Keynes and the adding-up problem

31 March, 2015 at 12:26 | Posted in Economics | 3 Comments

2014+22keynes%20illo2The unpopularity of the principle of organic unities shows very clearly how great is the danger of the assumption of unproved additive formulas. The fallacy, of which ignorance of organic unity is a particular instance, may perhaps be mathematically represented thus: suppose f(x) is the goodness of x and f(y) is the goodness of y. It is then assumed that the goodness of x and y together is f(x) + f(y) when it is clearly f(x + y) and only in special cases will it be true that f(x + y) = f(x) + f(y). It is plain that it is never legitimate to assume this property in the case of any given function without proof.

J. M. Keynes “Ethics in Relation to Conduct” (1903)  [h/t Robert Skidelsky]

Since econometrics doesn’t content itself with only making optimal predictions, but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — most important of these are additivity and linearity. Important, simply because if they are not true, your model is invalid and descriptively incorrect. It’s like calling your house a bicycle. No matter how you try, it won’t move you an inch. When the model is wrong — well, then it’s wrong.

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Krugman vs. Krugman

27 March, 2015 at 09:26 | Posted in Economics | 16 Comments

Paul Krugman wonders why no one listens to academic economists …

Listening_TitleOne answer is that economists don’t listen to themselves. More precisely, liberal economists like Krugman who want the state to take a more active role in managing the economy, continue to teach an economic theory that has no place for activist policy.

Let me give a concrete example.

One of Krugman’s bugaboos is the persistence of claims that expansionary monetary policy must lead to higher inflation. Even after 5-plus years of ultra-loose policy with no rising inflation in sight, we keep hearing that since so “much money has been created…, there should already be considerable inflation” … As an empirical matter, of course, Krugman is right. But where could someone have gotten this idea that an increase in the money supply must always lead to higher inflation? Perhaps from an undergraduate economics class? Very possibly — if that class used Krugman’s textbook.

Here’s what Krugman’s International Economics says about money and inflation:

“A permanent increase in the money supply causes a proportional increase in the price level’s long-run value. … we should expect the data to show a clear-cut positive association between money supplies and price levels. If real-world data did not provide strong evidence that money supplies and price levels move together in the long run, the usefulness of the theory of money demand we have developed would be in severe doubt …

A permanent increase in the level of a country’s money supply ultimately results in a proportional rise in its price level but has no effect on the long-run values of the interest rate or real output.”

This last sentence is simply the claim that money is neutral in the long run, which Krugman continues to affirm on his blog …

You might think these claims about money and inflation are unfortunate oversights, or asides from the main argument. They are not. The assumption that prices must eventually change in proportion to the central bank-determined money supply is central to the book’s four chapters on macroeconomic policy in an open economy …

So these are not throwaway lines. The more thoroughly a student understands the discussion in Krugman’s textbook, the stronger should be their belief that sustained expansionary monetary policy must be inflationary. Because if it is not, Krugman gives you no tools whatsoever to think about policy …

Liberal Keynesian economists made a deal with the devil decades ago, when they conceded the theoretical high ground. Paul Krugman the textbook author says authoritatively that money is neutral in the long run and that a permanent increase in the money supply can only lead to inflation. Why shouldn’t people listen to him, and ignore Paul Krugman the blogger?

J. W. Mason/The Slack Wire

Recept mot krisen

27 March, 2015 at 09:21 | Posted in Economics | Comments Off on Recept mot krisen

krisrubbeDet första rådet vid en finansiell härdsmälta är att det finansiella systemet bör repareras omedelbart. Det är hjärtat i marknadsekonomin. En finanskris kan inte hävas förrän kreditgivningen åter fungerar. Andra stimulansåtgärder blir till föga hjälp så länge som bankerna är förlamade …

Det andra rådet säger att de så kallade automatiska stabilisatorerna i den offentliga sektorns budget bör få verka i största möjliga utsträckning. Vid varje kris skjuter budgetunderskottet av sig självt i höjden som följd av växande offentliga utgifter för högre arbetslöshet och sjunkande skatteintäkter när konsumtion och sysselsättning krymper …

Detta andra råd kan synas enkelt och självklart. Men ingen svensk finansminister har öppet och helhjärtat vågat anamma principen att lämna över budgetspakarna till den finanspolitiska autopiloten, minst av allt vid djup kris. Ofta har man gjort tvärtom: dragit i den budgetpolitiska nödbromsen och stramat åt – och därmed förvärrat det ekonomiska läget …

Vår finanskris i början av 1990-talet demonstrerade den kritiska dynamiken på ett slående sätt. Då utmålades de automatiskt växande budgetunderskotten som tecken på ansvarslös och slapp finanspolitik – inte som tecken på väl fungerande stötdämpare. Experter från IMF på besök i Stockholm bidrog till den felaktiga tolkningen genom att rekommendera finanspolitisk åtstramning mitt under brinnande kris.

Förhoppningsvis finns det en bättre förståelse i dag. Även IMF har svängt, ångrat sin budgetsyn från 1990-talet och går nu ut med det allmänna rådet att inte strama åt. Budgetunderskotten måste få växa raskt under de närmaste krisåren för att hålla världsekonomin – liksom vår ekonomi – på rätt köl.

Lars Jonung

Hoppas nu att ordföranden i Finanspolitiska rådet erinrar sig vad professorn skrev …

Postmodern pedagogik-mumbo-jumbo

26 March, 2015 at 18:47 | Posted in Theory of Science & Methodology | 1 Comment

Den antiintellektuella avgrunden är nära när den postmoderna sanningsrelativismen infekterar det offentliga samtalet på alla nivåer, inklusive den akademiska världen.

truth_exit_signI Sverige tycks den pedagogiska disciplinen vara värst smittad. En docent i pedagogik fick för några år sedan Skolverkets uppgift att skriva en rapport om fysikundervisningen i den svenska skolan, samt komma med förslag på hur den skulle attrahera fler flickor.

Ur rapporten:

”Föreställningen om det vetenskapliga tänkandets självklara överhöghet rimmar illa med jämställdhets- och demokratiidealen. […] Vissa sätt att tänka och resonera premieras mera än andra i naturvetenskapliga sammanhang. […] Om man inte uppmärksammar detta riskerar man att göra missvisande bedömningar. Till exempel genom att oreflekterat utgå från att ett vetenskapligt tänkande är mer rationellt och därför borde ersätta ett vardagstänkande” …

Pedagogen skriver vidare i rapporten: ”En genusmedveten och genuskänslig fysik förutsätter en relationell infallsvinkel på fysiken samt att en hel del av det traditionella vetenskapliga kunskapsinnehållet i fysiken plockas bort.”

Det vetenskapliga kunskapsinnehållet i fysiken ska alltså ”plockas bort” för att ”underlätta” för flickor. Inte nog med att detta är en förfärlig kunskapssyn, det är dessutom kränkande att betrakta flickor som oförmögna eller sämre på att ta till sig kunskap i fysik.

Författaren till rapporten heter Moira von Wright och är numera professor i pedagogik och rektor för Södertörns högskola. När nu en sådan kunskapsteoretisk grundsyn slagit rot i våra högre lärosäten har vi ett problem …

Martin Ingvar  Christer Sturmark  Åsa Wikforss

Efter att ha läst i ett av de senaste numren av Pedagogisk Forskning i Sverige (2-3 2014) — där författaren till artikeln “En pedagogisk relation mellan människa och häst. På väg mot en pedagogisk filosofisk utforskning av mellanrummet” ger följande intressanta “programförklaring” — är man dock föga förvånad över sakernas tillstånd inom svensk pedagogisk “vetenskap”:

Med en posthumanistisk ansats belyser och reflekterar jag över hur både människa och häst överskrider sina varanden och hur det öppnar upp ett mellanrum med dimensioner av subjektivitet, kroppslighet och ömsesidighet.

elite-daily-sleeping-studentOch så säger man att pedagogikämnet är i kris. Undrar varför …

Why Paul Krugman is no real Keynesian

26 March, 2015 at 11:03 | Posted in Economics | 10 Comments

Keynes’s insights have enormous practical importance, according to Lance Taylor and Duncan Foley [who jointly received the Leontief Prize for Advancing the Frontiers of Economic Thought at Tufts University’s Global Development and Environment Institute on Monday.]

But isn’t Keynes now mainstream? No, say Foley and Taylor. The mainstream still sees economies as inherently moving to an optimal equilibrium … It still says demand causes short-run fluctuations, but only supply factors, such as the capital stock and technology, can affect long-run growth.

EVEN PAUL KRUGMAN, a self-described Keynesian, Nobel laureate, and New York Times columnist, writes in the 2012 edition of his textbook: “In the long run the economy is self-correcting: shocks to aggregate demand affect aggregate output in the short run but not in the long run” …

KeynesUpsidedownKrugman does point to one exception: If interest rates are nearly zero, as during the financial crisis, markets lose restorative force. But, Taylor asks, what’s the logic?

Keynes saw capitalism’s general state as allowing almost arbitrary unemployment: hence his “General Theory.” Full employment was a lucky exception.

To Taylor, calling full employment the general state and allowing one unlucky exception turns Keynes upside down. And look where this confusion has brought us, he adds. Take the current eurozone disaster. For two decades, the European Union bureaucracy in Brussels, the German Council of Economic Experts, and a chorus of others, branded Germany, the “sick man of Europe,” as suffering from a sclerotic supply side: rigid labor unions, impediments to layoffs, a burdensome welfare state. But German labor costs to produce output sank steadily, and Germany generated huge trade surpluses — hardly signs of a sclerotic supply side. Yet growth has barely averaged 1 percent a year since 2000.

Jonathan Schlefer

I can’t but agree with Taylor and Foley here. To a large degree one does get the impression that Krugman thinks he is a Keynesian because he is a stout believer in John Hicks IS-LM interpretation of Keynes.

In a post on his blog, self-proclaimed “proud neoclassicist” Paul Krugman has argued that “Keynesian” macroeconomics more than anything else “made economics the model-oriented field it has become.” In Krugman’s eyes, Keynes was a “pretty klutzy modeler,” and it was only thanks to Samuelson’s famous 45-degree diagram and Hicks’s IS-LM that things got into place. Although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” he still vehemently defends — and always have — the mathematization of economics:

I’ve seen quite a lot of what economics without math and models looks like — and it’s not good.

However, being a student of Hyman Minsky, yours truly very much doubt that IS-LM is an adequate reflection of the width and depth of Keynes’s insights on the workings of modern market economies.

Almost nothing in the post-General Theory writings of Keynes suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s canonical statement of the essence of his theory — in the famous 1937 Quarterly Journal of Economics article — there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. John Hicks, the man who invented IS-LM in his 1937 Econometrica review of Keynes’ General Theory — “Mr. Keynes and the ‘Classics’. A Suggested Interpretation” — returned to it in an article in 1980 — “IS-LM: an explanation” — in Journal of Post Keynesian Economics. Self-critically he wrote that ”the only way in which IS-LM analysis usefully survives — as anything more than a classroom gadget, to be superseded, later on, by something better — is in application to a particular kind of causal analysis, where the use of equilibrium methods, even a drastic use of equilibrium methods, is not inappropriate.”

IS-LM is typically set in a current values numéraire framework that definitely downgrades the importance of expectations and uncertainty — and a fortiori gives too large a role for interests as ruling the roost when it comes to investments and liquidity preferences. Reducing uncertainty to risk — implicit in most analyses building on IS-LM models — is nothing but hand waving. 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.” 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 often have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents as modeled by “modern” social sciences. And often we “simply do not know.”

IS-LM not only ignores genuine uncertainty, but also the essentially complex and cyclical character of economies and investment activities, speculation, endogenous money, labour market conditions, and the importance of income distribution. Most of the insights on dynamic coordination problems that made Keynes write General Theory are lost in the translation into the IS-LM framework.

Sure, “New Keynesian” economists like Krugman — and their forerunners, “Keynesian” economists like Paul Samuelson and (young) John Hicks — certainly have contributed to making economics more mathematical and “model-oriented.”

wrong-tool-by-jerome-awBut if these math-is-the-message-modelers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematically formalized macromodels are stable in the sense that they do not change when we “export” them to our “target systems,” these mathematical models do only hold under ceteris paribus conditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems.

The kinds of laws and relations that “modern” economics has established, are laws and relations about mathematically formalized entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made mathematical-statistical “nomological machines” they are rare, or even non-existant. Unfortunately that also makes most of contemporary mainstream neoclassical endeavours of mathematical economic modeling rather useless. And that also goes for Krugman.

In recent blogposts Paul Krugman has come back to his idea that it would be great if the Fed stimulated inflationary expectations so that investments would increase. I don’t have any problem with this idea per se, but I don’t think it’s of the stature that Krugman seems to think. But although I have written extensively on Knut Wicksell and consider him the greatest Swedish economist ever, I definitely – since Krugman portrays himself as “sorta-kinda Keynesian” – have to question his invocation of Knut Wicksell for his ideas on the “natural” rate of interest. Krugman writes (emphasis added):

Start with the very simplest view of how Fed policy affects the economy: the Fed sets short-term interest rates, and other things equal a lower rate leads to higher output; the “natural rate” of interest … is the rate at which output equals potential, that is, at which there are neither inflationary nor deflationary pressures …

What does this tell us? First of all, that there is nothing “artificial” or “unnatural” about low interest rates; they’re low because demand is low, and the Fed is responding appropriately. If anything, the “unnatural” situation is that rates are too high, because they’re constrained by the zero lower bound (rates can’t go below zero, except for some minor technical bobbles, because people can always just hold cash).

wicksell3Second, the Fed’s inability to get rates as low as they should be justifies a search for policies that can fill this policy gap. Fiscal stimulus is one such policy; unconventional monetary policies of various kinds are another. Actually, the natural policy — natural in a Wicksellian sense, and also the one that in terms of standard economics should produce the least distortion — would be a credible commitment to higher inflation.

Now consider what Keynes himself wrote in General Theory:

In my Treatise on Money I defined what purported to be a unique rate of interest, which I called the natural rate of interest¾namely, the rate of interest which, in the terminology of my Treatise, preserved equality between the rate of saving (as there defined) and the rate of investment. I believed this to be a development and clarification of Wicksell’s ‘natural rate of interest’, which was, according to him, the rate which would preserve the stability of some, not quite clearly specified, price-level.

I had, however, overlooked the fact that in any given society there is, on this definition, a different natural rate of interest for each hypothetical level of employment. And, similarly, for every rate of interest there is a level of employment for which that rate is the ‘natural’ rate, in the sense that the system will be in equilibrium with that rate of interest and that level of employment. Thus it was a mistake to speak of the natural rate of interest or to suggest that the above definition would yield a unique value for the rate of interest irrespective of the level of employment. I had not then understood that, in certain conditions, the system could be in equilibrium with less than full employment.

I am now no longer of the opinion that the [Wicksellian] concept of a ‘natural’ rate of interest, which previously seemed to me a most promising idea, has anything very useful or significant to contribute to our analysis. It is merely the rate of interest which will preserve the status quo; and, in general, we have no predominant interest in the status quo as such.

Paul Krugman has on his blog tried to explain why we should still use the neoclassical hobby horse Aggregate Supply-Aggregate Demand model:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

Actually, this is the same unsubstantiated stuff you find in all of the “fairly Keynesian” Greg Mankiw’s textbooks.

Well, THIS “fairly Keynesian” guy is not impressed. And I doubt that Keynes himself would have been impressed by having his theory being characterized with catchwords like “tendency to return to full employment” and “money is neutral in the long run.”

As Taylor and Foley convincingly argue — Krugman is no real Keynesian.

Added GMT 1630: In case you still think that Keynes shared Krugman’s concern of getting across “the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility” — well, have a look at this 1934 BBC radio address by Keynes, and you will certainly come to think differently [h/t Sandwichman].

Statistics and mathematics — of no avail in solving our disagreements

25 March, 2015 at 20:29 | Posted in Economics | 3 Comments

Statistical Science is not really very helpful for understanding or forecasting complex evolving self-healing organic ambiguous social systems – economies, in other words.

leamer1 zoomedA statistician may have done the programming, but when you press a button on a computer keyboard and ask the computer to find some good patterns, better get clear a sad fact: computers do not think. They do exactly what the programmer told them to do and nothing more. They look for the patterns that we tell them to look for, those and nothing more. When we turn to the computer for advice, we are only talking to ourselves …

Mathematical analysis works great to decide which horse wins, if we are completely confident which horses are in the race, but it breaks down when we are not sure. In experimental settings, the set of alternative models can often be well agreed on, but with nonexperimental economics data, the set of models is subject to enormous disagreements. You disagree with your model made yesterday, and I disagree with your model today. Mathematics does not help much resolve our internal intellectual disagreements.

Ed Leamer

När bot blir sot

25 March, 2015 at 20:04 | Posted in Economics, Politics & Society | Comments Off on När bot blir sot

Starka offentliga finanser är en absolut förutsättning för tillväxt och fler jobb. Det inser man nu i Frankrike, Irland, Italien, Portugal, Spanien, Storbritannien och inte minst Grekland. Runtom i Europa väntar tuffa budgetsaneringsprogram. Det vet vi i Sverige efter de krisår vi gått igenom framför allt under 90-talet – eller borde veta. För oss socialdemokrater är det självklart: Sverige ska tillbaka till överskott …

2011-10-26-dumb_and_dumber-533x299Det Europa behöver är en ny och stram Stabilitets- och tillväxtpakt byggd på tydliga regler och sanktioner som tvingar Europas länder att sanera sina statsfinanser … Det måste finnas konsekvenser för medlemsländer som bryter mot pakten. Det bör övervägas om medlemsländer som bryter mot pakten ska få ta del av EU-medel …

För Sveriges del är det oerhört viktigt att euron blir framgångsrik. Det är viktigt för Europas ekonomiska framtid. Vi är fortfarande positiva till euron som politiskt projekt och är övertygade om att den kan bidra till handel, jobb och långsiktig tillväxt …

Europa behöver en ny och stram Stabilitets- och tillväxtpakt och fler ansvarstagande europeiska regeringar.

Mona Sahlin Thomas Östros

Grodors plums och ankors plask.

Herre du milde!

Har för mig att Östros fick ett nytt jobb också för ett par veckor sedan …

Money hoarding — an explanation of today’s low inflation

25 March, 2015 at 14:58 | Posted in Economics | 10 Comments

Based on the [quantity theory of money equation MV = PQ] holding the money velocity constant, if the money supply (M) increases at a faster rate than real economic output (Q), the price level (P) must increase to make up the difference. According to this view, inflation in the U.S. should have been about 31 percent per year between 2008 and 2013, when the money supply grew at an average pace of 33 percent per year and output grew at an average pace just below 2 percent. Why, then, has inflation remained persistently low (below 2 percent) during this period? …

During the first and second quarters of 2014, the velocity of the monetary base2 was at 4.4, its slowest pace on record. This means that every dollar in the monetary base was spent only 4.4 times in the economy during the past year, down from 17.2 just prior to the recession. This implies that the unprecedented monetary base increase driven by the Fed’s large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP (either P or Q).

5267109005_ac183b2699So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP? The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of Money …

And why then would people suddenly decide to hoard money instead of spend it? A possible answer lies in the combination of two issues:
•A glooming economy after the financial crisis
•The dramatic decrease in interest rates that has forced investors to readjust their portfolios toward liquid money and away from interest-bearing assets such as government bonds.

Yi Wen & Maria Arias (St. Louis Fed)

Anyone still believing in Say’s Law? Just wondering …

Macroeconomics — totally messed-up

25 March, 2015 at 09:12 | Posted in Economics | 2 Comments

Until a few years ago, economists of all persuasions confidently proclaimed that the Great Depression would never recur. In a way, they were right. After the financial crisis of 2008 erupted, we got the Great Recession instead. Governments managed to limit the damage by pumping huge amounts of money into the global economy and slashing interest rates to near zero. But, having cut off the downward slide of 2008-2009, they ran out of intellectual and political ammunition.

EconomistsMessedUp2

Economic advisers assured their bosses that recovery would be rapid. And there was some revival; but then it stalled in 2010. Meanwhile, governments were running large deficits – a legacy of the economic downturn – which renewed growth was supposed to shrink. In the eurozone, countries like Greece faced sovereign-debt crises as bank bailouts turned private debt into public debt.

Attention switched to the problem of fiscal deficits and the relationship between deficits and economic growth. Should governments deliberately expand their deficits to offset the fall in household and investment demand? Or should they try to cut public spending in order to free up money for private spending?

Depending on which macroeconomic theory one held, both could be presented as pro-growth policies. The first might cause the economy to expand, because the government was increasing public spending; the second, because they were cutting it. Keynesian theory suggests the first; governments unanimously put their faith in the second.

The consequences of this choice are clear. It is now pretty much agreed that fiscal tightening has cost developed economies 5-10 percentage points of GDP growth since 2010. All of that output and income has been permanently lost. Moreover, because fiscal austerity stifled economic growth, it made the task of reducing budget deficits and national debt as a share of GDP much more difficult. Cutting public spending, it turned out, was not the same as cutting the deficit, because it cut the economy at the same time.

Robert Skidelsky

Boom Bust Boom

24 March, 2015 at 16:54 | Posted in Economics | Comments Off on Boom Bust Boom

 

Desire

22 March, 2015 at 14:05 | Posted in Varia | Comments Off on Desire

 

Putte Wickman (1924-2006) — self-taught master jazz clarinetist.

Att försvara mänskliga rättigheter måste få kosta

20 March, 2015 at 08:29 | Posted in Politics & Society | 1 Comment

Diskussionens vågor går i dessa dagar höga vad gäller de diplomatiska relationerna med Saudiarabien och hur de lämpligen hanteras. De flesta verkar hålla med om att t ex tusen piskrapp plus 10 års fängelse inte känns som ett riktigt proportionerligt straff för lite bloggande kritik mot religiösa ledare.

wallstrom-ta36ae68-jpgLåt oss försiktigt sammanfatta det som att det finns en del som tyder på att Saudiarabien inte är bäst i klassen avseende mänskliga rättigheter.

Enigheten är mindre framträdande när det gäller hur den svenska regeringen hanterat kopplade saker den senaste tiden.

Heidi Avellan [Sydsvenskan] har ju inte gjort sig känd som en fanatisk Löfvensupporter och menade i en krönika 13/3 att även det utrikespolitiska nu dragits in i det pågående rödgröna haveriet. I ett försök att knyppla ihop en liberal hållning vad gäller mänskliga rättigheter med kritik mot utrikesministerns förmodade klumperier skriver Avellan att Margot Wallströms kritik var berättigad, men diplomatiskt illa formulerad.

Det är svårt undgå slutsatsen att det som stört harmonin är att kritiken, som alltså ansågs befogad, faktiskt uppmärksammades av Saudiarabien. Om Wallström bara hade uttalat kritiken för sig själv inne på någon toalett i Sagerska palatset, medan Stefan Löfven med någon vag fras om hur mycket bättre världen vore med mer mänskliga rättigheter löst upp avtalet när löptiden ändå runnit ut, så hade saken varit utagerad. Fingerspitzgefühl.

Det är naturligtvis sant, men det man måste fråga sig är om sådant fjäderlätt diplomatiskt tryck från en liten stat som Sverige är meningsfullt annat än för att hjälpa liberalt sinnade samhällsdebattörer att sova en smula bättre om natten: nå, vi har i alla fall gjort något.

Kanske det kanske, men man har väl knappast gjort mindre om man med avsevärt uppkäftigare diplomati fått massvis med internationell uppmärksamhet och uppenbarligen gjort diplomatiskt intryck på motparten? Om inget annat så komplicerar det i vart fall Avellans påstående att Sveriges röst i världen har försvagats av Wallströms agerande.

Till syvende och sist så kokar allt ner till en enkel fråga: Får det någonsin kosta något – kosta något på riktigt – att försvara mänskliga rättigheter diplomatiskt? Den frågan borde vara lätt att besvara för en liberalt sinnad debattör såvida inte ett rödgrönt skynke skymmer sikten i lite för många frågor förstås.

Mikael Sundström

Dags att skingra myterna om statsskulden

19 March, 2015 at 19:31 | Posted in Economics | 2 Comments

Vid en analys av den svenska depressionens förlopp är det viktigt att ha klart för sig att statsskuldens snabba tillväxt inte har utgjort någon orsak till krisen utan istället varit ett symptom på nedgången i ekonomin. I själva verket skulle krisen ha blivit djupare om inte mycket stora underskott i de offentliga finanserna släppts fram … Krisförloppet innebar en överflyttning av en given skuldbörda från privat till offentlig sektor. Någon ökning av folkhushållets totala skuldsättning har inte kommit till stånd.

debtEn nödvändig privat skuldsanering utgör alltså kärnan i den svenska depressionen … Man måste också fråga sig hur krisen skulle ha utvecklat om den offentliga sektorn inte hade accepterat att utgöra en — förhoppningsvis tillfällig — ‘parkeringsplats’ för den privata sektorns alltför stora skulder …

De stora budgetunderskotten kan ses som ett resultat av en omfattande ‘socialisering,’ där den offentliga sektorn kortsiktigt bidrar till att lyfta av den privata en alltför stor skuldbörda …

Statsskuldsutvecklingen spelar idag en viktig pedagogisk roll som indikator på den fara som ligger i dröjsmål med det ekonomisk-politiska reformarbetet. Endast under hotet om statsbankrutt förefaller Sveriges riksdag förmögen att fatta beslut om begränsningar av statens utgiftsåtaganden.

Hans Tson Söderström

Tyvärr lika sant idag som för 20 år sedan — och det säger en hel del om kvalitén på den svenska statsskuldsdebatten bland politiker och ekonomer.

 

The core problem with DSGE models

18 March, 2015 at 17:37 | Posted in Economics | 2 Comments

[DSGE] models ‘force’ behavioral changes through adjustment mechanisms that operate in narrowly parameterized equilibrium spaces. So violations of key model assumptions are introduced economically ‘one by one’ …

fubar1-2This modeling convention … makes it virtually impossible to incorporate concerns that are central to heterodox economics: liquidity preference, power in finance, predatory behavior, illiquid asset markets, increasing inequality in income and wealth …

One possibly decisive structural change has yet to be — and perhaps cannot be — acknowledged through DSGE modeling: the fact that most nations in the global North are simultaneously pursuing austerity policies. It is obvious in trade theory that every nation in a global trading system cannot maintain a surplus on current account. But this obvious result, which is an implication of a regime in which nation after nation is pursuing austerity macroeconomic policies, cannot be expressed in a macroeconomics based on models that focus almost completely on intertemporal coordination, while ignoring point-in-time structural interconnections.

Gary Dymski

Alesina and the deficit mania — poor research

18 March, 2015 at 13:34 | Posted in Economics | 1 Comment

The obsession with government budget deficits since the crisis of 2008 and the subsequent recession illustrates the damage done by mistaken economic ideas. In the rich West, tens of millions of people lost jobs that could have been saved …

81peE0DWJoLThe media focused on the politics of the budget debate, but economic ideas had a central role in the outcome. Believers in Say’s law predominated … The most prominent research was led by Alberto Alesina of Harvard University, where conservative economists had displaced much of the formerly pro-government liberal faculty of the 1960s … Cut deficits, went Alesina’s argument, and you will restore the business confidence to invest fully the excess savings; spending cuts were more effective than tax increases in reducing deficits.

Alesina’s research was poor. Most important, his analysis, which started in the early 1990s, didn’t distinguish the economic conditions under which austerity policies were adopted. Essentially, Alesina’s optimistic conclusions about austerity expansions applied only when economies were already strengthening or their currencies were falling in value sufficiently to spur export — conditions not applicable to either the United States or most of Europe.

Alan Kirman on the fundamental micro-macro difference

18 March, 2015 at 13:12 | Posted in Economics | Comments Off on Alan Kirman on the fundamental micro-macro difference

 

What the Eurozone crisis has taught us

17 March, 2015 at 19:11 | Posted in Economics | Comments Off on What the Eurozone crisis has taught us

Ever since the establishment of the modern nation-state in the late eighteenth and nineteenth centuries, the creation of the euro was perhaps the first significant experiment in modern times in which there was an attempt to separate money from the state, that is, to denationalize currency, as some right-wing ideologues and founders of modern neoliberalism, such as Friedrich von Hayek, had defended. resized_creepy-willy-wonka-meme-generator-oh-you-have-your-own-money-you-are-soooooo-cool-a958dcWhat the Eurozone crisis teaches is that this perception of how the monetary system works is quite wrong, because, in times of crisis, the democratic state must be able to spend money in order to meet its obligations to its citizens. The denationalization or “supra-nationalization” of money with the establishment that happened in the Eurozone took away from elected national governments the capacity to meaningfully manage their economies. Unless governments in the Eurozone are able to renegotiate a significant control and access money from their own central banks, the system will be continually plagued with crisis and will probably collapse in the longer term.

Mario Seccareccia

Keynes letter to President Roosevelt

17 March, 2015 at 17:33 | Posted in Economics | 5 Comments

The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

John Maynard Keynes

[h/t Constance]

‘Sound finance’ — a sign of obstinate ignorance

17 March, 2015 at 16:59 | Posted in Economics | 1 Comment

To many conservative and neoliberal politicians and economists there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these Keynesophobics to fight it are the confidence argument and the doctrine of ‘sound finance.’

Is this witless crusade against economic reason new? Not at all. In 1943 a famous Polish economist wrote the following in a classic essay on ‘sound finance’:

kale It should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives …

Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article …

We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

Michal Kalecki Political aspects of full employment

David K. Levine’s sad gibberish

16 March, 2015 at 22:17 | Posted in Economics | 4 Comments

50cf9626f2deeIn the wake of the latest financial crisis many people have come to wonder why economists never have been able to predict these manias, panics and crashes that haunt our economies.

In responding to these warranted wonderings, some economists – like theoretical economist David K. Levine in the article Why Economists Are Right: Rational Expectations and the Uncertainty Principle in Economics in the Huffington Post – have maintained that
 

it is a fundamental principle that there can be no reliable way of predicting a crisis.

To me this is a totally inadequate answer. And even trying to make an honour out of the inability of one’s own science to give answers to just questions, is indeed proof of a rather arrogant and insulting attitude.

Fortunately yours truly is not the only one racting to this guy’s arrogance:

Steve Blough trolls me this morning over on the Twitter Machine about the truly remarkable ignorance of economics professor David K. Levine:

I confess I am embarrassed for my great-grandfather Roland Greene Usher, who sweated blood all his life trying to help build Washington University in St. Louis into a great university, that WUSTL now employs people like David K. Levine:

Levine, you see, appears to believe that we live not in a monetary but in a barter economy. And so Levine claims that the Friedmanite-monetarist expansionary policies to fight recessions that recommended by Milton Friedman cannot, in fact, work:

David K. Levine: The Keynesian Illusion:
I want to think here of a complete economy peopled by real people … a phone guy who makes phones, a burger flipper, a hairdresser and a tattoo artist…. The burger flipper only wants a phone, the hairdresser only wants a burger, the tattoo artist only wants a haircut and the phone guy only wants a tattoo…. Each can produce one phone, burger, haircut or tattoo…. The phone guy produces a phone, trades it to the tattoo artist in exchange for a tattoo, who trades the phone to the hairdresser in exchange for a haircut, who trades it to burger flipper in exchange for a burger. All are employed… everyone is happy.

Now suppose that the phone guy suddenly decides he doesn’t like tattoos enough to be bothered building a phone…. Catastrophe. Everyone is unemployed…. The stupid phone guy… is lazy and doesn’t want to work…. The burger flipper would like to work making burgers if he can get a phone, the hairdresser would like cut hair if he could get a burger and the tattoo artist would like to work if he could get a haircut and yet all are unemployed …

Maybe the government should follow Keynes’s [note: Levine means “Milton Friedman’s” here] advice and print some money…. Then the phone guy can buy a tattoo, and the tattoo guy can buy a haircut and the haircutter can buy a burger, and the burger flipper — ooops… he can’t buy a phone because there are no phones…. [Perhaps] the burger flipper realizes he shouldn’t sell the burger because he can’t buy anything he wants… and we are right back… with everyone unemployed…. Maybe he doesn’t realize that and gets left holding the bag… a Ponzi scheme…. It seems like a poor excuse for economic policy that our plan is that we hope the burger flipper will be a fool and be willing to be left holding the bag.

DKL’s argument that Friedmanite-monetarist expansionary policies cannot cure a downturn is, I believe, correct — if the downturn is caused by a sudden outbreak of worker laziness, an adverse supply shock that reduces potential output.

Expansionary monetary policy in such a situation will indeed produce inflation. People’s expectations of the prices at which they will be able to buy are disappointed on the upside as too much money chases too few goods. It is not clear to me why DKL calls this a “Ponzi scheme” rather than “unanticipated inflation”.

But does anybody — save DKL — believe that an extraordinary and contagious outbreak of worker laziness is what caused the downturn that began in 2008?

No.

Everybody else believes that the downturn that began in 2008 occurred not because of a supply shock in which workers suddenly became lazy but because of a demand shock in which the financial crisis caused nearly everybody in the economy to try to rebuild their stocks of safe, liquid, secure financial assets. Everybody else believes that the right way to model the economy is not the barter economy of DKL — trading phones for tattoos, etc. — but as a monetary economy, in which people hold stocks of financial assets and trade them for currently-produced goods and services.

This matters.

This matters a lot.

Brad DeLong

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