Steve Keen’s new book

5 Mar, 2015 at 18:13 | Posted in Economics | Comments Off on Steve Keen’s new book

Cover of Developing an economics for the post-crisis worldThe veracity of mainstream economics has been called into question in the years since the economic crisis began. But the questioning of economics precedes the crisis, and not by merely years but arguably ever since 1898, when Thorstein Veblen published his brilliant paper “Why is Economics not an Evolutionary Science?” But Veblen’s critique fell on the deaf ears of the mainstream, and was unknown to the public. Only in the fringes of academic economists did Veblen’s words, and the spirit of rebellion he encouraged, live on.

Economics came under challenge again in the 1930s, and this time Keynes led the charge against an orthodoxy that, six years after the Great Depression began, had no idea what caused it, or how to overcome it. But Keynes’s challenge was largely deflected by Hicks’s reinterpretation of Keynes, and the taxonomic economics that Veblen hoped to defeat was rebuilt after the challenge of the Great Depression and the World War had ended.

In 2007, the global economy experienced its greatest crisis since the Great Depression, and once again, mainstream economics failed to anticipate the crisis, and even after it has apparently passed – in the Anglo-Saxon world at least – once again, can provide no explanation of why it happened in the first place.   What is different this time around is that there is a publicly accessible outlet for critical voices, and it has been around – in various guises – for 15 years. What was first known as PAECON (the Protest against Autistic ECONomics) and is now known as the Real World Economics Review was established by Edward Fullbrook in 2000 in response to protests by French students against the unworldly theorems they were forced to learn in the French economics curriculum. When the financial crisis hit in late 2007, the Real World Economics Review was already there, ready to provide an outlet for critical economists, and intent on getting their views to the public.

This short book provides the articles that I have published in RWER over the last fifteen years – starting with the first in July 2001. The topics covered include methodology, microeconomics, and the monetary approach to macroeconomics that I have been developing – along with many other non-mainstream economists – over the last 20 years.

Steve Keen

Wage gap explanations

5 Mar, 2015 at 08:47 | Posted in Theory of Science & Methodology | Comments Off on Wage gap explanations

A passage from Stanley Lieberson’s classic book on the methodology of social research, Making It Count (1985), has always stuck with me. In it, he considers what a social scientist might conclude from a regression model predicting black and white earnings from various background characteristics, including education. Invariably the coefficient for schooling is strong, positive, and significant—the more education one has, the greater one’s earnings. Moreover, the apparent gap between black and white earnings is much smaller when schooling is included as a predictor in the equation than when it is left out. In this sense, the racial gap is “explained” by lower average levels of education among blacks compared with whites. Obviously, therefore, all one has to do to reduce the racial gap in earnings is to increase levels of black education. The social scientist thus recommends that policymakers design and implement programs to reduce black dropout rates and increase the odds of college attendance.

41-OrnwYKbLLieberson (1985), however, doubts that reducing educational gaps will reduce the earnings gap and goes on to sketch a provocative counter-argument:

“Suppose we start with a radically different perspective on this question and see where it leads us.
Let us hypothesize that racial or other interest groups will tend to take as much as they can for
themselves and will give as little as necessary to maintain the system and avoid having it overturned.
In this case, whites will give blacks as little as they can. Under such circumstances, one would assume that observed interrelations between income gaps and features such as education . . . describe . . . the current pathways leading from a specific causal force to the outcome of that force. If so, a complicated causal analysis of factors contributing to the racial gaps in income has not the causal value one might have assumed. It describes the given set of events at a given time; it describes what a black person might well follow as a get-ahead strategy if he or she can assume that not many other blacks will follow the same strategy and hence the basic [social] matrix will remain unaltered. But there is no assurance that this matrix will continue to operate—indeed, there is virtual certainty that the matrix will not continue to operate if some superficial factor that appears to cause the income gap is no longer relevant (for example, if the groups end up with the same educational distribution). In which case, new rules and regulations will operate; the other regression coefficients will change in value in order to maintain the existing system.” (pp. 191–92)

Simply put, Lieberson argues that if whites are selfishly motivated to discriminate against blacks to enhance their own material well-being, then when the government forces them to end a particular discriminatory practice, they will simply look for other means to maintain white privilege. If an older discriminatory mechanism based explicitly on race becomes impossible to sustain, whites will substitute new ones that are more subtly associated with race. The specific mechanisms by which racial stratification is achieved may thus be expected to change over time as practices shift in response to civil rights enforcement.

Douglas Massey

Dangerous Chicago Nonsense

4 Mar, 2015 at 11:25 | Posted in Economics | 7 Comments


Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.

John Cochrane

I may be too bold, but I’m willing to take the risk, and so recommend Cochrane and other Chicago economists to make the following addition to their reading lists …

Fallacy 3

Government borrowing is supposed to “crowd out” private investment.

The current reality is that on the contrary, the expenditure of the borrowed funds (unlike the expenditure of tax revenues) will generate added disposable income, enhance the demand for the products of private industry, and make private investment more profitable. As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly, (instead of trying to counter the supposedly inflationary effect of the deficit) those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

Where is ‘the positive’?

4 Mar, 2015 at 09:20 | Posted in Theory of Science & Methodology | Comments Off on Where is ‘the positive’?

adornoIn my eyes, social orders are normally fragile and precarious; unpleasant surprises may turn up at any moment. I also think it wrong to demand that someone who identifies a problem should immediately offer a solution as well. I do not bow to such prescriptions … Problems may be such that there is no solution to them — or anyway, none achievable here and now. If someone were to ask me reproachfully where was ‘the positive,’ this would then indeeed be a case where I could appeal to Adorno. For his reply, much better formulated, would doubtless have been: what if there is nothing positive?

Wolfgang Streeck

Printing money has no effects on the economy

3 Mar, 2015 at 20:30 | Posted in Economics | 4 Comments

printing-moneyThe creation of money has no effects on the economy as long as the printed money remains in the print shop. It is only when the money gets out into the economy that any effects come about. Money which is newly created and kept locked up might as ell never have been created.

Abba Lerner

Signifikanta resultat är inte alltid signifikanta

3 Mar, 2015 at 16:15 | Posted in Statistics & Econometrics | Comments Off on Signifikanta resultat är inte alltid signifikanta

significant-p-valueTidskriften Basic and Applied Social Psychology beslutade nyligen att förbjuda p-värden i publicerade artiklar. Det finns mycket att säga om denna ganska drastiska åtgärd … men det står helt klart att det finns problem med att fokusera alltför mycket på p-värden. Särskilt problematiska är p-värden när den statistiska styrkan (power) är låg i kombination med publiceringsbias, d.v.s. att framförallt statistiskt signifikanta resultat publiceras (se tidigare inlägg om publiceringsbias). Om den statistiska styrkan är låg, kan låga p-värden i vissa fall snarare vara en garant för missvisande resultat än ett tecken på tillförlitlighet.

Robert Östling

Läsvärd artikel!

Yours truly har själv berört problemen med den överdrivna fixeringen vid p-värden här, här, här och här.

Look who’s talking!

3 Mar, 2015 at 13:25 | Posted in Economics | 1 Comment

I think a lot of the work in Keynesian economics has gotten too far away from thinking about individuals and their decisions at all. Keynesians don’t often worry about what actual individuals are doing. They look at mechanical statistical relationships that have no connection with what real individuals are actually doing.

Robert Lucas Interviewed in The Margin

maxresdefaultAnd this comes from an economist who repeatedly has argued that progress in economics lies in the pursuit of the ambition to “tell better and better stories” and who in search of a “technical model-building principle” adapts the rational expectations view, according to which agents’ subjective probabilities are identified “with observed frequencies of the events to be forecast” and equivalent to “true” probabilities. A hypothesis that he maintains

will most likely be useful in situations in which the probabilities of interest concern a fairly well defined recurrent event, situations of ‘risk’ [where] behavior may be explainable in terms of economic theory … In cases of uncertainty, economic reasoning will be of no value … Insofar as business cycles can be viewed as repeated instances of essentially similar events, it will be reasonable to treat agents as reacting to cyclical changes as ‘risk’, or to assume their expectations are rational, that they have fairly stable arrangements for collecting and processing information, and that they utilize this information in forecasting the future in a stable way, free of systemic and easily correctable biases.

Robert Lucas (1981) Studies in Business-Cycle Theory

Living in his self-made analogue and unrealistic rational-expectations-glass-house this guy should not throw stones.

Forecasting time series data in Gretl

2 Mar, 2015 at 20:38 | Posted in Statistics & Econometrics | 2 Comments


Thanks to Allin Cottrell and Riccardo Lucchetti we today have access to a high quality tool for doing and teaching econometrics — Gretl. And, best of all, it is totally free!

Gretl is up to the tasks you may have, so why spend money on expensive commercial programs?

The latest snapshot version of Gretl can be downloaded here.

Hayek’s blueprint for EU

1 Mar, 2015 at 13:34 | Posted in Politics & Society | 1 Comment

Government by agreement is only possible provided that we do not require the government to act in fields other than those in which we can obtain true agreement.

austrian-economicsIf, in the international sphere, democratic government should only prove to be possible if the tasks of the international government are limited to an essentially liberal program, it would no more than confirm the experience in the national sphere, in which it is daily becoming more obvious that democracy will work only if we do not overload it and if the majorities do not abuse their power of interfering with individual freedom. Yet, if the price we have to pay for an international democratic government is the restriction of the power and scope of government, it is surely not too high a price, and all those who genuinely believe in democracy ought to be prepared to pay it.

Friedrich von Hayek

As yours truly has written on several occasions here on the blog, there are many good reasons to be critical of Austrian economics. And although we have to be careful — following the apt counsel of Robert Solow — so that we don’t throw out the baby with the bath water, this is sure an example of the really Bad Hayek.

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