LARS P. SYLL

Economics — a primary reason for the rise of inequality

In 2004, the Nobel laureate Robert Lucas warned against any revival of efforts to reduce inequality. “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”

Accounts of the rise of inequality often take a fatalistic view. The problem is described as a natural consequence of capitalism, or it is blamed on forces, like globalization or technological change, that are beyond the direct control of policymakers. But much of the fault lies in ourselves, in our collective decision to embrace policies that prioritized efficiency and encouraged the concentration of wealth, and to neglect policies that equalized opportunity and distributed rewards. The rise of economics is a primary reason for the rise of inequality.

And the fact that we caused the problem means the solution is in our power, too …

The market economy remains one of humankind’s most awesome inventions, a powerful machine for the creation of wealth. But the measure of a society is the quality of life throughout the pyramid, not just at the top, and a growing body of research shows that those born at the bottom today have less chance than in earlier generations to achieve prosperity or to contribute to society’s general welfare  …

Willful indifference to the distribution of prosperity over the last half century is an important reason the very survival of liberal democracy is now being tested by nationalist demagogues. I have no special insight into how long the rope can hold, or how much weight it can bear. But I know our shared bonds will last longer if we can find ways to reduce the strain.

Binyamin Appelbaum

Dépendance au sentier

Die ‘schwarze Null’ ist kein ideal

Christian Kastrop … ist gewissermaßen der Erfinder der deutschen Schuldenbremse, als Unterabteilungsleiter im Finanzministerium entwickelte er das Konzept einer im Grundgesetz verankerten Regel, die die öffentliche Kreditaufnahme begrenzt. Heute ist Kastrop Europa-Direktor bei der Bertelsmann Stiftung und beschäftigt sich immer noch mit Schulden – nur dass er sie nicht mehr begrenzen will, sondern ermöglichen.

Ausgerechnet der Erfinder der deutschen Schuldenbremse macht sich also Gedanken darüber, wie die Regierung zusätzliche Kredite aufnehmen kann. “Wir brauchen mehr Flexibilität bei der Finanzierung von Zukunftsaufgaben”, sagt Kastrop. Eine Idee: Nicht der Staat selbst, sondern eine spezielle Investitionsagentur nimmt die Kredite auf und finanziert die Projekte. Die Darlehen würden dann nicht auf die Schuldenbremse angerechnet. Sie wäre zwar noch da, in ihrer Wirkung aber deutlich eingeschränkt.

Wenn man wissen will, was eigentlich passiert ist … muss man sich etwas intensiver mit der Ära Merkel befassen. Genauer gesagt: mit einem Schlüsselsatz ihrer Kanzlerschaft – und mit dessen Folgen …

Vielleicht ist dies das größte Problem an Merkels Satz, wonach Deutschland nicht über seine Verhältnisse leben dürfe: Er nimmt die Verhältnisse als gegeben an, dabei sind sie das Ergebnis politischer Entscheidungen. Wie ein Privathaushalt hat der Staat nicht nur Schulden, sondern auch Vermögen … Merkel wurde für den Abbau der Staatsschulden gefeiert – aber niemand sah, wie dabei das staatliche Vermögen zusammenschrumpfte. Wenn in den vergangenen Jahren mehr investiert worden wäre, dann gäbe es heute mehr Schulplätze, die Züge wären pünktlicher, und die Internetversorgung wäre besser.

Marc Brost & Mark Schieritz / Die Zeit

No matter how much confidence you have in the policies pursued by authorities nowadays, it cannot turn bad austerity policies into good job creating policies. Austerity measures and overzealous and simple-minded fixation on monetary measures and inflation ​are not what it takes to get our limping economies out of their present-day limbo. They simply do not get us out of the ‘magneto trouble’ — and neither does budget deficit discussions where economists and politicians seem to think that cutting government budgets would help us out of recessions and slumps. In a situation where monetary policies have​ become more and more decrepit, the solution is not fiscal austerity, but fiscal expansion!

We are not going to get out of the present economic doldrums as long as we continue to be obsessed with the insane idea that austerity is the universal medicine. When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues mean​ increased deficits — and calls for even more austerity. And so on, and so on …

The state has the ability to promote full employment and a stable price level – and it ought to use its powers to do so. If that means that it has to take on ​debt and (more or less temporarily) underbalance its budget – so let it be! Public debt is neither good nor bad. It is a means to achieving two over-arching macroeconomic goals – full employment and price stability. What is sacred is not to have a balanced budget or running down public debt regardless of the effects on the macroeconomic goals. If ‘sound finance’, austerity and​ balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

Debt zombies

Cherry-picking economic models

How would you react if a renowned physicist, say, ​Richard Feynman, was telling you that sometimes force is proportional to acceleration and at other times it is proportional to acceleration squared?

I guess you would be unimpressed. But actually, what most mainstream economists do amounts to the same strange thing when it comes to theory development and model modification.

In mainstream economic theory,​ preferences are standardly expressed in the form of a utility function. But although the expected utility theory has been known for a long time to be both theoretically and descriptively inadequate, mainstream economists all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.

What most mainstream economists try to do in face of the obvious theoretical and behavioural inadequacies of the expected utility theory, is to marginally mend it. But that cannot be the right attitude when facing scientific anomalies. When models are plainly wrong, you’d better replace them! Instead of mending the broken pieces it would be much better to concentrate on developing descriptively accurate models of choice under uncertainty.

Expected utility theory is seriously flawed since it does not take into consideration the basic fact that people’s choices are influenced by changes in their wealth. Where standard microeconomic theory assumes that preferences are stable over time, behavioural economists have forcefully again and again shown that preferences are not fixed, but vary with different reference points. How can a theory that doesn’t allow for people having different reference points from which they consider their options have a (typically unquestioned) axiomatic status within economic theory?

Much of what experimental and behavioural economics come up with, is really bad news for mainstream economic theory. It unequivocally shows that expected utility theory is nothing but transmogrifying truth.

But mainstream economists do not see this​ since they have the weird idea that economics is nothing but a smorgasbord of ‘thought experimental’ models. For every purpose you may have, there is always an appropriate model to pick.

But, really, there have​ to be some limits to the flexibility of a theory!

If you freely can substitute any part of the core and auxiliary sets of assumptions and still consider that you deal with the same theory, well, then it’s not a theory, but a chameleon.

The big problem with the mainstream cherry-picking view of models is of course that the theories and models presented get totally immunized against all critique.  A sure way to get rid of all kinds of ‘anomalies,’ yes, but at a far too high price. So people do not behave optimizing? No problem, we have models that assume satisficing! So people do not maximize expected utility? No problem, we have models that assume … etc., etc …

A theory that accommodates for any observed phenomena whatsoever by creating a new special model for the occasion, and a fortiori having no chance of being tested severely and found wanting, is of little real value.