Än en gång får vi skämmas över regeringen Reinfeldts handfallenhet

19 oktober, 2011 kl. 11:19 | Publicerat i Politics & Society | Kommentarer inaktiverade för Än en gång får vi skämmas över regeringen Reinfeldts handfallenhet

Europadomstolen beslöt i går att inhibera utvisningen av Ganna.

Det är bra.

Däremot är det minst sagt beklämmande att vi har en regering som inte kan tillämpa begreppet ”synnerligen ömmande omständigheter” när det uppenbart just ska tillämpas.

Än en gång får vi stå där och skämmas internationellt över våra ledande politiska företrädares skandalösa handfallenhet.

Gränsen mellan handfallenhet och hjärtlöshet är ibland hårfin.

Tänkte inte på det …

18 oktober, 2011 kl. 10:11 | Publicerat i Economics, Politics & Society | 2 kommentarer

Alla vi som tyckt det är lite märkligt att Folkpartiet driver linjen att Sverige bör gå med i eurosamarbetet får nu reda på varför. Den folkpartistiske EU-parlamentarikern Olle Schmidt säger i en intervju att Sverige bör ställa upp med lån till krisdrabbade Grekland.

– En billig premie för att undvika katastrof, säger Olle Schmidt.

Undrar hur  många svenska väljare som tycker att det är en bra idé att Sverige går med i EMU bara för att få vara med och betala räkningen för eurons misslyckande?

Yours truly och Paul Krugman diskuterar Nobelpriset i ekonomi

17 oktober, 2011 kl. 20:39 | Publicerat i Economics | Kommentarer inaktiverade för Yours truly och Paul Krugman diskuterar Nobelpriset i ekonomi

Paul Krugman hade idag ett inlägg på sin blog där han ondgjorde sig över vad han uppfattade som orättvis kritik mot årets Nobelpristagare i ekonomi. Paul skriver:

So why does the prize matter? Mainly, I’d say, because it gives visibility. And the main way the Nobel can alter the debate is by highlighting work that wasn’t getting as much attention it arguably should … So the Sims/Sargent prize isn’t a vindication of anyone or any particular point of view; it’s basically a signal saying, hey, if you haven’t been aware of this important line of work, now is a good time to read up on it.

Det är inte så ofta jag har meningsskiljaktigheter med den gode Paul. Men här var jag tvungen att resa frågetecken vad gäller hans analys:

Paul, it’s not everyday that I find myself disagreeing with you. But on this issue I think you’re partly wrong. Knowing – and having debated with – many of the members of the committee for the economics prize over the years, I would rather say that there is a clear bias in whom these guys award the prize (as YOU certainly know, there are exceptions …). They are usually people of the neoclassical school, from Chicago, developing the axiomatic-deductive tool-box and very seldom with a real interest in ontological-methodological questions pertaining to the ”realism” and applicability of their preferred models (as a rule based on representative actors making choices in an equlibrium based on some variant of rational expectations). So, of course, the Nobel Prize in economics is apart of a power-game (more on this in this interview with Phil Mirowski: https://larspsyll.wordpress.com/2011/09/16/nobelpriset-i-ekonomi-ett-vape… ). That signaling function of the prize is just as important as the one you chose to focus on.

Man skulle ha kunnat ge priset till exempelvis Axel Leijonhufvud – den ende nu levande svenske ekonom som skulle kunna komma ifråga – eller Paul Davidson. Varför gjorde man inte det? Antagligen därför att det skulle tvinga priskommittén att medge existensen av icke-neoklassisk nationalekonomi. Och att neoklassisk nationalekonomi inte är synonymt med nationalekonomi tout court är något man inte gärna tillstår i den sötvattenimpregnerade klubben.

The Nobel Prize in Freshwater Economics

17 oktober, 2011 kl. 18:11 | Publicerat i Economics | Kommentarer inaktiverade för The Nobel Prize in Freshwater Economics

John Cassidy has a truly wonderful and illuminating article on the latest Nobel Prize in Economics in The New Yorker. I especially liked the following passage:

Unfortunately, in case it needs restating, freshwater economics turned out to be based on two ideas that aren’t true. The first (Fama) is that financial markets are efficient. The second (Lucas/Sargent/Wallace) is that the economy as a whole is a stable and self-correcting mechanism. The rational-expectations theorists didn’t refute Keynesianism: they assumed away the reason for its existence. Their models were based not just on rational expectations but on the additional assertion that markets clear more or less instantaneously. But were that true, there wouldn’t be any such thing as involuntary unemployment, or any need for counter-cyclical monetary policy.

Perhaps because they wanted to head off this sort of criticism, the Nobel committee said that it was honoring Sargent not for his original work on rational expectations and economic policy but for his contributions to “econometrics”—the application of statistics to economics. But if this is a distinction it is a very fine one. Sargent’s econometric research explored the implications of the rational-expectations hypothesis for testing theories. In the mind of every economist I know, he is still closely associated with rational expectations and its later refinements.

Folkpartiets krav på svenskt medlemskap i EMU – ren självmordspolitik

17 oktober, 2011 kl. 10:50 | Publicerat i Economics, Politics & Society | Kommentarer inaktiverade för Folkpartiets krav på svenskt medlemskap i EMU – ren självmordspolitik

För en vecka sedan skrev jag en kritisk artikel angående folkpartisten Carl Bastiat Hamiltons oövertänkta förslag om att Sverige borde gå med i EMU. På dagens newsmill har Göran Zettergren – chefsekonom på TCO och tidigare chef för Konjunkturinstitutets enhet för prognosområdena arbetsmarknad, löner, inflation och resursutnyttjande – en synnerligen läsvärd artikel som också hårt kritiserar Hamiltons märkliga argumentation:

Euron bidrog inte bara till att skapa och förvärra problemen i Europa. Den försvårar också allvarligt möjligheterna att komma till rätta med dessa. Den gemensamma valutan är dessutom den egentliga orsaken till att vi överhuvudtaget har en skuldkris i Europa.

Tvärtemot alla förhoppningar ledde införandet av euron inte till någon konvergens av ländernas ekonomier. Även om det kanske såg ut så till en början. Tvärtom ledde den till en divergens som på mindre än tio år skapade gigantiska obalanser inom eurozonen och en ohållbar konkurrenssituation för flera av dess medlemsländer.

Euron är naturligtvis inte orsaken till alla Europas problem. Långt därifrån. Flera länder i eurozonen har dessutom klarat krisen relativt väl medan andra länder utanför zonen idag har allvarliga ekonomiska problem. De flesta industriländer har idag problem med höga offentliga underskott och stigande statsskulder. Det är dock bara i vissa euroländer som vi har en skuldkris. Det är bara euroländer som hotar att ställa in sina betalningar. Och detta är inte någon slump.

Under de europeiska valutakriserna i början av 1990-talet lärde vi oss att en fast växelkurs är en inbjudan till spekulation. Eftersom ländernas valutareserver är begränsade är det bara att satsa tillräckligt stora summor för att knäcka landets centralbank och sedan casha in en säker vinst. När de första länderna ger efter, leder detta till en smittoeffekt på andra länder. Ett efter ett tvingades länderna att ge upp. Till slut tvingades även Danmark att ge upp, trots att man inte hade några fundamentala problem med den då gällande växelkursen.

Från denna episod kan man dra olika slutsatser. Den europeiska slutsatsen var att dessa ”halvfasta” växelkurser inte var tillräckligt fasta. Endast en gemensam valuta kunde skydda landet från sådan spekulation. Den svenska slutsatsen – om man får kalla den så – var den omvända. Endast en flytande växelkurs kunde skydda oss från spekulanterna. Jag tror att mycket få då insåg hur rätt vi hade.

Folkpartiets linje att vi ska gå med i eurosamarbetet – när vi nu sitter med facit i hand över det misslyckade experimentet – verkar vara rena politiska självmordet. Obegripligt.

Michael Goldberg on irrationality and financial crises

16 oktober, 2011 kl. 19:30 | Publicerat i Economics | Kommentarer inaktiverade för Michael Goldberg on irrationality and financial crises

Michel Goldberg is interviewed on the above subjects  here. For more on Michael Goldberg’s and Roman Frydman’s critique of rational expectations and ergodicity, see my earlier posts here and here.

Why occupy Wall Street? Watch MELTDOWN!

15 oktober, 2011 kl. 19:50 | Publicerat i Economics, Politics & Society | Kommentarer inaktiverade för Why occupy Wall Street? Watch MELTDOWN!

Why Ricardian equivalence is false and expansionary policies might work

15 oktober, 2011 kl. 16:36 | Publicerat i Economics | Kommentarer inaktiverade för Why Ricardian equivalence is false and expansionary policies might work

Paul Krugman has a nice piece today on what’s wrong with Ricardian equivalence. Commenting on the paper by John Kay that I wrote about the other day here on docendo discimus, he writes:

It’s one thing to have an argument about whether consumers are perfectly rational and have perfect access to the capital markets; it’s another to have the big advocates of all that perfection not understand the implications of their own model.

So let me try this one more time.

Here’s what we agree on: if consumers have perfect foresight, live forever, have perfect access to capital markets, etc., then they will take into account the expected future burden of taxes to pay for government spending. If the government introduces a new program that will spend $100 billion a year forever, then taxes must ultimately go up by the present-value equivalent of $100 billion forever. Assume that consumers want to reduce consumption by the same amount every year to offset this tax burden; then consumer spending will fall by $100 billion per year to compensate, wiping out any expansionary effect of the government spending.

But suppose that the increase in government spending is temporary, not permanent — that it will increase spending by $100 billion per year for only 1 or 2 years, not forever. This clearly implies a lower future tax burden than $100 billion a year forever, and therefore implies a fall in consumer spending of less than $100 billion per year. So the spending program IS expansionary in this case, EVEN IF you have full Ricardian equivalence.

Is that explanation clear enough to get through? Is there anybody out there?

And the answer is that there isn’t.

The fact that these guys don’t even get the implications of their own models right tells us that the problem runs deeper than believing too much in abstract math. At some level it has to be political: they want to declare government policy ineffectual so badly that for all their vaunted modeling mojo they can’t be bothered to think it through, or listen to other people who point out their error.

As I see it Ricardian equivalence is false mainly because it requires rational expectations. As Kevin Hoover has it in his The New Classical Macroeconomics (Basil Blackwell 1988):

Ricardian equivalence is the claim that whether a given path of government expenditure is financed through taxes or debt is unimportant: substituting debt for taxes appears to increase disposable income today. But since the debt must be repaid with interest, a rational taxpayer would save the entire windfall in order to afford the future tax bill, leaving his expenditure unchanged. Ricardian equivalence remains controversial because it depends on assumptions about the public’s foresight and grasp of the fiscal system closely related to the rational-expectations hypothesis and on debatable assumptions about the incidence of taxes and expenditure.

A rather ironic fact is that Ricardo himself didn’t believe in Ricardian equivalence. In “Essay on the Funding System” (1820) he writes:

But the people who paid the taxes never so estimate them, and therefore do not manage their private affairs accordingly. We are too apt to think that the war is burdensome only in proportion to what we are at the moment called to pay for it in taxes, without reflecting on the probable duration of such taxes. It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1000.

[For more on this issue: https://larspsyll.wordpress.com/2011/05/16/robert-lucas-rational-expectations-and-the-understanding-of-business-cycles/ ]

Is it really possible to take the Lucas-Sargent models seriously?

15 oktober, 2011 kl. 10:33 | Publicerat i Economics | Kommentarer inaktiverade för Is it really possible to take the Lucas-Sargent models seriously?

James Tobin gave the answer to that question already thirty years ago:

They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they fins objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

Arjo Klamer, The New Classical Mcroeconomics: Conversations with the New Classical Economists and their  Opponents,Wheatsheaf Books, 1984

Rigorous models lacking relevance is no to be taken seriously. I would rather be vaguely right, than precisely wrong – as Keynes once put it.

Calmfors medicin räcker inte för att rädda Grekland

14 oktober, 2011 kl. 21:43 | Publicerat i Economics, Politics & Society | Kommentarer inaktiverade för Calmfors medicin räcker inte för att rädda Grekland

Lars Calmfors argumenterade igår – vid finansutskottets seminarium om EU och finanskrisen – för att Europas ledare ”måste komma till skott” och skriva ner Greklands skuld med minst 50 procent. Problemen – inte minst i banksektorn – som följer på detta får sen ECB fixa med ökade resurser till den gemensamma räddningsfonden.

Allt det här låter helt OK – men är ändå fullständigt otillräckligt! Åtminstone i ett blickfält som sträcker sig mer än tre månader framåt i tiden.

På sikt kommer varken Grekland eller de andra PIIGS-länderna att räddas av den här typen av ambulansutryckningar och bankuter. Konstgjord andning i all ära, men i längden är det bättre om man kan andas fritt och utan respirator.

För mig känns det inte intellektuellt hederligt att låtsas som om europeriferiländernas medlemskap i eurosamarbetet fortsatt skulle gå att rädda. Ska Grekland och de andra europeriferiländerna ha en chans att få ordning på sina ekonomier och samhällen måste man bort från den rent kontraproduktiva ekonomiska politik som euron tvingar dem att föra. I stället för att hålla på och laga och lappa på det i grunden förfelade EMU-projektet är det bättre att inse att vi nått vägs ände och att det är dags att erkänna det. Och ta en annan väg. En väg som leder framåt. En väg utan euron.

Nödvändig läsning för alla dessa ”ansvarsfulla” politiker

14 oktober, 2011 kl. 16:59 | Publicerat i Economics | Kommentarer inaktiverade för Nödvändig läsning för alla dessa ”ansvarsfulla” politiker

Martin Wolf läxar i en alldeles förträfflig artikel i Financial Times upp den engelske premiärministern David Cameron för att inte ha förstått makroekonomiska fundamenta. Men den handlar lika mycket om Anders Borg och Fredrik Reinfeldt. För alla är de lika ”ansvarsfulla”  – och alla har de uppenbart fel om vägen ut ur krisen: 

How should the UK escape from a slump that seems sure to be longer and more costly than the Great Depression of the 1930s? David Cameron, the prime minister, has no doubt. In his speech to the Conservative conference last week, he insisted that: “The only way out of a debt crisis is to deal with your debts. That’s why households are paying down their credit card and store card bills. It means banks getting their books in order. And it means governments – all over the world – cutting spending and living within their means.” What would be the result of this advice? Prolonged stagnation, at best. That is what we have been seeing, after all.

What Mr Cameron recommends is even nigh on impossible. Why is that? Is it not common sense that if one has borrowed too much, one must pay it back? Alas, what makes sense for individuals does not make sense for an economy, because one person’s spending is another person’s income. Consider a closed economy. Income and spending must match. If the private sector decided to spend less than its income, to pay down debt and if the government also decided to stop borrowing, aggregate incomes would fall until they could no longer achieve what they wanted. All they would obtain, by following Mr Cameron’s advice, is a race to the economic bottom …

If debt destruction were desired, the least damaging policy would be inflation. At the least, no sane policymaker would choose deflation in an overindebted economy. Yet one government – that of Japan – did just that. The view in the UK is that deflation is inconceivable. I disagree. Monetarists should note that broad money and lending are stagnant. Yes, headline inflation is high, but unit labour costs are flat and nominal wage growth low. The UK could be just one negative shock away from deflation. With fiscal policy contractionary, banks weak and caution rampant in the private sector, the risk is not at all small …

Without economic growth, it is almost impossible to deleverage an economy. The prime minister revels in his pre-Keynesian views. When weak demand is the immediate constraint on output, that is simply terrifying.

Why ideas are so important

14 oktober, 2011 kl. 10:50 | Publicerat i Economics | Kommentarer inaktiverade för Why ideas are so important

When giving courses on economic growth I often find students having problems grappling with the distinction between  ideas and human capital in modern endogenous growth theory.

However, in this passage – in Chad Jones and Paul Romer’s article  The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital – a succinct, beautiful and accessible account of the difference is given:

Of the three  statevariables  that we endogenize, ideas  have been the hardest  to bring into the applied general equilibrium structure. The difficulty arises because of the defining characteristic of an idea, that it is a pure nonrival good. A given idea is not scarce in the same way that land or capital or other objects are scarce; instead, an idea can be used by any number of people simultaneously without congestion or depletion.

Because they are nonrival goods, ideas force two distinct changes in our thinking about growth, changes that are sometimes conflated but are logically distinct. Ideas introduce scale effects. They also change the feasible and optimal economic institutions. The institutional implications have attracted more attention but the scale effects are more important for understanding the big sweep of human history.

The distinction between rival and nonrival goods is easy to blur at the aggregate level but inescapable in any microeconomic setting. Picture, for example, a house that is under construction. The land on which it sits, capital in the form of a measuring tape, and the human capital of the carpenter are all rival goods. They can be used to build this house but not simultaneously any other. Contrast this with the Pythagorean Theorem, which the carpenter uses implicitly by constructing a triangle with sides in the proportions of 3, 4 and 5. This idea is nonrival. Every carpenter in the world can use it at the same time to create a right angle.

Of course, human capital and ideas are tightly linked in production and use. Just as capital produces output and forgone output can be used to produce capital, human capital produces ideas and ideas are used in the educational process to produce human capital. Yet ideas and human capital are fundamentally distinct. At the micro level, human capital in our triangle example literally consists of new connections between neurons in a carpenter’s head, a rival good. The 3-4-5 triangle is the nonrival idea. At the macro level, one cannot state the assertion that skill-biased technical change is increasing the demand for education without distinguishing between ideas and human capital.

Why everyone should occupy Wall Street

13 oktober, 2011 kl. 16:57 | Publicerat i Economics | 2 kommentarer

Dean Baker  – chef för Center for Economic and Policy Research i Washington – förklarar på ett pedagogiskt och övertygande sätt varför alla egentligen har anledning att ockupera Wall Street och andra finanscentra runt omkring i världen:

The reason that we have 26 million people unemployed, underemployed or out of the work force altogether is not that we are poor, but rather that we are rich. The immediate problem facing our economy is not one of too few goods and resources; it is a problem of too little demand. And this is what should make the Wall Street Occupiers and everyone else absolutely furious at our leaders.

If people had more money in their pockets, then they would buy more goods and services. Companies would then hire more people to produce these goods and services and we would then have more jobs. The unemployment and poverty that the country is experiencing today is overwhelmingly the result of a failure of political will.

If the federal government increased spending on infrastructure, gave teens jobs cleaning up their neighborhoods, gave state and local governments the funds to keep teachers and firefighters employed and encouraged employers to shorten work hours rather than lay off workers, we could quickly get the economy back to full employment. Economists have known this story for more than 70 years, but somehow creating jobs doesn’t rank as high on the priority list in Washington as cutting Social Security and Medicare.

In short, we have an economic system that, even when it is working, has been rigged to redistribute income to rich. And we have a political system that at a time of immense economic distress is more focused on undercutting the means of support for working families than fixing the economy. It is hard to understand why everyone is not occupying Wall Street.

Slö, slapp, lat, loj och likgiltig? Nej!

13 oktober, 2011 kl. 09:53 | Publicerat i Economics, Politics & Society | Kommentarer inaktiverade för Slö, slapp, lat, loj och likgiltig? Nej!

Om det till äventyrs fortfarande finns någon där ute som tror att problemen i europeriferiländerna beror på att greker, spanjorer och irländare skulle vara slöa, slappa, lata, loja och likgiltiga – läs Kash Mansori artikel Why Greece, Spain, and Ireland Aren’t to Blame for Europe’s Woes så försvinner den villfarelsen snabbt.

Ambulansutryckningar och ensidig åtstramning räddar inte euron

12 oktober, 2011 kl. 19:51 | Publicerat i Economics, Politics & Society | Kommentarer inaktiverade för Ambulansutryckningar och ensidig åtstramning räddar inte euron

Martin Wolf gör en helt riktig analys i Financial Times  och visar hur hopplöst det är att tro sig kunna rädda euron genom att tvinga europeriferiländerna till nedskärningar – samtidigt som man i eurokärnländerna för en politik som bygger på ”ansvarsfull” åstramning:

At least, nobody now sees the eurozone crisis as a little local difficulty. It has become the epicentre of an aftershock of the global financial crisis that could prove even more destructive than the initial earthquake. Potentially, it is a triple shock: a financial crisis; a crisis of sovereigns, including Italy, the world’s third largest sovereign debtor; and a crisis of the European project with unknowable political consequences. It is no wonder people are frightened. They ought to be.

Against this fearsome background, what should (and can) the eurozone do? The most important part of the answer …  is that it must deal with the immediate crisis in ways that also help resolve the longer-term challenges.

The broad consensus of the world’s policymakers and commentators is that the eurozone must now do the following: divide countries in difficulties into the insolvent and the illiquid; restructure the debts of the former and provide unlimited, but temporary, support for the latter; and recapitalise banks, after stress tests that allow for losses on sovereign debt, either from national treasuries or from the European financial stability facility, in accordance with the flexibility given by the decisions taken in July 2011.

Achieving this package will stretch the eurozone’s inter-governmental decision-making to (and quite possibly beyond) breaking point.

My concern is deeper: these ideas, albeit now necessary, deal with the symptoms of what has gone wrong, not the underlying causes.

As I have long argued, at bottom this is far more a balance of payments crisis rooted in financial sector misbehaviour and cumulative divergence in competitiveness, than a fiscal crisis. The architects of the eurozone thought that balance of payments crises were impossible in a currency union. They were wrong. In the absence of automatic cross-border financing, an unfinanceable external deficit will emerge as a domestic credit crisis. Then, even currency risk will return if the union is among largely sovereign states.

Critics such as Prof Sinn focus on the risk that excessive financing will undermine, if not destroy, incentives to adjust. Yet there is an opposing risk, that forcing adjustment on the weak will fail, because of a lack of offsetting adjustment in the strong. That would not be a huge problem if those forced to adjust are small. It is a vast problem if they are large. The risk is of a downward spiral as austerity is exported and re-exported.

No doubt, a way must be found to deal with the immediate crisis that does not allow another panic. But that would not be a solution if it merely led to indefinite financing of fundamentally uncompetitive economies. At the same time, one-sided and unduly hasty adjustment would exacerbate the downturns in the eurozone and world economies. What is needed is financing and adjustment. Unless and until that difficult combination is achieved, we are delivering first aid not a cure.

Det går inte att backa sig ur en ekonomisk kris. De som har kraft måste våga vara loken som drar de andra framåt. Annars kör man fast i en nedåtgående kumulativ process.   

The Failures of Modern Macroeconomics – models using the WRONG simplifications

12 oktober, 2011 kl. 15:44 | Publicerat i Economics, Theory of Science & Methodology | Kommentarer inaktiverade för The Failures of Modern Macroeconomics – models using the WRONG simplifications

In a speech – on the Lindau Meeting of Economic Laureates – Joseph Stiglitz argues that the basic problem with macroeconomics today is not that it uses simplifications – all sciences and models do. The problem is that it uses the wrong simplifications. Great speech!

http://www.mediatheque.lindau-nobel.org/EmbeddedPlayer.aspx?id=622

[Update: I especially liked the Stiglitzian anti-market-fundamentalism-quip ”The Invisible Hand is Invisible – simply because it is not there.”]

The useless macroeconomic theories of Robert Lucas and Thomas Sargent

11 oktober, 2011 kl. 21:27 | Publicerat i Economics | Kommentarer inaktiverade för The useless macroeconomic theories of Robert Lucas and Thomas Sargent

In a truly wonderful comment on the state of standard macroeconomic theory , Willem Buiter argues that neither the New Classical, nor the New Keynesian, macro theory helped us foresee, understand or craft solutions to the crisis of today’s economy. They did not allow key questions of insolvency and illiquidity to be asked, and even less, to be answered.

Buiter writes:

The Monetary Policy Committee of the Bank of England I was privileged to be a ‘founder’ external member of during the years 1997-2000 contained, like its successor vintages of external and executive members, quite a strong representation of academic economists and other professional economists with serious technical training and backgrounds. This turned out to be a severe handicap when the central bank had to switch gears and change from being an inflation-targeting central bank under conditions of orderly financial markets to a financial stability-oriented central bank under conditions of widespread market illiquidity and funding illiquidity. Indeed, the typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding. It was a privately and socially costly waste of time and other resources.

Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro etc, and the New Keynesian theorizing of Michael Woodford and many others) have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and aesthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works – let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck.

Both the New Classical and New Keynesian complete markets macroeconomic theories not only did not allow questions about insolvency and illiquidity to be answered. They did not allow such questions to be asked.

In both the New Classical and New Keynesian approaches to monetary theory (and to aggregative macroeconomics in general), the strongest version of the efficient markets hypothesis (EMH) was maintained. This is the hypothesis that asset prices aggregate and fully reflect all relevant fundamental information, and thus provide the proper signals for resource allocation. Even during the seventies, eighties, nineties and noughties before 2007, the manifest failure of the EMH in many key asset markets was obvious to virtually all those whose cognitive abilities had not been warped by a modern Anglo-American Ph.D. education.   But most of the profession continued to swallow the EMH hook, line and sinker, although there were influential advocates of reason throughout, including James Tobin, Robert Shiller, George Akerlof, Hyman Minsky, Joseph Stiglitz and behaviourist approaches to finance. The influence of the heterodox approaches from within macroeconomics and from other fields of economics on mainstream macroeconomics – the New Classical and New Keynesian approaches – was, however, strictly limited.

Charles Goodhart, who was fortunate enough not to encounter complete markets macroeconomics and monetary economics during his impressionable, formative years, but only after he had acquired some intellectual immunity, once said of the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling: “It excludes everything I am interested in”. He was right. It excludes everything relevant to the pursuit of financial stability.

The Bank of England in 2007 faced the onset of the credit crunch with too much Robert Lucas, Michael Woodford and Robert Merton in its intellectual cupboard. A drastic but chaotic re-education took place and is continuing.

I believe that the Bank has by now shed the conventional wisdom of the typical macroeconomics training of the past few decades. In its place is an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions and half-developed insights. It is not much, but knowing that you know nothing is the beginning of wisdom.

Still stunned and disappointed at the 2011 Nobel Prize in Economics

11 oktober, 2011 kl. 20:51 | Publicerat i Economics | Kommentarer inaktiverade för Still stunned and disappointed at the 2011 Nobel Prize in Economics

Olaf Storbeck has an interesting and thought-provoking piece on the fact that The Royal Swedish Academy of Sciences decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 to Thomas J. Sargent and Christopher A. Sims. He writes:

I think this decision is detrimental to the reputation of the Nobel prize in Economics as well as bad for the discipline in a broader sense. As an influential economist told me confidentially last night at a drinks reception here in London: “This is completely ridiculous.”

In fact Stockholm once again honours the Ancien Régime in macroeconomics.

The prize goes to theories that are rightly blamed for paving the way to the biggest financial and economic crisis since the Great Depression. It is a price for a school of economics that assumes unfettered markets always perform smoothly and the financial system is so efficient that macro economists don’t have to bother looking at it.

Hence, there are no banks (and by definition: no banking crises) whatsoever in the mainstream macro models. There usually is one stable equilibrium, and every economic agent behaves perfectly rational and selfishly. Consumers as well as firms are building “rational expectations” about the future and rightly assume any future consequence of a government intervention. Additionally, mainstream macro economists quite often assume that all consumers and all companies are identical. All those assumptions make it much easier to solve the models. And all those assumptions are at odds with the world we live in.

Those models usually lead to the conclusion that fiscal and monetary policy can’t achieve a lot and that government interventions are doing more harm than good. The experience of the last for years teaches us otherwise. Without the ultra-aggressive monetary policy and the large fiscal stimulus the world economy would have fallen into a second Great Depression.

Mainstream macro economists like Thomas Sargent and Christopher Sims devised elegant mathematical models and methods that are widely used in the profession. In a telephone interview, Tom Sargent said yesterday:

 “We try to experiment in our models before we wreck the world”.

This is precisely the problem. They use models that were based on wrong assumptions and delivered wrong conclusion. Macroeconomists like Sargent and Sims lead their discipline into an illusionary world and dangerous policy advice.

The helpless answers Sargent and Sims gave on questions regarding the financial crisis were the latest evidence supporting this view. “There is no easy solution, we have to look at data”, Sims told the world. Sargent said in a telephone interview: “We are just bookish types that look at data and try to figure out what’s going on.”

We are in the fourth year of the most severe financial crisis since the Great Depression and this is all that two of the allegedly leading macroeconomists have to offer? My goddess, maybe I really should start to buy gold after all.

Unfortunately, this years noble price committee decision is no outlier. When it comes to economics, Stockholm for decades has been cherished a weird preference in favour of a specific school of orthodox economics. Time and again, the award was given to very conservative economists who were arguing against government interventions.

This started with Milton Friedman and George Stigler and includes Gary Becker, Robert Lucas, Ed Prescott, Finn Kydland and Robert Mundell. The prize to Robert Merton and Myron Scholes can also be seen in this tradition.

This years decision to give the prize to Sargent and Sims is particularly bizarre. It is like honouring the engineer who designed the Titanic after the ship sunk.

Intressant prismotivering

11 oktober, 2011 kl. 08:56 | Publicerat i Economics | Kommentarer inaktiverade för Intressant prismotivering

I ett uttalande apropå ekonomipriset levererade igår en av priskommitténs medlemmar, Mats Persson, professor i nationalekonomi vid Institutet för Internationell ekonomi i Stockholm, följande intressanta prismotivering:

– Inom makroekonomin, med BNP, sysselsättning och ränta, är det speciellt svårt att se orsak och verkan. Om Riksbanken höjer räntan, påverkar det inflationen eller är det förväntningarna om en framtida uppgång i inflationen som har påverkat Riksbankens räntepolitik?  Det här är hur krångligt som helst och det har de här två pristagarna rett ut och skapat en modell för. I stort sett alla riksbanker och regeringar i världen använder nu de här teorierna.

Hmm. Det låter ju väldigt förtroendeingivande med tanke på hur det ser ut i ekonomin runt omkring i världen idag …

Nobel Prize Winner Thomas Sargent an empirical macroeconomist? I’ll be dipped!

10 oktober, 2011 kl. 18:27 | Publicerat i Economics | Kommentarer inaktiverade för Nobel Prize Winner Thomas Sargent an empirical macroeconomist? I’ll be dipped!

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 to Thomas J. Sargent and Christopher A. Sims ”for their empirical research on cause and effect in the macroeconomy”.

In an interview with Thomas Sargent in The Region (September 2010), however, I read the following defense of  ”modern macro” (my emphasis):

Sargent: I know that I’m the one who is supposed to be answering questions, but perhaps you can tell me what popular criticisms of modern macro you have in mind.

Rolnick: OK, here goes. Examples of such criticisms are that modern macroeconomics makes too much use of sophisticated mathematics to model people and markets; that it incorrectly relies on the assumption that asset markets are efficient in the sense that asset prices aggregate information of all individuals; that the faith in good outcomes always emerging from competitive markets is misplaced; that the assumption of “rational expectations” is wrongheaded because it attributes too much knowledge and forecasting ability to people; that the modern macro mainstay “real business cycle model” is deficient because it ignores so many frictions and imperfections and is useless as a guide to policy for dealing with financial crises; that modern macroeconomics has either assumed away or shortchanged the analysis of unemployment; that the recent financial crisis took modern macro by surprise; and that macroeconomics should be based less on formal decision theory and more on the findings of “behavioral economics.” Shouldn’t these be taken seriously?

Sargent: Sorry, Art, but aside from the foolish and intellectually lazy remark about mathematics, all of the criticisms that you have listed reflect either woeful ignorance or intentional disregard for what much of modern macroeconomics is about and what it has accomplished. That said, it is true that modern macroeconomics uses mathematics and statistics to understand behavior in situations where there is uncertainty about how the future will unfold from the past. But a rule of thumb is that the more dynamic, uncertain and ambiguous is the economic environment that you seek to model, the more you are going to have to roll up your sleeves, and learn and use some math. That’s life.

Are these the words of an empirical macroeconomist? I’ll be dipped! To me it sounds like the same old axiomatic-deductivist mumbo-jumbo that parades as economic science of today.

Neoclassical economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of the other part of the model-target dyad.

Neoclassical economics has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. But “facts kick”, as Gunnar Myrdal used to say. Hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

When that day comes  The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel will hopefully be awarded a real macroeconomist and not axiomatic-deductivist modellers like Thomas Sargent and economists of that ilk in the efficient-market-rational-expectations camp .

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