INET — marginalizing heterodox economics rather than transforming the discipline

15 April, 2014 at 18:20 | Posted in Economics | Leave a comment

Big-vs-SmallIn a report published by The Association for Heterodox Economics, INET is criticized for actually marginalizing heterodox economics:

Our main concern is that the positive potential of INET is steadily being closed down. What began as recognition of fundamental problems that require fundamental change is becoming a more modest set of alterations. A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline …

Marginalising heterodoxy creates problems for teaching economics as a discipline in which economists constructively disagree and can be in error. This is important because it is through a conformity that suppresses a continual and diverse critical awareness that economics becomes a dangerous discourse prone to lack of realism, complacency, and dogmatism. Marginalising heterodoxy reduces the potential realisation of the different components of economics one might expect to be transformed as part of a project to transform the discipline …

Highlighting the points we have may seem like simple griping by a special interest. But there is far more involved than that. Remember we are talking about the failure of a discipline and how it is to be transformed. The marginalisation of heterodoxy has real consequences. In a general sense the marginalisation creates manifest problems that hamper teaching economics in a plural and critically aware way. For example, the marginalisation promotes a Whig history approach. It is also important to bear in mind that heterodoxy is a natural home of pluralism and of critical thinking in economics … Unlike the mainstream, heterodoxy does not have to be made compatible with pluralism and with critical thinking; it is predisposed to these and is already a resource for their development. So, marginalising heterodoxy really does narrow the base by which the discipline seeks to be renewed. That narrowing contributes to restricting the potential for good teaching in economics (including the profoundly important matter of how economists disagree and how they can be in error).

Därför har den svenska järnvägen havererat

15 April, 2014 at 13:45 | Posted in Politics & Society | Leave a comment

urNu krävs det en kriskommission för att rädda de svenska järnvägarna och den svenska tågtrafiken, skriver yours truly och fem andra experter i Dagens Samhälle.

Sweden hit by deflation — a sad and worrying reminder of the impotence of mainstream economics

14 April, 2014 at 22:24 | Posted in Economics | 3 Comments

irvingSweden is according to new statistics from  Statistics Sweden in a state of deflation. The inflation rate was -0.6 percent in March.

To a large extent the deflation is caused by tight monetary and fiscal policies  pursued by Sweden’s  Central Bank and the government. With a very defensive fiscal policy and a targeted inflation rate set at a very low level, real inflation has during the last 2-3 years been very close to zero, and now even negative. Another consequence of the austere fiscal and monetary policies is that overall unemployment is still at almost 9 % and youth unemployment close to 26 %.

This is deeply worrying.

So yours truly thought he should give the Swedish Fed and the Swedish finance minister - Anders Borg –  a suggestion for reading …

Zoltan Pozsnar and Paul McCulley have written an absolutely splendid essay on what a liquidity trap means and why mainstream neoclassical economics has nothing to offer in way of solving the problems that it brings along – and why it is so important to get hold of the insights that Fisher, Keynes, Minsky and Krugman have given us on debt-deflation processes and liquidity traps:

A liquidity trap is a circumstance in which the private sector is deleveraging in the wake of enduring negative animal spirits caused by the bursting of joint asset price and credit bubbles that leave privatesector balance sheets severely damaged. In a liquidity trap the animal spirits of the private sector cannot be revived by a reduction in short-term interest rates because there is no demand for credit. This effectively means that conventional monetary policy does not work in a liquidity trap …

Deleveraging can be rational for an individual household. It can be rational for an individual corporation. It can be rational for an individual country. However, in the aggregate it begets the paradox of thrift1: what is rational at the microeconomic level is irrational at the community, or macroeconomic, level.

This is not to say that the private sector should not deleverage. It has to. It is a part of the economy’s healing process and a necessary first step toward a self-sustaining economic recovery.

However, deleveraging is a beast of a burden that capitalism cannot bear alone. At the macro level, deleveraging must be a managed process: for the private sector to deleverage without causing a depression, the public sector has to move in the opposite direction and re-lever by effectively viewing the balance sheets of the monetary and fiscal authorities as a consolidated whole.

Fiscal austerity does not work in a liquidity trap and makes as much sense as putting an anorexic on a diet. Yet, “diets” are the very prescriptions that fiscal austerians have imposed (or plan to impose) in the U.S., U.K. and Eurozone. Austerians fail to realize, however, that everyone cannot save at the same time and that in liquidity traps, the paradox of thrift and depression are fellow travelers that are functionally intertwined.

Historically, austerity has only worked when accompanied by monetary easing – where wealth effects and stronger private demand for credit helped offset the effects of fiscal austerity – and/or a weaker currency – which helped steal others’ demand.

In a liquidity trap, however, austerity cannot work because monetary policy is neither functioning correctly nor able offset lost demand, and weak currencies work only at a time of strong global demand and only for individual countries, not for several major countries at one time. Imposing austerity without potential offsets and at a time of weak global aggregate demand is deflationary, which makes deleveraging much harder, balance sheet repair much slower and recovery much less likely to achieve. In a liquidity trap, governments have no logical option but to borrow and to invest.

How could governments borrow more if government debt is also a problem everywhere? Would it not be irresponsible to increase borrowing at a time of record government debt levels? Fiscal austerians are quick to invoke age-old textbook orthodoxies: (1) that additional borrowing will be too much for future generations to handle, citing the law of Ricardian equivalence; (2) that increased borrowing will crowd out private sector borrowing and will most likely delay the economic recovery; and (3) that bond investors will stop buying and send yields higher.

However, in the topsy-turvy world of liquidity traps, these textbook orthodoxies do not apply, and acting irresponsibly relative to orthodoxy by increasing borrowing will do more good than harm. Austerians argue that reducing deficits and putting nations’ fiscal houses in order will help growth through confidence. However, Ricardian equivalence does not work in reverse! It is not confidence, but Godley’s tyranny of arithmetic that matters: someone simply has to borrow and invest to fill missing demand.

Crowding out, overheating and rising interest rates are also not likely to be a problem as there is no competition for funds from the private sector. For evidence, look no further than the impact of government borrowing on long-term interest rates in the U.S. during the Great Depression, or more recently, Japan …

Held back by concerns borne of these orthodoxies, however, governments are not spending with passionate purpose. They are victims of intellectual paralysis borne of inertia of dogma that, in the present circumstances, do not apply. As a result, their acting responsibly relative to orthodoxy and going forth with austerity may drag economies down the vortex of deflation and depression.

The importance of fiscal expansion and the impotence of conventional monetary policy measures in a liquidity trap have profound implications for the conduct of central banks. This is because in a liquidity trap, the fat tail risk of inflation is replaced by the fat tail risk of deflation. In turn, the fatness of the deflation tail is a function of the government’s willingness and ability to pump-prime, i.e. to borrow and spend.

Added 19 April: Paul Krugman comments on the Swedish situation.

Lisa Gerrard

12 April, 2014 at 14:28 | Posted in Varia | 3 Comments



12 April, 2014 at 11:33 | Posted in Economics | 2 Comments

We investigate the possibility that a decision-maker prefers to avoid making a decision and instead delegates it to an external device, e.g., a coin flip. In a series of experiments our participants often choose stochastically dominated lottery between outcomes, contradicting most theories of choice such as expected utility …

images-3In situations where decision-making is hard, a possible procedural preference arises: the decision-maker may wish for the decision to be taken away from herself. Her cognitive or emotional cost of deciding may outweigh the bene fits that arise from making the optimal choice. For example, the decision-maker may prefer not to make a choice without having sufficient time and energy to think it through. Or, she may not feel entitled to make it. Or, she may anticipate a possible disappointment about her choice that can arise after a subsequent resolution of uncertainty. Waiving some or all of the decision right may seem desirable in such circumstances even though it typically increases the chance of a suboptimal outcome.

The difficulty of such preferences is that they are non-consequentialist and are therefore excluded by most models of choice such as expected utility. For example, flipping a coin between different choice options contradicts expected utility theory except if the decision-maker is exactly indifferent between these options. Yet people regularly do flip coins or revert to other random decision aids. More general than expected utility theory, a basic axiom of choice — stochastic dominance — postulates that whenever the decision-maker has a strict preference for one of the options, she makes the choice herself rather than delegate it to randomness.

This paper discusses preferences that allow for coinflipping. It then presents several data sets, experimental and field-empirical, where stochastic dominance is violated by decision makers.

Nadja Dwenger   Dorothea Cabler   Georg Weizsäcker

Emotional finance — on taking uncertainty seriously

11 April, 2014 at 11:54 | Posted in Economics | 5 Comments

Conventional thinking about financial markets begins with the idea that security prices always accurately reflect all available information; it ends with the belief that price changes come about only when there is new information. Markets are supposed to reflect new information quickly and efficiently, albeit with a few anomalies.

emotion-pendulum-pictureIn 2007, I interviewed over 50 investment managers mainly in New York, Boston, London, and Edinburgh. Talking to them I came to the conclusion that conventional theories of finance miss the essence of market dynamics. Information is usually ambiguous and its value uncertain. When information is ambiguous and outcomes are fundamentally uncertain, decisions are not clear cut. They necessarily rely on human imagination and judgment, not simply calculation. Human imagination and judgment are impossible without human emotion. Conventional theories of finance, which ignore emotion, are therefore a very poor basis for understanding and policy.

“As long as we neglect emotion’s role in financial markets, and fail to understand and adapt to dimensions of human social and mental life that influence judgement, financial markets will be inherently unstable.”

Uncertainty and ambiguity are what make financial markets interesting and possible. They generate feelings that manifest in exciting stories, problematic mental states and strange group processes. As long as we neglect emotion’s role in financial markets, and fail to understand and adapt to dimensions of human social and mental life that influence judgement, financial markets will be inherently unstable. They will also be likely to create poor outcomes for ordinary savers and significant distortions in capital allocation – exactly what we have been witnessing in the market today.

The uncertainty to which I refer can be termed radical, fundamental, Knightian or Keynesian uncertainty. I use these descriptions to stress the fact that, although we can imagine the future, we cannot know it in advance. My interviewees collectively risked over $500 billion every day. Every one of the positions they took depended on interpreting ambiguous information and each would be vulnerable to unforeseen events. Consider the present possibilities that the Euro crisis will lead to a return to national currencies, and that disputes in the US congress will lead to problems meeting US debt obligations. What the existence of such possibilities will do to the prices of commodities, currencies and securities over the next thirty-six months, and what different financial decision-makers will think about it, is not knowable – and there will be many more unexpected developments with significant ramifications.

Decisions made in a radically uncertain context are totally different in their implications from decisions made in conditions of risk modelled as a Gaussian probability distribution. A Gaussian model constrains future probabilities, thereby creating known unknowns. The outcome of decisions becomes predictable and what is rational becomes clear. Under radical uncertainty this is not the case. What will happen tomorrow involves far more complexity and interaction than can be captured by analogies to games of chance. Taking radical uncertainty seriously, therefore, changes everything.

David Tuckett


‘New Keynesian’ reality check

10 April, 2014 at 08:08 | Posted in Economics | Leave a comment

Taking part of the debate on microfoundations among macroeconomists these days, I wonder if Heinz-Peter Spahn isn’t more on the right track than those who desperately offer more or less contrived defenses of the microfoundationalist programme:

The crucial point however is: market conditions, which are presupposed in the model of intertemporal choice, are not given in reality. Distributing consumption optimally over time depends on the possibility of individuals to lend money on their permanent income, if temporary periods of low market income are to be bridged. Because this perfect financial market does not exist, consumption behaviour necessarily depends  strongly on current income. Consumers know that their future expected income is distorted by spells of unemployment, the occurrence of which is hard to predict though; these quantity constraints are important also for firms …

Professional modern economics appear to suffer from schizophrenia as in the field of financial-market economics all these deviations from the Utopian ideal market are well known (information asymmetries etc.), which are stubbornly ignored when it comes to talk about macroeconomics in NKM [New Keynesian Macroeconomics]. The assumption of complete markets means that all agents’ intertemporal budget constraints always are satisfied, bankruptcies and insolvencies are impossible. The NKM world is populated by agents who never default …  Basically, NKM designs a non-monetary economy … Questions regarding financial instability cannot be answered within this models, they cannot even be asked …

NKM faces an uncomfortable trade-off. On the one hand, General Equilibrium Theory has shown that preferences and behaviour of heterogeneous agents cannot simply be aggregated. Variances between individuals matter! The Sonnenschein-Mantel-Debreu problem states that choices may not be transitive; the representative agent’s ranking differs from individual rankings; reactions to shock may be different … On the other hand, if people are assumed to be identical, NKM may keep the representative agent, but as a consequence the model has no interaction of agents, no distribution problems, no asymmetric information and no meaningful stock market.

The critique so far may appear as unfair as it neglects the various refinements that were proposed in order to develop and improve the basic model set-up … But these extensions of NKM – due to the Walrasian method – yield many precisely-looking results … but do not grasp the impact of bank credit on goods demand, market income and employment in a typical monetary economy.

Heinz-Peter Spahn

Far from Hollywood

9 April, 2014 at 23:34 | Posted in Varia | Leave a comment


Dinosaurierapport från sosseträsket …

9 April, 2014 at 18:24 | Posted in Education & School | 2 Comments

dinoKarin Pettersson i AB angriper Anders Borg. Förvisso en rimlig ansats, Borg för helt följdriktigt borgerlig politik som kastar stekta sparvar i halsen på dem som redan har krävan full av ananasjärpe och hummer. Problemet är bara att Pettersson ondgör sig över något Borg sagt. Citerar nedan Petterssons artikel:

Det var inte bara vad Anders Borg sa om lärarna. Det var hur han sa det.

‘Det går inte att ‘känna’ mattetalen. Man kan inte samtala sig till ett deriveringsresultat. Man kan inte uppleva en andragradsekvation. Det hjälper inte om hela gruppen håller varandra i händerna och känner tillsammans, man hittar ändå inte svaret på Wikipedia’, sa Borg och anklagade den svenska lärarkåren för att syssla med ‘osedvanligt dålig pedagogik’.

Nej, så pratar man faktiskt inte om väljargrupper som givit en sin röst och litar på en.

Framför allt går man inte bakom ryggen på någon med ett sådant budskap.

Inte konstigt att lärarna blev arga tillbaka. Det är nog i själva verket ett sundhetstecken.

Hur Pettersson kan kritisera Borg för något som är 100% korrekt övergår mitt förstånd. Pettersson verkar dessvärre ha någon sorts totalt snedvridna sossebrillor på sig, eftersom det för en gångs skull inte finns något att invända. Pettersson sitter sannolikt och leker sossesandlåda i en bostadrätt i Stockholms innerstad och hade tyvärr inte en susning om matematik när hon gick i skolan och har det inte nu heller. Pettersson har också sannolikt gjort det gamla vanliga korkade sosse-misstaget att försöka avskaffa normalfördelningskurvan. Hon tror att ”alla kan” bara de får ”rätt pedagogik”. Detta är fel, fel, fel!!! Alla kan inte! Men sossarnas uppgift är att ge dem som kan möjligheten. Att detta ska vara så jävla svårt att förstå i sosseträsket???


Economics textbooks on ‘capital’ — how to get away with scientific fraud

9 April, 2014 at 15:20 | Posted in Economics | Leave a comment


It is important, for the record, to recognize that key participants in the debate openly admitted their mistakes. Samuelson’s seventh edition of Economics was purged of errors. Levhari and Samuelson published a paper which began, ‘We wish to make it clear for the record that the nonreswitching theorem associated with us is definitely false’ … Leland Yeager and I jointly published a note acknowledging his earlier error and attempting to resolve the conflict between our theoretical perspectives … burmeisterHowever, the damage had been done, and Cambridge, UK, ‘declared victory’: Levhari was wrong, Samuelson was wrong, Solow was wrong, MIT was wrong and therefore neoclassical economics was wrong. As a result there are some groups of economists who have abandoned neoclassical economics for their own refinements of classical economics. In the United States, on the other hand, mainstream economics goes on as if the controversy had never occurred. Macroeconomics textbooks discuss ‘capital’ as if it were a well-defined concept — which it is not, except in a very special one-capital-good world (or under other unrealistically restrictive conditions). The problems of heterogeneous capital goods have also been ignored in the ‘rational expectations revolution’ and in virtually all econometric work.

Edwin Burmeister

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