and maybe even nations in a decisive way…) here.
Mostly Economics
Example of an economics exam from Harvard University in 1953
Prof. Ric Holt (of South Oregon Univ) shares this interesting copy of the exam paper (via a group mail on history of economic thought).
Just take a look at the economics questions asked in Universities during those times. Needless to say all this has changed dramatically. Earlier it required understanding of history and economics, now it is just about math.As these guys determine the standards elsewhere as well, the disease has caught onto most parts of the world (if not all):
DEPARTMENT OF ECONOMICS
GENERAL EXAMINATION
(Three hours)
Please note on the front cover of your bluebook the number of each question upon which you write, in the order followed in your book, and HONORS or NON-HONORS.
PART I
(One hour)
Economic Analysis
HONORS candidates answer ONE question taken from questions 1- 4.
l. “Depressions are caused by the exhaustion of investment opportunities and the rigidity of saving.” Discuss.
2. “Keynes’ theory may have undermined the nee-classical theory of the price level but it has left intact the neo-classical theory of relative prices.” Discuss.
3. “The basic criteria of anti-trust policy with respect to product markets are the same whatever thecompetitive structure of labor markets may be.” Discuss.
4. “Despite all the changes that have taken place in economic theory the profit motive continues to occupy the central role which it had in Ricardo’s theory.” Discuss the role of profit in (a) Ricardo, (b) nee-classical theory, (c) Schumpeter’s theory.
NON-HONORS candidates answer ONE question taken from questions 5-8.
5. “Future historians may well write the epitaph of our civilization as follows:
From freedom and science came rapid growth and change.
From rapid growth and change came economic instability.
From instability came demands which ended growth and change.
Ending growth and change ended science and freedom.”
Discuss this alleged conflict between economic growth and measures to secure economic stability. In your answer refer to the views of some of the great economists, for example, Schumpeter and Keynes, on this problem.
6. In explaining business cycles most economists place crucial emphasis on fluctuations in investment or capital goods.
Discuss the determinants of investment and the manner by which these factors operate upon investment to produce fluctuations in National Income.
7. The basic economic questions any society must somehow answer are: ( 1) What consumer and capital commodities shall be produced and in what quantities? (2) How shall the goods beproduced, i.e., by whom and with what resources? (3) For whom are goods to be produced, i.e., how is the national product to be distributed among individuals? Outline the way in which these questions are answered in a perfectly competitive, free enterprise economy.
8. In addition to wages, interest, and rent, economists often talk about a fourth category of income: profit. What do economists mean by this return? What are the causes of profit and its function in a capitalistic system?
PART II
(Two hours)
All students are required to choose TWO of the four fields in Part II of this examination and to answer two questions in each selected field. Thus a total of four questions are to be answered in Part II with an allowance of a half hour per question.
A. Economic History
9. “The very increases in the possibilities of unrestrained competition of the past seventy-five years,through developments in transport, technology, the size and organization of firms, etc. – may in themselves partly explain some of the restraints on price competition that have appeared in thiscentury.” Discuss both the developments and their alleged effects.
10. “In the past 150 years the United States economy has radically altered its relationship to the world economy and at intervals has been a seriously disturbing factor.” Discuss, including references to periods in the 19th as well as the 20th century.
11. “In spite of the waste, apparent exploitation, and graft, the railroads more than paid for themselves in terms of American economic growth.” Discuss.
12. Why did Hamilton favor a central banking system? What was the subsequent history in the 19th century of the issue that he poses? How satisfactory, in terms of the needs of an expanding economy, were the alternatives to a centralized banking system that existed
prior to 1912.
B. Money and Finance
13. What are the relations between a country’s balance of payments and its internal monetary andfiscal policies?
14. From a fiscal policy standpoint, what do you consider would be the best budgetary policy for the federal government to adopt in order to combat a growing deflationary trend?
Indicate the relative advantages and disadvantages involved in the policy you propose.
Indicate practical as well as theoretical considerations.
15. “Classical economists tended to view the amount of taxes paid by the private sector of the economy as measuring the amount of ‘burden’ which the government imposed on the private sector.” Do you agree with this view? If you do, what is the justification for your position? If you do not, what are some possible alternative ways of measuring the ” burden” of the government on the economy, and for what purposes can they be used?
16. “Older business cycle theories emphasized fluctuations in prices while modern ones emphasize fluctuations in income.” What is the theoretical and empirical justification for this change in emphasis?
17. What role did the Federal Reserve System play in financing the Second World War?
Discuss the impact of this experience upon money and banking in the United States.
C. Market Organization
18. The spread between prices paid farmers for products used as food and prices paid for these foods at retail was 55% of the consumer’s dollar spent for food in 1910-14. It was 54% in 1952 . Account for the failure of this spread to increase in spite of the great increase in processing, services, and transportation sold with the food.
19. Although price discrimination generally is regarded as being contrary to the public interest, it is expressly sanctioned in railroad rate-setting under another name: the “value-of service” principle.What cost and market characteristic of railroads might lead you to justify the use of discriminatory pricing in their case?
20. Bituminous coal is a “sick” industry. What are the causes of this “sickness”? What attempts have been made to impose “healthier” conditions on the industry?
21. Various techniques are used by oligopolistic industries in attaining stable and desirable price and production conditions. Explain at least three ( 3) of these techniques and discuss the possible reasons for using any one over another.
D. Labor Economics
22. What role did the courts play in labor-management relations in the latter part of the nineteenth century? How far was this situation changed subsequent to 1930?
23. What is collective bargaining? Is it a process of communication and education leading to agreement based upon mutually accepted and recognized goals and standards, or is it a temporary truce based upon balance of power with conflicting basic objectives?
24. Has organized labor “distorted” the wage structure and wage level of the country at the expense of the unorganized or the weakly organized and at the expense of the recipients of other functional shares?
25. How would you handle the problem of national emergency disputes?
April 29, 1953.
In economics, sticking to the facts is heterodox…
New Keynesian models often negate sound empirical evidence in favor of hard-right, market fundamentalist assumptions. That’s why so-called heterodox economists, who chose to use models which are more consistent with the facts and the concepts of the data (stock-flow consistent modelling comes to mind), criticize these models. Paul Krugman and Simon Wren-Lewis are therefore wrong to complain that heterodox economics “gives aid and comfort to the wrong people” (Krugman) and “When you are trying hard to convince policy makers and journalists that what those on the right are arguing for is not implied by mainstream thought, people from the left pop up to undermine what you say.” .
There are good reasons, consistent with the policy ideas of Wren-Lewis and Krugman, why ‘New Keynesian Models’ are criticized. Let’s for instance take this article by Kühn, Muysken and Van Veen, titled:
The Adverse Effect of Government Spending on Private Consumption in New Keynesian Models
The summary:
Empirical evidence shows that government spending crowds in private consumption, a Keynesian phenomenon. The current, state of the art, New Keynesian models based on optimizing households and firms are not able to predict such a result. In this paper, we critically analyse fiscal policy in these models using a graphical framework as well as a formal model. Extensions aimed at generating crowding in, like useful government spending or rule of thumb consumers, turn out to be inappropriate. We argue that introducing productivity enhancing government spending could potentially lead to crowding in.
The hard-right, market fundamentalist assumption of the New Keynesian models is that government spending is, by definition, wasteful while government investments are, by definition, not productive (hell, without the dikes, which in my country have been a government or at least a public responsibility for as long as the record stretches, the Netherlands would not even exist). The point: other assumptions can be made and are being made. The hard-right stance is a choice. Just like the choice, in the New Area Wide Model of the ECB to (quote) “abandon” money in the model, and therewith also, of course, debt. Or the weird idea that the unemployed are happier than the employed. Look here for an empirical example of the large difference between voluntary and involutary declines in labor supplied. Or the funny fact that this ‘representative consumer’, which does not know gender, inequality (there is just one consumer/capital owner/worker), class (heshe is the only worker as well as the owner of all capital, which is rented to companies which are owned by… you guess it) or whatever, by implication does know national borders. Heshe is, in most of the models, a citizen of the USA. Which is puzzling…
In reality, money exists. Inequality exists. Governments do make productive investments. And some people are 100% employed while others are 100% unemployed. Government subsidized and produced primary and secondary education might have to become more efficient – but people do learn to read and write. And there are differences between people selling their labor and rentiers. I don’t think that bringing this to the fore undermines the policy arguments of Wren-Lewis and Krugman – see the Kühn, Muysken and Van Veen article. But if so – let it be.
Abstract and substantive reasoning for real life economics
I am greatly encouraged by the growing eagerness seen in many parts of the world to move out of arid academic economics into engagement with real life economic issues. However, at times I get the impression that the quest is for a more ‘realistic’ economic theory to deal with real life economic problems. In my thinking academic economics as it is practised at least in the English-speaking world and real life economics are two substantially different entities. Here I shall concentrate on what I consider to be the characteristics of real life economics.
First and foremost, real life economics is professedly part of the larger social enquiry; it belongs to what in earlier days was considered to be ‘political economy’. To put it differently, it is not a mere intellectual exercise to solve problems posed by other academics, and in that sense belonging to a realm largely, and to some extent deliberately, isolated from day to day lives of the vast majority of human beings. With rare exceptions academic economics has been setting up a universe of its own, a universe of discourse, where experts speak to other experts. Real life economics belongs to the realm of ordinary human beings and their day to day experiences.
Secondly, therefore, real life economics is oriented towards finding solutions to problems which people experience in their lives — poverty, unemployment, increasing disparities of income and wealth. The objectives in medicine and in economics are very similar: to cure disease and contribute to healthy bodies in the former; to solve problems and improve the condition of the ‘body politic’ in the latter. The ‘body politic’ is a more complex entity, though, and the economist who deals with only a segment of it has a harder time in getting to know its physiology. Hence professional training certainly has its place in economics. However, the professional economist must also be a practitioner as in the field of medicine. In my Rethinking Economics (1996) after indicating that practical knowledge is both the beginning and end of economic knowledge, I went on to say: “As the professional discourse grows, it will have a tendency to become completely distanced from where it started… [But] refined economic language will become sterile unless it is again linked to practical knowledge. If the two are linked, the scientific knowledge of economics has the means of renewing itself. It also has the possibility of lifting practical knowledge to a higher level so that the understanding of all members of society can become clearer and more authentic. The professional economist, then, has a twofold responsibility to contribute to the refinement and renewal of the language of the profession, and to harness the knowledge and insights of economic science to enrich the general awareness of the real-life economy” (1996, pp.250-251).
STTPML on Neoclassical Economics:
political economy of capitalism 07-037
causality and regression analysis Syll64
UnderstandingCapitalismInstructorsManual
The Foundations of Capitalist Economy
terrel-carver-karl-marx-texts-on-method political economy of capitalism 07-037
RadicalPoliticalEconomicsOfDFD
Marxism for the few let them eat theory
capitalism-and-its-economics-a-critical-history-douglas-dowd
Theoretical System of Marx and Engels, completed and proofed.(3) pdf
Tsinghua CASS Conference Paper on Development of Marxist Ecnomics
Neoclassical Economics and Neoliberalism as Neo-Imperialism (2)
presentation-at-tsinghua-aug-2012
Citigroup-Plutonomy-Report-Part-1
Citigroup_Plutonomy_Report_Part_2
citibank plutonomy symposium memo3
The anti-Samuelson. Volume One. Macroeconomics- basic problems of
The anti-Samuelson. Volume Two. Microeconomics- basic problems of
Critiques of Steve Keen and NC Economics Chinese version img257
Critiques of Keen and NC Economics English img256
eprint of international ed and imper 21598282.2011
Neoclassical Economics Death of Colander
old vs new paradigms in economics Fullbrook66
0521366259.Cambridge.University.Press.The.Cambridge.Companion.to.Marx.Nov.1991