Why central banks don’t control the money supply

26 Oct, 2012 at 16:47 | Posted in Economics | Comments Off on Why central banks don’t control the money supply

Why Central Banks Don’t Control the Money Supply: A Visual Tour of the Macroeconomic Dynamics of Bank Loans, Reserve Requirements, Capital Requirements, and Cash Withdrawals

So what

26 Oct, 2012 at 11:05 | Posted in Varia | Comments Off on So what

Lärare och kunskap – obligatorisk läsning för skolpolitiker

26 Oct, 2012 at 10:55 | Posted in Education & School | 1 Comment

Vetenskapsjournalisten David Warshs bok Kunskap och nationers välstånd – som handlar om den amerikanske ekonomen Paul Romers uppmärksammade och revolutionerande teori om sambandet mellan kunskap och tillväxt – borde vara obligatorisk läsning för landets alla skolpolitiker.

I Sverige har levnadsstandarden mätt som per capitainkomst ökat med en faktor på över 50 sedan mitten av 1800-talet. Överlag är människor i västvärlden idag mer tjugo gånger rikare än vad de var för ett och ett halvt sekel sedan. Dess befolkning har en förväntad livstid som är nästan dubbelt så hög som förfädernas. Vad har skapat denna ökning i välfärd och levnadsstandard?

Och samtidigt: varför skiljer sig idag per capitainkomst och tillväxttakt i olika länder åt mer än någonsin? Varför har skillnaden mellan rika och fattiga länder ökat? Hur kan det komma sig att världens rikaste länder i början av det tjugoförsta århundradet har en per capitainkomst som är mer än trettio gånger större än den i de fattigaste länderna?

”En verkligt god förklaring är praktiskt taget sömlös” skrev Adam Smith 1776 i Wealth of Nations. Finns det en sådan förklaring för samhällsvetenskapernas och mänsklighetens kanske viktigaste problemfält – den ekonomiska tillväxten?

Paul Romers artikel ”Endogenous Technological Change” (1990) – där kunskap görs till tillväxtens viktigaste drivkraft – är nog det närmsta vi för närvarande kan komma.

Romer gör en betydelsefull åtskillnad mellan vanliga objekt (bilar, kylskåp, datorer) och kunskaper (formler, matrecept, patent). Kunskaper är för Romer ett slags instruktioner eller recept som talar om hur vi kan använda våra resurser för att producera nyttigheter. Med bättre kunskaper kan tillväxten öka även om de materiella resurserna är begränsade. Kunskaper är icke-rivaliserande så till vida att en persons nyttjande av kunskap inte minskar andras möjlighet till brukande av samma kunskap. Till skillnad från människor (med sina speciella färdigheter och utbildning) och ting (aktier, maskiner, naturtillgångar) styrs kunskap av stigande avkastning. Ett föremål (en portion mat) kan bara konsumeras av en enskild person vid ett tillfälle, medan kunskap (matreceptet) kan användas av hur många som helst när som helst.

Romer har övertygande visat på kunskapsproduktionens betydelse för skapandet av nationernas välfärd. Och om idéer och kunskaper spelar en så avgörande roll för långsiktig tillväxt och välfärd borde betydligt mer av debatten – istället för räntor och skattesatser – handla om utbildningsstrategier, forskningssatsningar och lärarlöner. Att kunna hantera spänningen mellan att skapa kunskapsbefrämjande institutioner och samtidig se till att så många som möjligt får nytta av kunskapen är en av politikens främsta uppgifter.

Kunskap är makt. Detta gäller också inom ekonomi. Bill Gates och Ingvar Kamprad är levande bevis på att kunskap om något som andra inte har kunskap om kan göra en rik. Och kanske än viktigare: kunskap är det som ligger till grund för våra möjligheter att skapa långsiktig välfärd.

Ödets vagn löper förvisso inte på skenor. Men kunskap är likväl, som Romer visar, det lokomotiv som driver den ekonomiska tillväxten och människors välfärd framåt.

Poverty? Is that something you can eat?

25 Oct, 2012 at 20:28 | Posted in Economics, Politics & Society | 3 Comments


 

RICHARD EPSTEIN: What’s good about inequality is if, in fact, it turns out that inequality creates an incentive for people to produce and to create wealth, it’s a wonderful force for innovation.

PAUL SOLMAN: Aren’t many of the top 1 percent or 0.1 percent in this country rich because they’re in finance?

RICHARD EPSTEIN: Yes. Many of the very richest people in the United States are rich because they are in finance.

And one of the things you have to ask is, why is anyone prepared to pay them huge sums of money if in fact they perform nothing of social value? And the answer is that when you try to knock out the financiers, what you do is you destroy the liquidity of capital markets. And when you destroy the liquidity of those markets, you make it impossible for businesses to invest, you make it impossible for people to buy home mortgages and so forth, and all sorts of other breakdowns.

So they should be rich. It doesn’t bother me.

PAUL SOLMAN: Are you worried that a small number of people controlling a disproportionate share of the wealth can control a democratic system?

RICHARD EPSTEIN: Oh, my God no. 

PBS-interview with libertarian professor of law Richard Epstein

When the economy is like a pack of wild horses

25 Oct, 2012 at 18:54 | Posted in Economics | 2 Comments

Andrew Haldane is England’s Executive Director for Financial Stability. Olaf Storbeck recently inteviewed him about the crisis of contemporary economics and the way forward.

I am just trying to make sense of the real world. The workhorse model we used in economics is no longer working properly. Hence we are compelled to think innovatively, to seek insights from disciplines beyond our own. We are looking for systems behaviour that matches what we can see happening in the real world. In some ways we are just borrowing ideas from other disciplines.

What are the issues of contemporary macroeconomics?

With the benefit of hindsight, we built an edifice, a set of models, that were quite peculiar in the assumptions they made . For example, we drifted away from the notion of having a multiplicity of equilibria. We also forgot that we could even get stuck in the wrong equilibrium, which is one way of making sense of where we are today. We drifted away from the notion that systems could become dynamically unstable when stretched or stressed too much. It is hard to think of a system outside of economics, whether from the natural world or from social sciences, that doesn’t have a multiplicity of equilibria and doesn’t behave peculiarly when stretched or stressed and can which be destabilising. However, in modern macro, the notion of equilibrium was a singular stationary, stabilising concept.

Can you give a concrete example, please?

Back in the 20s, when macro was beginning to find its feet, Knut Wicksell used the metaphor, when explaining economic systems, of the rocking horse. Imagine you are hitting a rocking horse with a stick: The horse moves according to a pretty regular pattern. That metaphor is a fairly accurate summary of how we approached economic modelling theoretically and empirically for a century.

If the economy doesn’t resemble a rocking horse, what’s a more appropriate description?

Instead of beating a rocking horse, imagine hitting a pack of wild horses with a stick. What happens next? Well, the truth is: you don’t know. One possibility is nothing happens at all. Maybe the horse you beat runs off in one direction. Most likely, however, the horse runs off scared and panics all the other horses who then also charge off in a direction that is impossible to predict ex ante.

Evidensbaserad skola

25 Oct, 2012 at 10:30 | Posted in Education & School | Comments Off on Evidensbaserad skola

Yours truly har idag en artikel – Den evidensbaserade skolan – en chimär – i nättidningen Skola och samhälle. Läs den!

Reaganomics

24 Oct, 2012 at 09:52 | Posted in Varia | 5 Comments

Ben Bernanke and MMT

23 Oct, 2012 at 20:08 | Posted in Economics | 5 Comments


In this interesting video Federal Reserve Chairman Bernanke basically says that idle balances don’t chase goods and services and that a fortiori we don’t have to be overly afraid that quantitative easing will spill over into inflation. And – which actually is the most interesting part of the speech – he also confirms the Modern Monetary Theory view that the financing of these operations is made possible by simply crediting a bank account and thereby – by a single keystroke – actually creating money.

One of the most important reasons why we’re still stuck in depression-like economic quagmires is that people in general – including most mainstream economists – simply don’t understand the workings of modern monetary systems. The result is totally and utterly wrong-headed austerity policies, emanating out of a groundless fear of creating inflation via central banks printing money, in a situation where we rather should fear deflation and inadequate effective demand.

Leverage cycles (wonkish)

23 Oct, 2012 at 17:22 | Posted in Economics | Comments Off on Leverage cycles (wonkish)

John Geanakoplos has a great lecture at Yale University on why central banks should pay much more attention to leverage cycles.He is forcefully arguing that one of the missing ingredients in the macro models used by central banks today are endogenous default and endogenous lending terms distinct from the interest rate. Focussing to much on interest rates have made them unable to recognise that changes in the perception of potential defaults can have serious repercussions on economic activities. It has also made central banks unable to detect the financial bubbles and to a faulty understanding of the nature of debt and leverage. In short – central banks have to a large degree based their policies on the wrong models.

Fiscal multipliers and economic history

23 Oct, 2012 at 15:10 | Posted in Economics | Comments Off on Fiscal multipliers and economic history

The IMF grabbed headlines and upset officials earlier this month when it released an analysis which concluded that, starting in 2009, the fiscal policy multiplier has actually been considerably larger than previously supposed (IMF 2012). The Fund’s new estimates, which range from 0.9 to 1.7, suggest that Europe’s policies of austerity are in fact directly responsible for the fact that the continent’s recessions have been even deeper than initially forecast.

We are shocked – shocked – to find that there’s multiplication going on in here.

Actually, not so shocked. This is of course just what standard theory would suggest: that the fiscal multiplier will be unusually large when there is little monetary response to the fiscal impulse, whether because interest rates are at the zero lower bound or for other reasons. One might object that the ECB has, in fact, reacted to the Eurozone slowdown by easing. To this we would respond: not so much. What matters in this context are not targeted interventions like last year’s Long-Term Refinancing Operations or this (or next?) year’s Outright Monetary Transactions, which are designed to enhance the operation of particular markets and help specific sovereigns. What matters for the multiplier are economy-wide measures like interest rate cuts and quantitative easing. To date, the latter has been non-existent, while the former have been underwhelming.

In the classic movie Casablanca, Captain Renault expressed shock when publicly describing an uncomfortable fact of which he was privately aware. We suspect that European officials, while also expressing shock and outrage over the IMF’s uncomfortable finding, were similarly aware of what was going on ‘in here’ well before the Fund brought it to the world’s attention. The question now is whether, having been forced to go public, they are finally prepared to translate that awareness into action.

Barry Eichengreen & Kevin O’Rourke

One of my favourite blogs

23 Oct, 2012 at 10:55 | Posted in Economics | Comments Off on One of my favourite blogs

One of my favourite blogs is Naked Keynesianism.

One example of the interesting articles regularly published there is a piece – posted yesterday – by Matias Vernengo on  purchasing power parity:

In a previous post I suggested that there might some problems with using Purchasing Power Parity (PPP) measures of income per capita …

PPP was developed by Gustav Cassel as an extension of the Quantity Theory of Money (QTM) to international matters. The quantity of money determined domestically the internal price level, and the exchange rate was determined as the ratio of domestic and foreign prices (or vice versa depending on how you define the exchange ratio), or in dynamic versions, the change in the exchange rate was defined as the difference of the inflation rates.

Wicksell was very critical of Cassel’s theory, as I note in my paper … He basically suggested that the rate of interest, the natural rate determined by the productivity of capital and the savings decisions of economic agents, was the key variable, not the money supply. Hence, the bank rate, if it was lower than the natural rate, would not only generate his famous cumulative process of inflation, but it would also lead to flows of capital, provided that it was not in line with the bank rate of interest in other countries, and would basically determined the foreign exchange rate [note that Wicksell, and not the Keynes of the Tract, as is often argued, is the first, in 1919, to defend what we would today refer to as the uncovered interest parity condition].

From our perspective what matters here is that, even within the marginalist approach, the notion that the Quantity of Money, and prices, determine the equilibrium exchange rate is ultimately incorrect, once money is endogenous, as Wicksell assumed [note that the modern consensus in macroeconomics, both the New Keynesians and the so-called New Neoclassical Synthesis, assume an exogenous rate of interest, using some sort of rule, typically a variation of Taylor’s rule]. Further, if we assume free capital movement, which implies a uniform rate of profit, marginalism would require that capital would flow to places in which it is scarce, and eventually (in the long run) the rate of profit or the natural rate of interest would be equalized. Hence, the exchange rate that would be establish after the process is complete, would correspond to the uniform natural rate, which governs the bank rate, which as we saw is what Wicksell suggested determines exchange rate. So there must exist a natural exchange rate that corresponds to the natural rate of interest …

It is obvious that there are ‘imperfections’ and the natural rate of interest is not equalized in the real world, so the exchange rate also deviate from the natural rate. But that isn’t the main problem with the mainstream view. As we saw, the capital debates undermine the theoretical basis for a natural rate of interest, and hence for a natural exchange rate (or a natural rate of unemployment for that matter). Hence, it is the Keynesian (and Sraffian) institutional rate of interest, as determined by monetary authorities that rules the roost.

How neoclassical economics contributed to causing today’s crisis

22 Oct, 2012 at 19:01 | Posted in Economics | 1 Comment

Oxford professor John Kay has a very interesting article on why economists have tended to go astray in their – as my old mentor Erik Dahmén used to say – tool sheds. The article is essential reading for all those who want to understand why mainstream – neoclassical – economists actively have contributed to causing todays’s economic crisis rather than to solving it.

Perhaps this becomes less perplexing to grasp when considering what one of its main proponents today – Robert Lucas – maintained already in 1983:

My thesis in this lecture is that macroeconomics in this original sense has succeeded: its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

And this comes from an economist who has built his whole career on the assumption that people are hyper rational “robot imitations” with rational expectations and next to perfect ability to process information. Mirabile dictu!

Andreas Cervenka – lysande!

21 Oct, 2012 at 20:04 | Posted in Economics | 2 Comments

Nyligen skrev Andrew Haldane på den brittiska centralbanken Bank of England
en artikel med rubriken: Vad har ekonomerna någonsin gjort för oss? Han konstaterar
att stora delar av ekonomkåren någongång på 1990-talet tycks ha smittats av ett
mystiskt virus som orsakade både allvarliga synskador och svår minnesförlust.

Som alla farliga virus har även detta ett krångligt namn: DSGE, på svenska dynamisk
stokastisk allmän jämviktsmodell.

För att göra en lång historia kort innebar det alltmer frekventa användandet av dessa
modeller att ekonomerna blev mindre intresserade av verkligheten och mer fascinerade
av matematiska samband. Ungefär som ensambarn som hellre stannar kvar i pojkrummet och bygger låtsasvärldar i
mekano än går på tonårsdisco.

Det finns en uppenbar risk att missa den så kallade helhetsbilden.

Enligt Andrew Haldane valde ekonomerna att i sina modeller mer eller mindre
strunta i företeelser som banker, finansmarknader och pengar. Som av en händelse
följdes detta av den största skuldexplosionen i mänsklighetens historia.

Vad har då denna yrkeskår lärt av krisen? På sina håll inte så mycket, tycks det. En
annan ekonomipristagare, Robert Lucas, har försvarat sig med att finanskrisen inte
kunde förutses eftersom ekonomisk teori förutser att sådana händelser inte kan förutses.
Slutet gott, allting gott.

För att skapa verklig förändring krävs det kanske att någon rullar in en liten symbolisk
handgranat i de akademiska äggtoddycirklarna. Här har kommittén som ska utse nästa års ekonomipristagare en
unik möjlighet. Vad skulle kunna skicka starkare signaler än att annonsera vinnaren
i form av ett annorlunda pressmeddelande: ett tomt vitt papper.

Andreas Cervenka, SvD 21/10 2012

Latvia – the ultimate Keynes Killer?

21 Oct, 2012 at 17:11 | Posted in Economics, Politics & Society | 2 Comments

Some people seem to consider the case of Latvia the ultimate Keynes Killer, showing austerity policies suffice to get you out deep recessions and not having to fall back on Keynesian stimulus.

Hmm …

What are the facts? Latvia today has a real GDP that still is 15% below its pre-crisis peak. Its unemployment rate is 16%. Indeed an impressive success …

Keynes vs. Bayes on information and uncertainty (wonkish)

20 Oct, 2012 at 19:17 | Posted in Economics, Theory of Science & Methodology | Comments Off on Keynes vs. Bayes on information and uncertainty (wonkish)

Neoclassical economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules (preferably the ones axiomatized by Ramsey (1931), de Finetti (1937) or Savage (1954)) – that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately – via some “Dutch book” or “money pump” argument – susceptible to being ruined by some clever “bookie”.

Bayesianism reduces questions of rationality to questions of internal consistency (coherence) of beliefs, but – even granted this questionable reductionism – do rational agents really have to be Bayesian? As I have been arguing elsewhere (e. g. here and here) there is no strong warrant for believing so, but in this post I want to make a point on the informational requirement that the economic ilk of Bayesianism presupposes.

In many of the situations that are relevant to economics one could argue that there is simply not enough of adequate and relevant information to ground beliefs of a probabilistic kind, and that in those situations it is not really possible, in any relevant way, to represent an individual’s beliefs in a single probability measure.

Say you have come to learn (based on own experience and tons of data) that the probability of you becoming unemployed in Sweden is 10%. Having moved to another country (where you have no own experience and no data) you have no information on unemployment and a fortiori nothing to help you construct any probability estimate on. A Bayesian would, however, argue that you would have to assign probabilities to the mutually exclusive alternative outcomes and that these have to add up to 1, if you are rational. That is, in this case – and based on symmetry – a rational individual would have to assign probability 10% to becoming unemployed and 90% of becoming employed.

That feels intuitively wrong though, and I guess most people would agree. Bayesianism cannot distinguish between symmetry-based probabilities from information and symmetry-based probabilities from an absence of information. In these kinds of situations most of us would rather say that it is simply irrational to be a Bayesian and better instead to admit that we “simply do not know” or that we feel ambiguous and undecided. Arbitrary an ungrounded probability claims are more irrational than being undecided in face of genuine uncertainty, so if there is not sufficient information to ground a probability distribution it is better to acknowledge that simpliciter, rather than pretending to possess a certitude that we simply do not possess.

I think this critique of Bayesianism is in accordance with the views of John Maynard Keynes’ A Treatise on Probability (1921) and General Theory (1937). According to Keynes we live in a world permeated by unmeasurable uncertainty – not quantifiable stochastic risk – which often forces us to make decisions based on anything but rational expectations. Sometimes we “simply do not know.” Keynes would not have accepted the view of Bayesian economists, according to whom expectations “tend to be distributed, for the same information set, about the prediction of the theory.” Keynes, rather, thinks that we base our expectations on the confidence or “weight” we put on different events and alternatives. To Keynes expectations are a question of weighing probabilities by “degrees of belief”, beliefs that have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents modeled by Bayesian economists.

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