Insupportable equilibrium

19 Mar, 2013 at 10:57 | Posted in Economics, Theory of Science & Methodology | Comments Off on Insupportable equilibrium

Theoretical physicist Mark Buchanan has some interesting reflections on equilibrium thought in economics in his upcoming book Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics:

balancepencilFor several decades, academics have assumed that the economy is in a stable equilibrium. Distilled into a few elegant lines of mathematics by the economists Kenneth Arrow and Gerard Debreu back in the 1950s, the assumption has driven most thinking about business cycles and financial markets ever since. It informs the idea, still prevalent on Wall Street, that markets are efficient — that the greedy efforts of millions of individuals will inevitably push prices toward some true fundamental value.

Problem is, all efforts to show that a realistic economy might actually reach something like the Arrow-Debreu equilibrium have met with failure. Theorists haven’t been able to prove that even trivial, childlike models of economies with only a few commodities have stable equilibria. There is no reason to think that the equilibrium so prized by economists is anything more than a curiosity.

It’s as if mathematical meteorologists found beautiful equations for a glorious atmospheric state with no clouds or winds, no annoying rain or fog, just peaceful sunshine everywhere. In principle, such an atmospheric state might exist, but it tells us nothing about the reality we care about: our own weather …

We’ll never understand economies and markets until we get over the nutty idea that they alone — unlike almost every other complex system in the world — are inherently stable and have no internal weather. It’s time we began learning about the socioeconomic weather, categorizing its storms, and learning either how to prevent them or how to see them coming and protect ourselves against them.

Cuts – the wrong cure

19 Mar, 2013 at 08:28 | Posted in Economics, Politics & Society | Comments Off on Cuts – the wrong cure

 

Inequality continues to grow – even in Sweden

18 Mar, 2013 at 19:21 | Posted in Economics, Politics & Society | 4 Comments

Inequality continues to grow all over the world.
And in case you think it’s different in e. g. Sweden, you should take a look at some new data from Statistics Sweden.

The Gini coefficient is a measure of inequality (where a higher number signifies greater inequality) and graphing with Gretl we get this for the disposable income distribution:
SwedenGini1980to2011

Sometimes a graph says more than a thousand words …

I would say that what we see happen in Sweden is deeply disturbing. The rising inequality is outrageous – not the least since it has to a large extent to do with income and wealth increasingly being concentrated in the hands of a very small and privileged elite.

Societies where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implode. The cement that keeps us together erodes and in the end we are only left with people dipped in the ice cold water of egoism and greed. It’s high time to put an end to this the worst Juggernaut of our time!

EconTalk transmogrifies Keynes

18 Mar, 2013 at 14:20 | Posted in Economics | Comments Off on EconTalk transmogrifies Keynes

econtalkYesterday, on my way home on train after conferencing in Stockholm, I tried to beguile the way by listening to a podcast of EconTalk where Garett Jones of George Mason University talked with EconTalk host Russ Roberts about the ideas of Irving Fisher on debt and deflation.

Jones’s thoughts on Fisher were thought-provoking and interesting, but in the middle of the discussion Roberts started to ask questions on the relation between Fisher’s ideas and those of Keynes, saying more or less something like “Keynes generated a lot of interest in his idea that the labour market doesn’t clear … because the price for labour does not adjust, i. e. wages are ‘sticky’ or ‘inflexible’.”

This is of course pure nonsense. For although Keynes in General Theory devoted substantial attention to the subject of wage rigidities, he certainly did not hold the view that wage rigidity was the reason behind high unemployment and other macroeconomic problems. To Keynes, recessions, depressions and faultering labour markets were not basically a problem of “sticky wages.”

Since unions/workers, contrary to classical assumptions, make wage-bargains in nominal terms, they will – according to Keynes – accept lower real wages caused by higher prices, but resist lower real wages caused by lower nominal wages. However, Keynes held it incorrect to attribute “cyclical” unemployment to this diversified agent behaviour. During the depression money wages fell significantly and – as Keynes noted – unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment.

In any specific labour market, lower wages could, of course, raise the demand for labour. But a general reduction in money wages would leave real wages more or less unchanged. The reasoning of the classical economists was, according to Keynes, a flagrant example of the “fallacy of composition.” Assuming that since unions/workers in a specific labour market could negotiate real wage reductions via lowering nominal wages, unions/workers in general could do the same, the classics confused micro with macro.

Lowering nominal wages could not – according to Keynes – clear the labour market. Lowering wages – and possibly prices – could, perhaps, lower interest rates and increase investment. But to Keynes it would be much easier to achieve that effect by increasing the money supply. In any case, wage reductions was not seen by Keynes as a general substitute for an expansionary monetary or fiscal policy.

Even if potentially positive impacts of lowering wages exist, there are also more heavily weighing negative impacts – management-union relations deteriorating, expectations of on-going lowering of wages causing delay of investments, debt deflation et cetera.

So, what Keynes actually did argue in General Theory, was that the classical proposition that lowering wages would lower unemployment and ultimately take economies out of depressions, was ill-founded and basically wrong.

To Keynes, flexible wages would only make things worse by leading to erratic price-fluctuations. The basic explanation for unemployment is insufficient aggregate demand, and that is mostly determined outside the labor market.

To mainstream neoclassical theory the kind of unemployment that occurs is voluntary, since it is only adjustments of the hours of work that these optimizing agents make to maximize their utility. Keynes on the other hand writes in General Theory:

The classical school [maintains that] while the demand for labour at the existing money-wage may be satisfied before everyone willing to work at this wage is employed, this situation is due to an open or tacit agreement amongst workers not to work for less, and that if labour as a whole would agree to a reduction of money-wages more employment would be forthcoming. If this is the case, such unemployment, though apparently involuntary, is not strictly so, and ought to be included under the above category of ‘voluntary’ unemployment due to the effects of collective bargaining, etc …

The classical theory … is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemployment, which is in the above sense involuntary, cannot occur. Apparent unemployment must, therefore, be the result either of temporary loss of work of the ‘between jobs’ type or of intermittent demand for highly specialised resources or of the effect of a trade union ‘closed shop’ on the employment of free labour. Thus writers in the classical tradition, overlooking the special assumption underlying their theory, have been driven inevitably to the conclusion, perfectly logical on their assumption, that apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity …

Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment – if there be such a thing (and who will deny it?). The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. We need to throw over the second postulate of the classical doctrine and to work out the behaviour of a system in which involuntary unemployment in the strict sense is possible.

gtUnfortunately, Roberts’s statement is not the only example of this kind of utter nonsense on Keynes. Similar distortions of Keynes’s views can be found in , e. g., the economics textbooks of the “New Keynesian” – a grotesque misnomer – Greg Mankiw. How is this possible? Probably because these economists have but a very superficial acquaintance with Keynes’s own works, and rather depend on second-hand sources like Hansen, Samuelson, Hicks and the likes.

Fortunately there is a solution to the problem. Keynes books are still in print. Read them!!

Inequality and well-being

16 Mar, 2013 at 11:42 | Posted in Economics, Politics & Society | Comments Off on Inequality and well-being

pickett
Source

How to argue with economists

15 Mar, 2013 at 08:57 | Posted in Economics | 1 Comment

argueIn the increasingly contentious world of pop economics, you … may find yourself in an argument with an economist. And when this happens, you should be prepared, because many of the arguments that may seem at first blush to be very powerful and devastating are, in fact, pretty weak tea …
Principle 1: Credentials are not an argument.

Example: “You say Theory X is wrong…but don’t you know that Theory X is supported by Nobel Prize winners A, B, and C, not to mention famous and distinguished professors D, E, F, G, and H?”

Suggested Retort: Loud, barking laughter.

Alternative Suggested Retort: “Richard Feynman said that ‘Science is the belief in the ignorance of experts.’ And you’re not going to argue with HIM, are you?”

Reason You’re Right: Credentials? Gimme a break. Nobody accepts received wisdom from sages these days. Show me the argument!

Principle 2: “All theories are wrong” is false.

Example: “Sure, Theory X fails to forecast any variable of interest or match important features of the data. But don’t you know that all models are wrong? I mean, look at Newton’s Laws…THOSE ended up turning out to be wrong, ha ha ha.”

Suggested Retort: Empty an entire can of Silly String onto anyone who says this. (I carry Silly String expressly for this purpose.)

Alternative Suggested Retort: “Yeah, well, when your theory is anywhere near as useful as Newton’s Laws, come back and see me, K?”

Reason You’re Right: To say models are “wrong” is fatuous semantics; philosophically, models can only have degrees of predictive power within domains of validity. Newton’s Laws are only “wrong” if you are studying something very small or moving very fast. For most everyday applications, Newton’s Laws are very, very right.

Principle 3: “We have theories for that” is not good enough.

Example: “How can you say that macroeconomists have ignored Phenomenon X? We have theories in which X plays a role! Several, in fact!”

Suggested Retort: “Then how come no one was paying attention to those theories before Phenomenon X emerged and slapped us upside the head?”

Reason You’re Right: Actually, there are two reasons. Reason 1 is that it is possible to make many models to describe any phenomenon, and thus there is no guarantee that Phenomenon X is correctly describe by Theory Y rather than some other theory, unless there is good solid evidence that Theory Y is right, in which case economists should be paying more a lot attention to Theory Y. Reason 2 is that if the profession doesn’t have a good way to choose which theories to apply and when, then simply having a bunch of theories sitting around gathering dust is a little pointless.

Principle 4: Argument by accounting identity almost never works.

Example: “But your theory is wrong, because Y = C + I + G!”

Suggested Retort: “If my theory violates an accounting identity, wouldn’t people have noticed that before? Wouldn’t this fact be common knowledge?”

Reason You’re Right: Accounting identities are mostly just definitions. Very rarely do definitions tell us anything useful about the behavior of variables in the real world. The only exception is when you have a very good understanding of the behavior of all but one of the variables in an accounting identity, in which case of course it is useful. But that is a very rare situation indeed.

Principle 5: The Efficient Markets Hypothesis does not automatically render all models useless.

Example: “But if your model could predict financial crises, then people could use it to conduct a riskless arbitrage; therefore, by the EMH, your model cannot predict financial crises.”

Suggested Retort: “By your logic, astrophysics can never predict when an asteroid is going to hit the Earth.”

Reason You’re Right: Conditional predictions are different than unconditional predictions. A macro model that is useful for making policy will not say “Tomorrow X will happen.” It will say “Tomorrow X will happen unless you do something to stop it.” If policy is taken to be exogenous to a model (a “shock”), then the EMH does not say anything about whether you can see an event coming and do something about it.

Principle 6: Models that only fit one piece of the data are not very good models.

Example: “Sure, this model doesn’t fit facts A, B, and C, but it does fit fact D, and therefore it is a ‘laboratory’ that we can use to study the impact of changes in the factors that affect D.”

Suggested Retort: “Nope!”

Reason You’re Right: Suppose you make a different model to fit each phenomenon. Only if all your models don’t interact will you be able to use each different model to study its own phenomenon. And this is highly unlikely to happen. Also, it’s generally pretty easy to make a large number of different models that fit any one given fact, but very hard to make models that fit a whole bunch of facts at once. For these reasons, many philosophers of science claim that science theories should explain a whole bunch of phenomena in terms of some smaller, simpler subset of underlying phenomena. Or, in other words, wrong theories are wrong.

Principle 7: The message is not the messenger.

Example: “Well, that argument is being made by Person X, who is obviously just angry/a political hack/ignorant/not a real economist/a commie/stupid/corrupt.”

Suggested Retort: “Well, now it’s me making the argument! So what are you going to say about me?”

Reason You’re Right: This should be fairly obvious, but people seem to forget it. Even angry hackish ignorant stupid communist corrupt non-economists can make good cogent correct arguments (or, at least, repeat them from some more reputable source!). Arguments should be argued on the merits. This is the converse of Principle 1.

There are, of course, a lot more principles than these … The set of silly things that people can and will say to try to beat an interlocutor down is, well, very large. But I think these seven principles will guard you against much of the worst of the silliness.

Noah Smith

Lönesänkarna

13 Mar, 2013 at 16:11 | Posted in Economics, Politics & Society | Comments Off on Lönesänkarna

Efter den uppmärksammade SVT dokumentären Lönesänkarna (se här) skrev en av Svenska Dagbladets ledarskribenter, Ivar Arpi, att på “1970-talet var kapitalandelen, jämfört med löneandelen, nästan noll” och att sedan 1970-talet har “det stora flertalet fått det bättre – även de med lägst inkomster.”

Och detta grodors plums och ankors plask ska man behöva läsa år 2013.

Och som om det inte var nog med detta skriver Per Krusell – ledamot av Kungliga Vetenskapsakademien och sedan 2004 ordinarie ledamot av Kommittén för Sveriges Riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne – att han sett programmet och att fasan han kände handlade om “känslan av att som ekonom ‘ha missat något, i vår analys av samhällsekonomin.”  Efter att ha funderat en stund mådde dock professorn betydligt bättre eftersom han då  insett att “det ligger väldigt lite i den huvudsakliga tesen i programmet, dvs att en ‘överenskommelse’ om att sänka löneandelen skett, kanske med syfte att öka sysselsättningen, men att en sysselsättningsökning sedan uteblev.”

Snacka går ju alltid, men det är ändå bättre om man vet vad man pratar om och kan belägga sina uttalanden. Så här ser det nämligen ut:

Källa: SWIID 3.0

(Ju lägre Ginikoefficient, desto jämlikare inkomstfördelning. Sedan 1981 har ojämlikheten i inkomstfördelningen i Sverige trendmässigt ökat brant.)

Källa: IFN, Roine och Waldenström 2008
Grafik: Idégrafik

I den ekonomisk-politiska debatten hör man ofta marknadsfundamentalismens förespråkare likt Svenska Dagbladets ledarskribenter säga att ojämlikhet inte är något problem. Anledningen sägs i huvudsak vara två.

Pro primo – hästskitsteoremet – enligt vilket sänkta skatter och ökad välfärd för de rika ändå så småningom sipprar ner till de fattiga. Göd hästen och fåglarna kan äta sig mätta på spillningen.

Pro secondo – att så länge alla har samma chans att bli rika är ojämlikheten oproblematisk.

Hästskitsteoremet (“trickle-down effect”) visade omfattande forskning redan under Thatcher-Reagan-eran hörde mytvärlden till.

Och för några år sedan visade Alan Krueger – ekonomiprofessor vid Princeton-universitetet – med sin Gatsbykurva att även det andra försöket till försvar av ojämlikhet hör hemma i sagornas värld:

[På den vertikala axeln visas hur mycket en enprocentig ökning i din fars inkomster påverkar dina förväntade inkomster (ju högre tal, desto lägre förväntad social rörlighet), och på den horisontella axeln visas Ginikoefficienten, som mäter ojämlikhet (ju högre tal, desto högre ojämlikhet)]

Tydligare än så här går det knappt att se att jämlika länder också är de med störst social rörlighet – och att det därför börjar bli dags att ta itu med de ökade inkomst- och förmögenhetsklyftorna. Så även i Sverige, där nyreviderade data från SCB visar hur utvecklingen av disponibel inkomst per konsumtionsenhet (exklusive kapitalvinst efter deciler, samtliga personer 1995-2010, medelvärden i tusen kr per k.e. i 2010 års priser) de senaste åren har sett ut:

Källa: SCB och egna beräkningar

Och än värre är det om man tittar på förmögenhetsutvecklingen.

Ojämlikheten ökar i Sverige. Att det är så beror i hög grad på politiska beslut – som att exempelvis skära i a-kassa och sjukfärsäkring. Men det är också ett uttryck för ett ideologiskifte som under trettio års tid förvandlat Sverige från ett föregångsland vad gäller jämlikhet till att bli ett av de länder där inkomst- och förmögenhetsklyftorna ökar mest i världen.

För dem som i likhet med Ivar Arpi och en del mer eller mindre prominenta nationalekonomer inte tror att det är så illa i Sverige när det gäller inkomst- och förmögenhetsfördelning, föreslår jag att kika lite närmre på diagrammet nedan över hur genomsnittsinkomsterna (uttryckt i 2009 års prisnivå) för de övre 0.1% och de lägsta 90% utvecklats sedan 1980 i Sverige:

.

Källa: The World Top Incomes Database

Det är hög tid att sätta stopp för det nya klassamhället. Det är hög tid att se till att klyftorna slutar växa i det svenska samhället. Det är hög tid att det nyliberala systemskiftet i Sverige upphör!

Mästarens återkomst

12 Mar, 2013 at 22:40 | Posted in Economics | 4 Comments

För den som vill förstå och kunna förklara finansiella och ekonomiska kriser är Robert Skidelskys Mästarens återkomst (Karnevals förlag, 2011) en utomordentlig startpunkt. Genom att lyfta fram Keynes teorier om osäkerhetens och förväntningarnas roll ger Skidelsky en nyttig motbild till den verklighetsfrämmande och modellartade bild av ekonomin som den förhärskande nationalekonomiska teorin ger.
Skidelsky visar övertygande att den neoklassiska makroteorins banérförare – vare sig det är en Robert Lucas, Thomas Sargent eller Greg Mankiw – inte bara misslyckats med att förutspå eller förklara den nuvarande krisen. De har i själva verket med sina teorier och modeller aktivt bidragit till den. I sitt förord skriver författaren:

Vissa recensenter har anklagat mig för att ge en vulgärversion av de ortodoxa teorierna som jag anser ha varit själva ursprunget till krisen. Det har hävdats att jag inte tagit tillräcklig hänsyn till de förbehåll och undantag till teorin om effektiva marknader som erkänts av dess egna akademiska förkämpar och inte heller till de många varierande åsikter som existerar inom den ekonomiska professionen. Mitt försvar inför den senare sanklagelsen är att det är Chicagoskolans teorier som dominerat under de senaste 30 åren och de som har tänkt annorlunda har blivit marginaliserade inom professionen. När det gäller den första anklagelsepunkten är det alltid i sin vulgära version som teorier tillämpas och det borde vara ett test på god ekonomisk teori att dess vulgarisering inte leder till usel politik.

Sporadic blogging

12 Mar, 2013 at 11:48 | Posted in Varia | Comments Off on Sporadic blogging

Touring again. This time conferencing in the most beautiful capital in the world – Stockholm.
Regular blogging will be resumed early next week.
 
sodermalm

Naket och självutlämnande

11 Mar, 2013 at 17:54 | Posted in Varia | Comments Off on Naket och självutlämnande

 

 
Naken och självutlämnande musik.
En rak höger i solar plexus.
Hjärtats mörker.
Peter LeMarc imponerade för tjugofem år sedan. Det gör han fortfarande.

How can truth be an insult?

11 Mar, 2013 at 17:19 | Posted in Economics | 2 Comments

 

Rigour is no substitute for relevance and realism

11 Mar, 2013 at 13:25 | Posted in Economics, Theory of Science & Methodology | Comments Off on Rigour is no substitute for relevance and realism

The mathematization of economics since WW II has made mainstream – neoclassical – economists more or less obsessed with formal, deductive-axiomatic models. Confronted with the critique that they do not solve real problems, they  often react as Saint-Exupéry‘s Great Geographer, who, in response to the questions posed by The Little Prince, says that he is too occupied with his scientific work to be be able to say anything about reality. Confronting economic theory’s lack of relevance and ability to tackle real probems, one retreats into the wonderful world of economic models. One goes into the “shack of tools” – as my old mentor Erik Dahmén used to say – and stays there. While the economic problems in the world around us steadily increase, one is rather happily playing along with the latest toys in the mathematical toolbox.

Paul Krugman has been having similar critical thoughts on our “queen of social science”. In a blogpost called Irregular Economics he writes:

Why, exactly, are we to have such faith in “regular economics”? What is the compelling evidence that the vision of a competitive, efficient economy allocating resources to the right uses is actually a good description of the world we live in?

I mean, it’s a lovely model, and one I, like everyone else in economics, use a lot. But I would not have said that it’s a model backed by lots of evidence. We do know that demand curves generally slope down; it’s a lot harder to give good examples of supply curves that slope up (as a textbook author, believe me, I’ve looked); and it’s a very long way from there to the vision of Pareto efficiency and all that which Barro wants us to take as the true economics. Realistically, imperfect competition, market failure, and more are everywhere.

Meanwhile, there’s actually a lot of evidence for a broadly Keynesian view of the world. Not, to be fair, for fiscal policy, mainly because clean fiscal experiments are rare. But there’s huge evidence for sticky prices, lots of evidence that monetary shocks have real effects — and it’s hard to produce a coherent model in which that’s true that doesn’t also leave room for fiscal policy.

In short, there’s no reason at all to consider microeconomics the “real” economics and macroeconomics some kind of flaky impostor. Yes, micro is a lot more rigorous — but if it’s rigorously wrong, who cares?

Instead of making the model the message, I think we are better served by economists who more  than anything else try to contribute to solving real problems. And then the motto of John Maynard Keynes is more valid than ever:

It is better to be vaguely right than precisely wrong

Efterfrågas – anspråkslösa nationalekonomer

10 Mar, 2013 at 18:15 | Posted in Economics | Comments Off on Efterfrågas – anspråkslösa nationalekonomer

I överdrifternas tidevarv lockas jag av en liten skrift med den otidsenliga titeln ”anspråkslöshet”. Den vederlägger alla föreställningar om att det är gaphalsarna som svarar för den hårdaste samhällskritiken … Skriften heter på tyska Bescheidenheit (Hanser Verlag 2013).

perfectly-good-econ-theoryI fokus för kritiken står de teorier och analyser som framförs av våra dagars chefsideologer, nationalekonomerna. De bygger upp myter och utvecklar matematiska modeller som ger falsk, bedräglig säkerhet. Därför uppmanar författarna dem att överge de tvärsäkra råd och prognoser som uttrycks med matematisk precision, men som egentligen bygger på diskutabla antaganden.

Skriften är ett samtal mellan två yngre akademiker: Tomas Sedlacek och David Orrell. Sedlaceck är ekonomen från Tjeckien som väckte stor uppmärksamhet med sin filosofiskt anlagda bästsäljare om ”det godas och det ondas ekonomi – från Gilgamesh till Wall Street”. David Orrell är en kanadensisk matematiker, utbildad i Oxford, som belönats för sin ”Ecomyths”, med fundamental kritik av ekonomernas modellbyggen …

David Orrell menar att matematiken inte erbjuder några lösningar, snarare är den en del av problemet … Tomas Sedlacek liknar den moderna ekonomiska teorin vid ett paraply, som fungerar utmärkt så länge det inte regnar. Han vill få slippa all avgudadyrkan av BNP-statistik. Sluta med att låtsas vara så tvärsäkert precisa. Var i stället anspråkslösa när teorin är så erbarmlig, lyder hans uppmaning.

I denna önskan om ödmjukhet ligger en omstörtande civilisationskritik.

Rolf Gustavsson (SvD)

The self-destruction of the euro

10 Mar, 2013 at 09:12 | Posted in Economics | Comments Off on The self-destruction of the euro

The outcome of the Italian elections should send a clear message to Europe’s leaders: the austerity policies that they have pursued are being rejected by voters.

The European project, as idealistic as it was, was always a top-down endeavour. But it is another matter altogether to encourage technocrats to run countries, seemingly circumventing democratic processes, and foist upon them policies that lead to widespread public misery.

Fayard Europe’s leaders shy away from the word, the reality is that much of the EU is in depression …

It is neither populism nor shortsighted-ness that has led citizens to reject the policies imposed upon them. Rather, it is an understanding that these policies are deeply misguided.

Europe’s talents and resources – its physical, human, and natural capital – are the same today as they were before the crisis began. The problem is that the prescriptions imposed are leading to massive under-utilisation of these resources. Whatever Europe’s problem, a response that entails waste on this scale cannot be the solution …

What will not work, at least for most eurozone countries, is internal devaluation – that is, forcing down wages and prices – as this would increase the debt burden for households, firms, and governments (which overwhelmingly hold euro-denominated debts).

And, with adjustments in different sectors occurring at different speeds, deflation would fuel massive distortions in the economy.

If internal devaluation were the solution, the gold standard would not have been a problem in the Great Depression. Internal devaluation, combined with austerity and the single-market principle (which facilitates capital flight and the haemorrhaging of banking systems), is a toxic combination.

The European project was, and is, a great political idea. It has the potential to promote prosperity and peace. But, rather than enhancing solidarity within Europe, it is sowing seeds of discord within and between countries …

Europe needs structural reform, as austerity advocates insist. But it is structural reform of the eurozone’s institutional arrangements, not reforms within individual countries, that will have the greatest impact. Unless Europe is willing to make those reforms, it may have to let the euro die to save itself.

The EU’s economic and monetary union was a means to an end, not an end in itself. The European electorate seems to have recognised that, under current arrangements, the euro is undermining the very purposes for which it was supposedly created. That is the simple truth that Europe’s leaders have yet to grasp.

Joseph Stiglitz

How to become a poster boy for controversy

9 Mar, 2013 at 14:01 | Posted in Economics | Comments Off on How to become a poster boy for controversy


(h/t Naked Keynesianism)

Är skolan “borgerlig”?

9 Mar, 2013 at 13:25 | Posted in Education & School | 3 Comments

Skolpedagogiska reformimpulser borde så småningom sluta att förlita sig på sjuttiotalets motiv, innebörder och semantik. Annars går det som när en orkester orubbligt fortsätter att spela de gamla välkända melodierna utan att bry sig om att publiken för länge sedan har lämnat salen. Det är på tiden att spela något nytt, man borde våga en ny början. Farväl till sjuttiotalet!
                                   Thomas Ziehe, ”Adjö till sjuttiotalet”, KRUT 2/1998

Vi lever i ett ojämlikt samhälle. Ojämlikheten ökar också på många områden. Inte minst vad avser inkomster och förmögenhet. Skillnader i livsbetingelser för olika grupper vad avser klass, etnicitet och genus är oacceptabelt stora.

Och i skolans värld har uppenbarligen familjebakgrunden fortfarande stor betydelse för elevers prestationer. Än värre är att den får större betydelse ju äldre eleverna blir. Självklart kan det inte uppfattas som annat än ett kapitalt misslyckande när en skola med kompensatoriska aspirationer uppvisar ett mönster där föräldrarnas utbildningsbakgrund får allt större genomslag ju äldre eleven blir.
 
tilsam
 
Tvärtemot alla reformpedagogiska utfästelser är det främst barn ur hem utan studietraditioner som förlorat i den omläggning i synen på skolan som skett under det senaste halvseklet. I dag – med skolpengar, fria skolval och friskolor – har utvecklingen tvärtemot alla kompensatoriska utfästelser bara ytterligare stärkt de högutbildade föräldrarnas möjligheter att styra de egna barnens skolgång och framtid. Det är svårt att se vilka som med dagens skola ska kunna göra den ”klassresa” så många i min generation har gjort.

Skolan spelar en stor och viktig funktionell roll i reproduktion av arbetsmarknad och socialisationsrelaterad disciplinering i vårt samhälle.

Allt detta känner vi väl till. Men var sak har sin tid och sin plats. Det jag här vill tackla är något annat. Socialisationsteori och hermeneutik kompletterar varandra. Istället för att förklara är jag här mer intresserad av att förstå. I stället för skolans samhällsövergripande funktioner, fokuserar jag här på några kultur- och subjektteoretiska aspekter av skolan som institution. Jag vill presentera några skissartade funderingar kring ett specifikt frågekomplex. Hur bör skolan vara relaterat till samhället i stort? Vad kan och bör skolan göra och vara för något?

Vi lever numera i ett samhälle där identitet är något som skapas, och inte så mycket som förr, något som ärvs. Detta kan upplevas både som en befrielse och som en börda. Många unga människor upplever idag en ambivalens inför den frihet som avtraditionaliseringen av våra sociala liv inneburit. Detta kommer också i hög grad till uttryck i skolan. Mycket av de orienteringsproblem som unga ger uttryck för hänger samman med den norm- och värdeupplösning som den genomgripande omvandlingen av det moderna samhällslivet lett till. Förr definierades man tydligare av en ärvd social identitet. Idag är bilden ungdomar gör sig av livet att det i mycket större utsträckning handlar om vad de själva som individer vill göra av livet. Varje individ skapar sin egen identitet. Men detta gör också att ryggstödet att luta sig mot inte finns. Det är ”fri” rörelse under eget ansvar och egna våndor och rotlöshet.

När jag växte upp och gick i skolan på 1960- och 70-talen var det fortfarande en hyfsat klar demarkationslinje mellan skolan – som tog hand om våra kognitiva färdigheter – och familjen – som tog hand om det uppväxande släktets socialisationsmässiga och emotiva behov – och samhället i stort.

zieheDet som en gång är nytt blir gammalt. Reformpedagogikens uppror mot en förstelnad skolinstitution med sina förlegade normer och lärostilar var nytt och radikalt på 1970-talet. Idag har verkligheten sprungit förbi den. När alla redan uppfattar sig göra som de själva vill och tar utgångspunkt i sina egna erfarenheter och liv, är det inte längre radikalt att säga till eleverna: ”Gör som ni vill”. Svaret blir då ofta: ”Kan vi inte slippa att behöva göra som vi själva vill? Det gör vi ju redan så mycket i våra vardagsliv och i den moderna skolan. Det ger oss ingen emancipatorisk upplevelse längre. Det blir bara mer av samma slappa och likgiltiga låt-gå-anda!”

Den innovativa kraften i avformalisering och subjektivering har sedan länge uttömt sin potential. Att då i dagens skola driva krav på ökad informalisering, närhet och subjektivitet är hopplöst otidsenligt. Att i någon mening ta sin utgångspunkt i elevernas verklighet får inte vara liktydigt med att restlöst anamma och bejaka den. Tvärtom måste man hålla fram en motbild, ett alternativ. Inte identitet, men skillnad.

Skolan ska lära för ett annat liv än det som finns i skolan. Framför allt ska den se till att fullt ut ta vara på varje elevs potential att leva ett annat liv än det de lever i dag. När kontinuitet, stabilitet och traditioner mister sin betydelse och självlegitimerande aura blir detta än viktigare. Skolan måste odla ”hoppets princip”. Utan det framtidsinriktade hoppet om en bättre värld kan inte skolan fullgöra sin uppgift. Därför kan inte heller socialisationsteoretiska explikationer kring frågan ”hur man blivit den man är” vara utgångspunkten. I skolans värld måste den bildningsteoretiska frågan ”hur man i framtiden blir det man har potential att bli” vara den riktgivande utgångspunkten.

Idag när livsvärlden, vardagen och subjektivitet bejakas fullt ut i skolans värld behövs inte mer av samma. Reformpedagogiken har varit så framgångsrik att den nu faller på eget grepp. Subjektiveringen har sedan länge nått mättnadsstadiet och mättnad har lett till att marginalnyttan är negativ. Nyhetens eufori har övergått i övermättnadens obehag. Då hjälper det inte längre att åberopa fraser från en annan tid – en icke-mätt tid – där dessa krav kanske kunde verka emancipatoriskt. Idag blir responsen från eleverna oftast bara: ”We’ve been there. We’ve seen that. We’ve done that. Peka på något som går utanför oss själva och gör att vi kan växa istället!” Det som var högsta radikalitet på 70-talet när jag studerade på lärarhögskolan – ”ta utgångspunkt i ditt eget intresse för mopeder och skriv teknologihistorien utifrån det” – har i dag bara ett löjets skimmer. När alla redan skriver sin ”mopedhistoria” behövs något annat.

Avstånd och avskiljande ger perspektiv. Skolan ska vara en ö i ett hav av samhälleliga rutiner. Att insistera på att skolan ska fortsätta närma sig elevernas upplevelsehorisonter är inte längre gångbart. Skolan får inte vara en reality-serie-värld där människor exponerar sina privata och intima liv för att tillfredsställa exhibitionistiska självbekräftelseimpulser. Vi behöver idag inte mer av nivellering mellan elevernas livsvärld och skolan. Tvärtom. Vi behöver mer respekt för den nödvändiga skillnaden mellan dessa världar. Lärandet i skolan måste erkänna som utgångspunkt skillnaden mellan elevernas livsvärld och skolan själv för att kunna fungera som en framtidsinriktad broslagning.

Skola är inte samhälle eller familj. Skolan ska inte vara en förlängning av elevernas liv utanför skolan. Tvärtom. Den ska vara ett alternativ. Något annat. I sin annorlundahet ska den skapa betingelser för framtid och inte hålla fast elevers upplevelsehorisont i nutid. Skolan ska inte ge självbekräftelse för vad eleverna är, utan hjälpa dem till vad de kan bli.

Framtiden är osäker. Och just därför är det så viktigt att skolan förhåller sig till framtiden och inte till nutiden. Därför ska också skolan vara något annorlunda och inte en spegel av samhället. Genom sin annorlundahet ska skolan kunna ge handlingsberedskap för ett nytt liv och en ny värld. När vi talar om vad skolan behöver ge eleverna måste detta stå i centrum

Ofta frågar man sig vad för slags elever samhället har behov av. Jag tycker den frågan är felställd. Kravet måste vara ett rättighetskrav som transcenderar elevernas egna upplevelsehorisonter och är framtidsinriktat genom att ta sikte på elevernas potential och inte deras kontingenta för-stunden-fakticitet.

Reformpedagogiken närde uppfattningen att avståndet mellan skola och samhälle skulle försvinna och att en identitet skulle råda. Den upplever sig fortfarande som progressiv (ofta med samma oreflekterade utgångspunkter som vad avser identitetspolitik i stort i våra moderna mångkulturella samhällen). Jag ser på det tvärtom. Håll fast vid skillnaden och avståndet mellan skola och samhälle. Liksom Adorno en gång talade om ”falsk intimitet” skulle jag vilja påstå att det här handlar om ”falsk identitet”. Skolan bör vara en egen entitet med egna spelregler och normer. Där går vi in med en del av våra identiteter under en del av våra liv. Skolan ska ställa krav på och utmana eleverna. Det kan få dem att växa och förverkliga deras potential. Att stryka medhårs och bygga falsk intimitet och identitet stjälper snarare än hjälper dessa framtidsriktade aspirationer.

För att kunna lära måste man kunna ”ta in” skillnader. Det innebär också ett krav på distansering. Elever är inte hjälpta av att skolan enbart speglar och bejakar deras egen livsvärld. Den ska vidga och fördjupa den. Här blir det också viktigt med teoretiska kunskaper. Utan dem kan fördjupning och perspektivering på den egna livsvärlden inte äga rum. En identitet skola-samhälle skulle cementera eleverna i nutiden istället för att förbereda för en okänd och osäker framtid.

Skolan ska vara den fasta punkt i unga människors tillvaro dit de kan komma och – liksom lärare – temporärt dra sig undan familje- och samhällslivets stormar. Skolan ska vara en ö i en värld full av intensiva förändringar. För att kunna lära sig saker krävs koncentration och möjligheter till avskärmning. I vår hypermedialiserade värld är kanske just det sistnämnda speciellt viktigt. I det ständiga digitala brus som unga människor omger sig av dygnet runt, behövs öar av distans, lugn och möjligheter till reflektion, sållning av brus och bearbetning av information till kunskaper. Inte för att permanent dra sig undan livsvärldens bekymmer och besvär, utan för att – med den styrka, färdigheter och perspektiv som en kunskaps- och medborgarskapsgrundad skola kan ge – bättre kunna tackla de ständiga reala omvandlingar som kännetecknar våra liv.

Arbetsdelning är en förutsättning för civilisation. Det gäller också skolan i relation till samhället. Skolan kan och ska inte lösa eller ackommodera för alla de problem som en ständigt föränderlig öppen värld skapar. Skolan kan inte kompensera för moderniseringsprocessens alla risker. Familj och föräldrar – liksom samhället i stort – har ett ansvar som inte skolan bara kan förutsättas gå in och ersätta eller kompensera för. Många samhällsforskare beskriver familj, normer och samhällsliv som stadda i upplösning över allt idag. Just därför är det så viktigt att skolan inte i första hand ska fungera som en kompensatorisk samhällsinstitution. Då förlorar den sin själ. Då förlorar den sin aura och förmåga att fungera som energigivande dröm om att allt kan vara annorlunda och att skolan kan bidra till att det också blir annorlunda.

Vi har alla flera olika identiteter. Vi har alla olika aspirationer, bakgrunder och drömmar. Men i skolan ska vi mötas som jämlikar. Olika, men jämlika. När vi går in igenom skolporten är vi alla jämlikar. Att gå in i skolan innebär samtidigt att du (temporärt) lämnar familj och samhälle och går in i ett begränsat rum med egna spelregler och mål. För en del av dagen går vi in i en värld där vi gemensamt skapar oss själva som medborgare och kunskapsutövare.

Ska man lära något nytt i skolan måste den vara något annat än en förlängning av elevers vardag och liv. Ska skolan kunna katalysera och förändra måste den vara något annat och inte identiskt med sin omgivning. I dagens samhälle måste skolan få fungera som något annorlunda, ett alternativ till de eroderande marknadskrafter som idag hotar samhällsbygget genom att reducera samhällsmedborgare till konsumenter. Kunskap är en nödvändig förutsättning för att kunna bjuda stånd mot denna utveckling. När inte familjen eller samhället står emot måste skolan kunna stå upp och ta tillvara det uppväxande släktets genuina emancipatoriska intressen

Prinzip_Hoffnung_En bra skola – inte minst i vårt meritokratiska kunskapssamhälle – är en viktig förutsättning för att unga människor ska kunna förverkliga sina drömmar om att i framtiden kunna förbättra sina villkor. Den ska hjälpa eleverna att komma ur den självcentrerade identitetsfixering de utvecklingsmässigt befinner sig i. Då fungerar det väldigt illa med dagens övertro på att skolan ska ta sin utgångspunkt i elevernas individuella, högst privata och subjektiva livsvärld. Idag skapar denna individualiseringsövertro mer problem än den löser.

Skolan ska fostra kunskapande medborgare. En skola med religiösa, etniska, eller vinstgivande bevekelsegrunder är ingen bra skola. Skolan ska möta eleverna utifrån vad de kan bli och inte utifrån vad de är. Skolan ska förse elever med kompass i framtidslandskapet så att de kan lära sig manövrera i osäkra farvatten. För att kunna uppfylla hoppets princip måste skolan få vara en ö av god annorlundahet – ofjättrad av allehanda former av identitetspolitik. Ju mer skolan dras in i samhällets kumulativa dynamiker, desto mer förlorar den sin nödvändiga status och egenlogik.

Om skolan ska kunna utgöra ett förverkligande av varje elevs potential snarare än tidsbundna och kontingenta fakticitet måste den kunna bygga broar till elevens livsvärld, samtidigt som den behåller distansen och avståndet mellan skola och samhälle.

Is employment all a question of incentives?

9 Mar, 2013 at 09:56 | Posted in Economics | 3 Comments

Yours truly recently had a discussion with a member of the Swedish Royal Academy of Sciences that yearly presents the winners of the Nobel Memorial Prize in Economic Sciences. What started the discussion was the allegation that the level of employment in the long run is a result of people’s own rational intertemporal choices and that how much people work basically is a question of incentives.

Somehow the argument sounded familiar.

A couple of years ago – in connection with being awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 – Thomas Sargent, in an interview with Swedish Television, declared that workers ought to be prepared for having low unemployment compensations in order to get the right incentives to search for jobs.

This old mercantilist idea has very little support in research, since it has turned out to be exceedingly difficult to really get clear cut results of causality on the issue. However, the Swedish right-wing finance minister – Anders Borg – appreciated Sargent’s statement and declared it to be a “healthy warning” for those who wanted to increase compensation levels.

Sargent’s and Borg’s view is symptomatic. As in the 1920s, more and more right-wing politicians – and some economists – now suggest that lowering wages is the right medicine to strengthen the competitiveness of their faltering economies, get the economy going, increase employment and create growth that will get rid of the towering debts and create balance in the state budgets.

But, intimating that one could solve economic problems by impairing unemployment compensations and wage cuts, in these dire times, should really be taken more as a sign of how low the confidence in our economic system has sunk. Wage cuts and lower unemployment compensation levels – of course – do not save neither competitiveness, nor jobs.

What is needed more than anything else in these times is stimulus and economic policies that increase effective demand.

On a societal level wage cuts only increase the risk of more people getting unemployed. To think that that one can solve economic crisis in this way is a turning back to those faulty economic theories and policies that John Maynard Keynes conlusively showed to be wrong already in the 1930s. It was theories and policies that made millions of people all over the world unemployed.

It’s an atomistic fallacy to think that a policy of general wage cuts would strengthen the economy. On the contrary. The aggregate effects of wage cuts would, as shown by Keynes, be catastrophical. They would start a cumulative spiral of lower prices that would make the real debts of individuals and firms increase since the nominal debts wouldn’t be affected by the general price and wage decrease. In an economy that more and more has come to rest on increased debt and borrowing this would be the entrance-gate to a debt deflation crises with decreasing investments and higher unemployment. In short, it would make depression knock on the door.

The impending danger for today’s economies is that they won’t get consumption and investments going. Confidence and effective demand have to be reestablished. The problem of our economies is not on the supply side. Overwhelming evidence shows that the problem today is on the demand side. Demand is – to put it bluntly – simply not sufficient to keep the wheels of the economies turning. To suggest that the solution is lower wages and unemployment compensations is just to write out a prescription for even worse catastrophes.

IS-LM – here we go again

9 Mar, 2013 at 09:12 | Posted in Economics | Comments Off on IS-LM – here we go again

What is Paul Krugman‘s favourite macroeconomic model – IS-LM – all about? Steve Keen gives a pedagogical exposition.

IS-LM

Veckans dumstrut

8 Mar, 2013 at 12:49 | Posted in Economics | Comments Off on Veckans dumstrut

dumstrutHär är det viktigt att titta på historiska data: över en mycket lång period (åtminstone hundra år) har antalet arbetade timmar hos hushållen i de flesta länder varit förhållandevis konstanta, TROTS att reallönerna gått upp mångfaldigt! Det verkar alltså inte, förvånansvärt nog, som reallönenivån är viktig alls i det långa perspektivet. För att förstå detta måste vi fördjupa oss i hur arbetsutbudet bestäms, dvs titta närmare på de faktorer som avgör hur mycket hushållen faktiskt VILL jobba. Hur mycket de vill jobba handlar om för- och nackdelar med att jobba, dvs incitament … Allt tyder på att … de s k substitutions- och inkomsteffekterna tar ut varandra ungefärligen. Detta är en fascinerande slutsats som är långt ifrån given, och den är alltså vår huvudförklaring till att hushållen jobbar ungefär lika mycket idag per capita [sic] som för hundra år sedan …

Strukturomvandling innebär kanske arbetslöshet på kort sikt men på lång sikt påverkas inte sysselsättningen. Den bara byter skepnad …

Avvägningen mellan arbete och fritid är central, i alla fall för hushållen som helhet och sett över ett längre tidsperspektiv. Huruvida sysselsättningen är för låg eller för hög är kanske inte lika lätt att säga … Jag skulle gärna se att mer av debatten, och även av våra läroböcker, handlade om dessa frågor och att de tog ett längre tidsperspektiv. Många faktorer som nog är relevanta på kort sikt — som t ex teknologiskift eller ändrade reallöner — visar sig nämligen irrelevanta, som jag argumenterat, utifrån ett längre tidsperspektiv.

Per Krusell

Och detta grodors plums och ankors plask ska man behöva läsa år 2013 – när vi runt omkring oss sett hur ett nyliberalt systemskifte, förfelad åtstramningspolitik och bristande efterfrågan fått arbetslösheten att trendmässigt stiga i land efter land sedan mer än två decennier.

Vem mer än en fullständigt verklighetsfrämmande neoklassisk nationalekonom skulle kunna hävda något så urbota dumt som att de flesta av de som är arbetslösa under finans- och eurokrisernas era inte VILL jobba? Med dumstrut på huvudet är det lätt att glömma att det finns något som heter efterfrågan också och att arbetslöshet och sysselsättning – på kort och på lång sikt – inte bara bestäms av utbudet.

Macroeconomics and the microfoundationalist programme

8 Mar, 2013 at 08:50 | Posted in Economics | 2 Comments

Most “modern” mainstream neoclassical macroeonomists more or less subscribe to the view that microfoundations somehow has lead to better models enabling us to make better predictions of future macroeconomic events.

But there exist strong reasons for being critical and doubtful re microfoundations of macroeconomics.

Microfoundations today means more than anything else that you try to build macroeconomic models assuming “rational expectations” and hyperrational “representative actors” optimizing over time. Both are highly questionable assumptions.

The concept of rational expectations was first developed by John Muth (1961) and later applied to macroeconomics by Robert Lucas (1972). Those macroeconomic models building on rational expectations microfoundations that are used today among both New Classical and “New Keynesian” macroconomists, basically assume that people on the average hold expectations that will be fulfilled. This makes the economist’s analysis enormously simplistic, since it means that the model used by the economist is the same as the one people use to make decisions and forecasts of the future.

Macroeconomic models building on rational expectations-microfoundations assume that people, on average, have the same expectations. Someone like Keynes for example, on the other hand, would argue that people often have different expectations and information, which constitutes the basic rational behind macroeconomic needs of coordination. Something that is rather swept under the rug by the extremely simple-mindedness of assuming rational expectations in representative actors models, which is so in vogue in New Classical and “New Keynesian” macroconomics. But if all actors are alike, why do they transact? Who do they transact with? The very reason for markets and exchange seems to slip away with the sister assumptions of representative actors and rational expectations.

Macroeconomic models building on rational expectations microfoundations impute beliefs to the agents that is not based on any real informational considerations, but simply stipulated to make the models mathematically-statistically tractable. Of course you can make assumptions based on tractability, but then you do also have to take into account the necessary trade-off in terms of the ability to make relevant and valid statements on the intended target system. Mathematical tractability cannot be the ultimate arbiter in science when it comes to modeling real world target systems. One could perhaps accept macroeconomic models building on rational expectations-microfoundations  if they had produced lots of verified predictions and good explanations. But they have done nothing of the kind. Therefore the burden of proof is on those macroeconomists who still want to use models built on these particular unreal assumptions.

In macroeconomic models building on rational expectations microfoundations –  where agents are assumed to have complete knowledge of all of the relevant probability distribution functions –  nothing really new happens, since they take for granted that people’s decisions can be portrayed as based on an existing probability distribution, which by definition implies the knowledge of every possible event (otherwise it is in a strict mathematical-statistically sense not really a probability distribution at all) that can be thought of taking place.

But in the real world, it is not possible to just assume that probability distributions are the right way to characterize, understand or explain acts and decisions made under uncertainty. When we simply do not know, when we have not got a clue, when genuine uncertainty prevail, macroeconomic models building on rational expectations-microfoundations simply will not do. In those circumstances it is not a useful assumption. The reason is that under those circumstances the future is not like the past, and henceforth, we cannot use the same probability distribution – if it at all exists – to describe both the past and future.

The future is not reducible to a known set of prospects. It is not like sitting at the roulette table and calculating what the future outcomes of spinning the wheel will be. We have to surpass macroeconomic models building on rational expectations-microfoundations and instead try to build economics on a more realistic foundation. A foundation that encompasses both risk and genuine uncertainty.

Macroeconomic models building on rational expectations microfoundations emanates from the belief that to be scientific, economics has to be able to model individuals and markets in a stochastic-deterministic way. It’s like treating individuals and markets as the celestial bodies studied by astronomers with the help of gravitational laws. Unfortunately, individuals, markets and entire economies are not planets moving in predetermined orbits in the sky.

To deliver macroeconomic models building on rational expectations microfoundations the economists have to constrain expectations on the individual and the aggregate level to be the same. If revisions of expectations take place they typically have to take in a known and prespecified precise way. This squares badly with what we know to be true in real world, where fully specified trajectories of future expectations revisions are no-existent.

Further, most macroeconomic models building on rational expectations microfoundations are time-invariant and so give no room for any changes in expectations and their revisions. The only imperfection of knowledge they admit of is included in the error terms, error terms that are assumed to be additive and to have a give and known frequency distribution, so that the models can still fully pre-specify the future even when incorporating these stochastic variables into the models.

In the real world there are many different expectations and these cannot be aggregated in macroeconomic models building on rational expectations microfoundations without giving rise to inconsistency. This is one of the main reasons for these models being modeled as representative actors models. But this is far from being a harmless approximation to reality. Even the smallest differences of expectations between agents would make these models inconsistent, so when they still show up they have to be considered “irrational”.

It is not possible to adequately represent individuals and markets as having one single overarching probability distribution. Accepting that, does not imply that we have to end all theoretical endeavours and assume that all agents always act totally irrationally and only are analyzable within behavioural economics. Far from it. It means we acknowledge diversity and imperfection, and that macroeconomics has to be able to incorporate these empirical facts in its models.

Most models in science are representations of something else. Models “stand for” or “depict” specific parts of a “target system” (usually the real world). A model that has neither surface nor deep resemblance to important characteristics of real economies ought to be treated with prima facie suspicion. How could we possibly learn about the real world if there are no parts or aspects of the model that have relevant and important counterparts in the real world target system? The burden of proof lays on the macroeconomists thinking they have contributed anything of scientific relevance without even hinting at any bridge enabling us to traverse from model to reality. All theories and models have to use sign vehicles to convey some kind of content that may be used for saying something of the target system. But purpose-built assumptions made solely to secure a way of reaching deductively validated results in mathematical models, are of little value if they cannot be validated outside of the model.

All empirical sciences use simplifying or unrealistic assumptions in their modeling activities. That is (no longer) the issue – as long as the assumptions made are not unrealistic in the wrong way or for the wrong reasons.

Theories are difficult to directly confront with reality. Economists therefore build models of their theories. Those models are representations that are directly examined and manipulated to indirectly say something about the target systems.

But being able to model a world that somehow could be considered real or similar to the real world is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified.

The microfounded macromodel should enable us to posit contrafactual questions about what would happen if some variable was to change in a specific way (hence the assumption of structural invariance, that purportedly enables the theoretical economist to do just that). But does it? Applying a “Lucas critique” on most microfounded macromodels, it is obvious that they fail. Changing “policy rules” cannot just be presumed not to influence investment and consumption behavior and a fortiori technology, thereby contradicting the invariance assumption. Technology and tastes cannot live up to the status of an economy’s deep and structurally stable Holy Grail. They too are part and parcel of an ever-changing and open economy.

Without export certificates models and theories should be considered unsold. Unfortunately this understanding has not informed modern neoclassical economics, as can be seen by the profuse use of so called representative agent models.

A common feature of modern neoclassical macroeconomics is to use simple (dynamic stochastic) general equilibrium models where representative actors are supposed to have complete knowledge, zero transaction costs and complete markets.

In these models, the actors are all identical. Of course, this has far-reaching analytical implications. Situations characterized by asymmetrical information – situations most of us consider to be innumerable – cannot arise in such models. If the aim is to build a macro-analysis from micro-foundations in this manner, the relevance of the procedure is highly questionable. Robert Solow has even considered the claims made by protagonists of rational agent models “generally phony”.

One obvious critique is that representative agent models do not incorporate distributional effects – effects that often play a decisive role in macroeconomic contexts. Investigations into the operations of markets and institutions usually find that there are overwhelming problems of coordination. These are difficult, not to say impossible, to analyze with the kind of Robinson Crusoe models that, e. g., real business cycle theorists employ and which exclude precisely those differences between groups of actors that are the driving force in many non-neoclassical analysis.

The choices of different individuals have to be shown to be coordinated and consistent. This is obviously difficult if the macroeconomic models don’t give room for heterogeneous individuals (this lack of understanding the importance of heterogeneity is perhaps especially problematic for the modeling of real business cycles in dynamic stochastic general equilibrium models). Representative agent models are certainly more manageable, however, from a realist point of view, they are also less relevant and have a lower explanatory potential. Or as Robert Gordon has it:

In the end, the problem with modern macro is that it contains too much micro and not enough macro. Individual representative agents assume complete and efficient markets and market clearing, while the models ignore the basic macro interactions implied by price stickiness, including macro externalities and coordination failures. In an economywide recession, most agents are not maximizing unconditional utility functions as in DSGE models but are maximizing, i.e., trying to make the best out of a bad situation, under biting income and liquidity constraints. Perceptive comments by others as cited above reject the relevance of modern macro to the current cycle of excess leveraging and subsequent deleveraging, because complete and efficient markets are assumed, and there is no room for default, bankruptcy, insolvency, and illiquidity.

Both the “Lucas critique” and Keynes’ critique of econometrics argued that it was inadmissible to project history on the future. Consequently an economic policy cannot presuppose that what has worked before, will continue to do so in the future. That macroeconomic models could get hold of correlations between different “variables” was not enough. If they could not get at the causal structure that generated the data, they were not really “identified”. Lucas himself drew the conclusion that the problem with unstable relations was to construct models with clear microfoundations where forward-looking optimizing individuals and robust, deep, behavioural parameters are seen to be stable even to changes in economic policies.

In microeconomics we know that aggregation really presupposes homothetic an identical preferences, something that almost never exist in real economies. The results given by these assumptions are therefore not robust and do not capture the underlying mechanisms at work in any real economy. And as if this was not enough, there are obvious problems also with the kind of microeconomic equilibrium that one tries to reduce macroeconomics to. Decisions of consumption and production are described as choices made by a single agent. But then, who sets the prices on the market? And how do we justify the assumption of universal consistency between the choices?

Models that are critically based on particular and odd assumptions – and are neither robust nor congruent to real world economies – are of questionable value.

And is it really possible to describe and analyze all the deliberations and choices made by individuals in an economy? Does not the choice of an individual presuppose knowledge and expectations about choices of other individuals? It probably does, and this presumably helps to explain why representative-agent models have become so popular in modern macroeconomic theory. They help to make the analysis more tractable.

One could justifiably argue that one might just as well accept that it is not possible to coherently reduce macro to micro, and accordingly that it is perhaps necessary to forswear microfoundations and the use of rational-agent models all together. Microeconomic reasoning has to build on macroeconomic presuppositions. Real individuals do not base their choices on operational general equilibrium models, but rather use simpler models. If macroeconomics needs microfoundations it is equally necessary that microeconomics needs macrofoundations.

The microeconomist Alan Kirman has maintained that the use of representative-agent models is unwarranted and leads to conclusions that are usually both misleading and false. It’s a fiction basically used by some macroeconomists to justify the use of equilibrium analysis and a kind of pseudo-microfoundations. Microeconomists are well aware that the conditions necessary to make aggregation to representative actors possible, are not met in actual economies. As economic models become increasingly complex, their use also becomes less credible.

Even if economies naturally presuppose individuals, it does not follow that we can infer or explain macroeconomic phenomena solely from knowledge of these individuals. Macroeconomics is to a large extent emergent and cannot be reduced to a simple summation of micro-phenomena. Moreover, as we have already argued, even these microfoundations aren’t immutable. Lucas and the new classical economists’ deep parameters – “tastes” and “technology” – are not really the bedrock of constancy that they believe (pretend) them to be.

For Alfred Marshall economic theory was “an engine for the discovery of concrete truth”. But where Marshall tried to describe the behaviour of a typical business with the concept “representative firm”, his modern heirs don’t at all try to describe how firms interplay with other firms in an economy. The economy is rather described “as if” consisting of one single giant firm – either by inflating the optimization problem of the individual to the scale of a whole economy, or by assuming that it’s possible to aggregate different individuals’ actions by a simple summation, since every type of actor is identical. But do not we just have to face that it is difficult to describe interaction and cooperation when there is essentially only one actor?

Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies and institutions are those based on rational expectations and representative actors. But there is really no support for this conviction at all. On the contrary. If we want to have anything of interest to say on real economies, financial crisis and the decisions and choices real people make, it is high time to place macroeconomic models building on representative actors and rational expectations-microfoundations where they belong – in the dustbin of history.

For if this microfounded macroeconomics has nothing to say about the real world and the economic problems out there, why should we care about it? The final court of appeal for macroeconomic models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic modelbuilding is little more than hand waving that give us rather little warrant for making inductive inferences from models to real world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around.

So – really – this is what the debate basically is all about. 

Given that, I would say that macroeconomists – especially “Keynesian” ones – ought to be even more critical of the microfoundationists than they are. If macroeconomic models – no matter of what ilk –  build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Incompatibility between actual behaviour and the behaviour in macroeconomic models building on representative actors and rational expectations microfoundations shows the futility of trying to represent real-world economis with models flagrantly at odds with reality.

In the conclusion to his book Models of Business Cycles (1987), Robert Lucas (in)famously wrote (p. 66 & 107-08):

It is remarkable and, I think, instructive fact that in nearly 50 years that Keynesian tradition has produced not one useful model of the individual unemployed worker, and no rationale for unemployment insurance beyond the observation that, in common with countercyclical cash grants to corporations or to anyone else, it has the effects of increasing the total volume of spending at the right times.  By dogmatically insisting that unemployment be classed as ‘involuntary’ this tradition simply cut itself off from serious thinking about the actual options unemployed people are faced with, and hence from learning anything about how the alternative social arrangements might improve these options.

The most interesting recent developments in macroeconomic theory seem to me describable as the reincorporation of aggregative problems such as inflation and the business cycle within the general framework of ‘microeconomic’ theory.  If these developments succeed, the term ‘macroeconomics’ will simply disappear from use and the modifier ‘micro’ will become superfluous.  We will simple speak, as did Smith, Ricardo, Marshall and Walras, of economic theory.  If we are honest, we will have to face the fact that at any given time there will be phenomena that are well-understood from the point of view of the economic theory we have, and other phenomena that are not.  We will be tempted, I am sure, to relieve the discomfort induced by discrepancies between theory and facts by saying the ill-understood facts are the province of some other, different kind of economic theory.  Keynesian ‘macroeconomics’ was, I think, a surrender (under great duress) to this temptation.  It led to the abandonment, for a class of problems of great importance, of the use of the only ‘engine for the discovery of truth’ that we have in economics.

Thanks to latter-day Lucasian New-Classical-New-Keynesian-Rational-Expectations-Representative-Agents-Microfoundations-economists, we are supposed not to – as our primitive ancestors – use that archaic term ‘macroeconomics’ anymore (with the possible exception of warning future economists not to give in to ‘discomfort.’)  Being intellectually heavily indebted to the man who invented macroeconomics – Keynes – yours truly firmly declines to concur.

Microfoundations – and a fortiori rational expectations and  representative agents – serve a particular theoretical purpose. And as the history of macroeconomics during the last thirty years has shown, this Lakatosian microfoundation programme for macroeconomics is only methodologically consistent within the framework of a (deterministic or stochastic) general equilibrium analysis. In no other context has it been possible to incorporate these kind of microfoundations, with its “forward-looking optimizing individuals,” into macroeconomic models.

This is of course not by accident. General equilibrium theory is basically nothing else than an endeavour to consistently generalize the microeconomics of individuals and firms on to the macroeconomic level of aggregates.

But it obviously doesn’t work. The analogy between microeconomic behaviour and macroeconomic behaviour is misplaced. Empirically, science-theoretically and methodologically, neoclassical microfoundations for macroeconomics are defective.  Tenable foundations for macroeconomics really have to be sought for elsewhere.

Of course there is an alternative to neoclassical general equilibrium microfoundations. Behavioural economics and Goldberg & Frydman’s “imperfect knowledge” economics being two noteworthy examples that easily come to mind. And for those of us who have not forgotten the history of our discipline, and not bought the sweet-water nursery tale of Lucas et consortes that Keynes was not “serious thinking,” we can easily see that there exists a macroeconomic tradition inspired by Keynes (that has absolutely nothing to do with any New Synthesis or “New Keynesianism” to do).

Its ultimate building-block is the perception of genuine uncertainty and that people often “simply do not know.” Real actors can’t know everything and their acts and decisions are not simply possible to sum or aggregate without the economist risking to succumb to “the fallacy of composition”.

Instead of basing macroeconomics on unreal and unwarranted generalizations of microeconomic behaviour and relations, it is far better to accept the ontological fact that the future to a large extent is uncertain, and rather conduct macroeconomics on this fact of reality.

The real macroeconomic challenge is to accept uncertainty and still try to explain why economic transactions take place – instead of simply conjuring the problem away by assuming uncertainty to be reducible to stochastic risk. That is scientific cheating. And it has been going on for too long now.

The Keynes-inspired building-blocks are there. But it is admittedly a long way to go before the whole construction is in place. But the sooner we are intellectually honest and ready to admit that “modern” neoclassical macroeconomics and its microfoundationalist programme has come to way’s end – the sooner we can redirect our aspirations and knowledge to more fruitful endeavours.

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