Understanding capitalism

10 Nov, 2014 at 09:28 | Posted in Economics | 2 Comments

Frank Roosevelt, a member of the Sarah Lawrence economics faculty since 1977, likens his field to the elephant a group of blind scholars famously tried to describe. Each felt a different part of the animal, and so described a different beast.

“There is no objective truth in economics,” says Roosevelt. “Nobody understands the whole picture. Everybody gets a piece of it.”

81ZvfCDvPoLIn February, Oxford University Press published the third edition of the introductory economics textbook Understanding Capitalism: Competition, Command, and Change, Roosevelt’s six-and-a-half-year project of rewriting and revision. It’s an untraditional book. Roosevelt is an untraditional economist.

“I’m not like ninety-nine percent of economists in the world—I’m in the one percent that is self-styled ‘radical,’” he says. “‘Alternative’ is a more sanitized word.”

Each year, about a million college students take introductory economics courses; their textbooks are selected from among some two dozen on the market. But this apparent magnitude of choices, Roosevelt says, belies the sameness in their explanation of economics. “Class,” for example, is not an independent entry in the index of the most popular traditional textbook. “In our book,” says Roosevelt, “class is not only in the index, but it has more references to it than almost any other word.

”There are power groups, power interests, and much of the world is made up of power relationships. Class is about power relations. We think introductory courses should educate people about the economic system in which we live. This concept is central to this book, and that’s what makes it different.”

As a student in the 60’s, Roosevelt was involved in the Civil Rights and anti-war movements, and co-founded a group called the Union for Radical Political Economics. The first edition of Understanding Capitalism (1985) was written by two friends from the Union’s early days, Samuel Bowles and Richard Edwards. Roosevelt began using it right away, giving it equal course time with more traditional textbooks and introducing, he concedes, “a lot of cognitive dissonance” into his classes.

J.B.

Game theory and the shaping of neoliberal capitalism

21 Sep, 2017 at 17:00 | Posted in Economics | 9 Comments

Prisoners_of_Reason Neoliberal subjectivity arises from the intricate pedagogy of game theory that comes to the fore in the Prisoner’s Dilemma game and is interchangeable with contemporary paradigmatic instrumental rationality. Rational choice is promoted as an exhaustive science of decision making, but only by smuggling in a characteristic​ confusion​ suggesting​ that everything of value​ to agents can be reflected in their appraisal of existential worth even though this is patently not the case in life viewed as a ‘fixed game.’ Without a critical and scrupulous pedagogy that carefully identifies as optional the assumptions necessary to operationalize strategic rationality, a new neoliberal understanding of capitalism will dominate the worldview​ of the student of game theory and inhabitant of neoliberal institutions.

When criticising game theory you often get the rather uninformative and vacuous answer that we all have to remember that game theory — as is mainstream neoclassical theory at large — is nothing but ‘as-if-theory’ built on ‘as-if-rationality.’ As Ariel Rubinstein has it, however, this only shows that “the phrase ‘as if’ is a way to avoid taking responsibility for the strong assumptions upon which economic models are founded” …

Behavioural economics and complexity economics

17 Aug, 2021 at 22:29 | Posted in Economics | 1 Comment

James Galbraith: what Europe needs is solidarity, not austerity | etuiWhat is to take the place of neoclassical economics and its neoliberal policy offshoot? There is no shortage of candidates, grouped under the broad banner of economic heterodoxy. Some of these successor doctrines – behavioral economics and complexity economics are examples of note – take the neoclassical orthodoxies as a point of departure. They therefore continue to define themselves in relation to those orthodoxies. Others avoided the gravitational pull altogether – or, as in the exceptional case of Keynes, made a “long struggle to escape”. The behaviorists depart from neoclassicism by giving up strict assumptions of rational and maximizing behavior. Complexity theorists explore the dynamics of interacting agents and recursive functions. Both achieve a measure of academic reputability by remaining in close dialog with the orthodox mainstream. Neither pays more than a glancing tribute to earlier generations or other canons of economic thought. The model is that of neoclassical offshoots – New Institutionalism, New Classical Economics, New Keynesianism – that make a vampire practice of colonizing older words and draining them of their previous meaning. The dilemma of these offshoots lies in having accepted the false premise of the orthodoxy to which it proposes to serve as the alternative. The conceit is of a dispassionate search for timeless truth, once again pursued by “relaxing restrictive assumptions” in the interest of “greater realism”. Thus, for example, in complexity theories agents follow simple rules and end up generating intricate and unpredictable patterns, nonlinear recursive functions give the same result, the variance of returns turns out to be non-normal, and so forth. But once the starting point is taken to be the neoclassical competitive general equilibrium model, these exercises are largely drained of insight and relevance. The behaviorists can tell us that real people do not appear to fit well into the portrait of autonomous, selfish, commodity-obsessed pleasure-seekers that is “economic man”. The complexity theorists can tell us, as Arthur (2021) does, is that a system constructed from confections of interacting agents may be unstable. These things, even the dimmest observer of real-existing capitalism already knew.

James Galbraith / RWER

Although discounting empirical evidence cannot be the right way to solve economic issues, there are still, in my opinion, a couple of weighty reasons why we — just as Galbraith — perhaps shouldn’t be too excited about the so-called ’empirical’ or ‘behavioural’ revolution in economics.

behBehavioural experiments and laboratory research face the same basic problem as theoretical models — they are built on often rather artificial conditions and have difficulties with the ‘trade-off’ between internal and external validity. The more artificial conditions, the more internal validity, but also less external validity. The more we rig experiments to avoid the ‘confounding factors’, the less the conditions are reminiscent of the real ‘target system.’ The nodal issue is how economists using different isolation strategies in different ‘nomological machines’ attempt to learn about causal relationships. One may have justified doubts on the generalizability of this research strategy since the probability is high that causal mechanisms are different in different contexts and that lack of homogeneity and invariance doesn’t give us warranted export licenses to the ‘real’ societies or economies.

If we see experiments or laboratory research as theory tests or models that ultimately aspire to say something about the real ‘target system,’ then the problem of external validity is central (and was for a long time also a key reason why behavioural economists had trouble getting their research results published).

A standard procedure in behavioural economics — think of e.g. dictator or ultimatum games — is to set up a situation where one induce people to act according to the standard microeconomic — homo oeconomicus — benchmark model. In most cases, the results show that people do not behave as one would have predicted from the benchmark model, in spite of the setup almost invariably being ‘loaded’ for that purpose. [And in those cases where the result is consistent with the benchmark model, one, of course, have to remember that this in no way proves the benchmark model to be right or ‘true,’ since there, as a rule, may be many outcomes that are consistent with that model.]

For most heterodox economists this is just one more reason for giving up on the standard model. But not so for mainstreamers and many behaviouralists. To them, the empirical results are not reasons for giving up on their preferred hardcore axioms. So they set out to ‘save’ or ‘repair’ their model and try to ‘integrate’ the empirical results into mainstream economics. Instead of accepting that the homo oeconomicus model has zero explanatory real-world value, one puts lipstick on the pig and hope to go on with business as usual. Why we should keep on using that model as a benchmark when everyone knows it is false is something we are never told. Instead of using behavioural economics and its results as building blocks for a progressive alternative research program, the ‘save and repair’ strategy immunizes a hopelessly false and irrelevant model.

By this, I do not mean to say that empirical methods per se are so problematic that they can never be used. On the contrary, I am basically — though not without reservations — in favour of the increased use of behavioural experiments and laboratory research within economics. Not least as an alternative to completely barren ‘bridge-less’ axiomatic-deductive theory models. My criticism is more about aspiration levels and what we believe that we can achieve with our mediational epistemological tools and methods in the social sciences.

The increasing use of natural and quasi-natural experiments in economics during the last couple of decades has led several prominent economists to triumphantly declare it as a major step on a recent path toward empirics, where instead of being a deductive philosophy, economics is now increasingly becoming an inductive science.

Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems.

‘Ideally controlled experiments’ tell us with certainty what causes what effects — but only given the right ‘closures.’ Making appropriate extrapolations from (ideal, accidental, natural or quasi) experiments to different settings, populations or target systems, is not easy. ‘It works there’ is no evidence for ‘it will work here.’ Causes deduced in an experimental setting still have to show that they come with an export-warrant to the target system. The causal background assumptions made have to be justified, and without licenses to export, the value of ‘rigorous’ and ‘precise’ methods is despairingly small.

Taking assumptions like utility maximization or market equilibrium as a matter of course leads to the ‘standing presumption in economics that, if an empirical statement is deduced from standard assumptions then that statement is ‘reliable’ …

maxresdefaultThe ongoing importance of these assumptions is especially evident in those areas of economic research, where empirical results are challenging standard views on economic behaviour like experimental economics or behavioural finance … From the perspective of Model-Platonism, these research-areas are still framed by the ‘superior insights’ associated with early 20th century concepts, essentially because almost all of their results are framed in terms of rational individuals, who engage in optimizing behaviour and, thereby, attain equilibrium …

While the mere emergence of research areas like experimental economics is sometimes deemed a clear sign for the advent of a new era … a closer look at these fields allows us to illustrate the enduring relevance of the Model-Platonism-topos and, thereby, shows the pervasion of these fields with a traditional neoclassical style of thought.

Jakob Kapeller

So — although it is good that behavioural economists are rewarded ‘Nobel prizes’ and that much of their research has vastly undermined the lure of axiomatic-deductive mainstream economics, there is still a long way to go before economics has become a truly empirical science. The great challenge for future economics is not to develop methodologies and theories for well-controlled laboratories, but to develop relevant methodologies and theories for the messy world in which we happen to live.

An economic theory that does not go beyond proving theorems and conditional ‘if-then’ statements — and do not make assertions and put forward hypotheses about real-world individuals and institutions — is of little consequence for anyone wanting to use theories to better understand, explain or predict real-world phenomena.

Building theories and models on patently ridiculous assumptions we know people never conform to, does not deliver real science. Real and reasonable people have no reason to believe in ‘as-if’ models of ‘rational’ robot-imitations acting and deciding in a Walt Disney-world characterised by ‘common knowledge,’ ‘full information,’ ‘rational expectations,’ zero transaction costs, given stochastic probability distributions, risk-reduced genuine uncertainty, and other laughable nonsense assumptions of the same ilk. Science fiction is not science.

For decades now, economics students have been complaining about the way economics is taught. Their complaints are justified. Force-feeding young and open-minded people with unverified and useless autistic mainstream theories and models cannot be the right way to develop a relevant and realist economic science.

Much work done in mainstream theoretical economics is devoid of any explanatory interest. And not only that. Seen from a strictly scientific point of view, it has no value at all. It is a waste of time. And as so many have been experiencing in modern times of austerity policies and market fundamentalism — a very harmful waste of time.

An alternative to mainstream orthodoxy that has been discussed much lately is so the called complexity economics and its agent-based modelling.

Agent-based models are formal models usually constructed using mathematical programming and performing simulations and ‘artificial experiments’ with the intention of being able to (more explicitly than in conventional mainstream game theory) describe aggregate effects and dynamics of interacting individuals and socio-economic structures without standardly having to assume equilibria, non-emergence, Walrasian auctioneers, representative agents, rational expectations, etc., etc..

Agent-based models come in different degrees of realism and are usually conceptualised as different kinds of self-organising complex systems. But one thing they all have in common is reliance on mathematical formalism. In essence the agent-based modelling endeavour in macroeconomics is an attempt at providing new alternative mathematical models where many of the bizarre and ridiculous known-to-be ‘unrealistic’ assumptions in standard DSGE models are replaced with other less ‘unrealistic’ assumptions. But the idea that mathematical modelling as such is always appropriate to apply is never seriously questioned. And that’s where I find it hard to follow. One set of mathematical tractability assumptions are substituted for another. But what if the mathematical modelling in itself is the problem? What if the use of mathematical-formalistic modelling in itself biases your research efforts in specific directions? If it is the mathematical-formalistic approach in itself that is the problem, we only end up with different models based on the same unquestioned mathematical modelling strategy. From my own critical realist perspective I can’t see that mathematical modelling is the self-evidently appropriate way to perform analyses of societies and economies. The kind of ‘closures’ demanded of the target systems for warranting the analyses, I would argue, simply often aren’t there.

As a critique of mainstream economics, yours truly fully appreciates the work done by the ‘complexity’ economists. But although their alternative agent-based models in many ways are superior to the more traditional mainstream ‘Walt Disney’ kind of models, I am not convinced that their unquestioned attachment to mathematical-formalist modelling is the right way to move forward in making economics a more realist and relevant science.

Top Economics Blogs

3 Jul, 2021 at 09:29 | Posted in Economics | 3 Comments

New outlook … | LARS P. SYLLMainstream economics has sadly made economics increasingly irrelevant to the understanding of the real world. Trying to contribute in making economics a more realist and relevant science, yours truly launched this blog in March 2011.

Now, ten years later and with millions of page views on it, yours truly is — together with people like e.g. Greg Mankiw and Paul Krugman — ranked on INOMICS’ The Top Economics Blogs list.

I am — of course — truly awed, honoured and delighted.

There are many excellent economics blogs out there … The blogs we’ve listed — in no particular order — are the ones we here at INOMICS turn to when we’re looking for interesting, informative, and occasionally offbeat articles on a wide range of economic topics …

1. Random Observations for Students of Economics

Greg Mankiw uses his blog predominantly to keep in touch with his own students, but it also serves as an excellent source of information on many economics topics to those currently studying …

7. Naked Capitalism

Naked Capitalism is a blog written by several different writers, all of whom have credentials writing and studying economics …

13. Paul Krugman

Paul Krugman, a household name and heavyweight economist in the modern age, writes a regular column for the New York Times on macroeconomics, trade, healthcare, social policy and politics  …

22. Lars P. Syll

Lars Pålsson Syll is a professor at Malmö University in Sweden who focuses on the philosophy and methodology of economics, theories of distributive justice, and critical realist social science. An avowed critic of neoliberalism and market fundamentalism, his blog covers a wide range of topics in English, French, German and Swedish.

Yours truly on The Top Economics Blogs list

3 Jun, 2021 at 21:47 | Posted in Economics | 2 Comments

New outlook … | LARS P. SYLLMainstream economics has sadly made economics increasingly irrelevant to the understanding of the real world. Trying to contribute in making economics a more realist and relevant science, yours truly launched this blog in March 2011.

Now, ten years later and with millions of page views on it, yours truly is — together with people like e.g. Greg Mankiw and Paul Krugman — ranked on INOMICS’ The Top Economics Blogs list.

I am — of course — truly awed, honoured and delighted.

There are many excellent economics blogs out there … The blogs we’ve listed — in no particular order — are the ones we here at INOMICS turn to when we’re looking for interesting, informative, and occasionally offbeat articles on a wide range of economic topics …

1. Random Observations for Students of Economics

Greg Mankiw uses his blog predominantly to keep in touch with his own students, but it also serves as an excellent source of information on many economics topics to those currently studying …

7. Naked Capitalism

Naked Capitalism is a blog written by several different writers, all of whom have credentials writing and studying economics …

13. Paul Krugman

Paul Krugman, a household name and heavyweight economist in the modern age, writes a regular column for the New York Times on macroeconomics, trade, healthcare, social policy and politics  …

22. Lars P. Syll

Lars Pålsson Syll is a professor at Malmö University in Sweden who focuses on the philosophy and methodology of economics, theories of distributive justice, and critical realist social science. An avowed critic of neoliberalism and market fundamentalism, his blog covers a wide range of topics in English, French, German and Swedish.

INOMICS

Ayn Rand — one of history’s biggest psychopaths

18 May, 2021 at 17:00 | Posted in Politics & Society | 7 Comments

Now, I don’t care to discuss the alleged complaints American Indians have against this country. I believe, with good reason, the most unsympathetic Hollywood portrayal of Indians and what they did to the white man. They had no right to a country merely because they were born here and then acted like savages. The white man did not conquer this country …

Since the Indians did not have the concept of property or property rights—they didn’t have a settled society, they had predominantly nomadic tribal “cultures”—they didn’t have rights to the land, and there was no reason for anyone to grant them rights that they had not conceived of and were not using …

What were they fighting for, in opposing the white man on this continent? For their wish to continue a primitive existence; for their “right” to keep part of the earth untouched—to keep everybody out so they could live like animals or cavemen. Any European who brought with him an element of civilization had the right to take over this continent, and it’s great that some of them did. The racist Indians today—those who condemn America—do not respect individual rights.

Ayn Rand,  Address To The Graduating Class Of The United States Military Academy at West Point, 1974

It’s sickening to read this gobsmacking trash. But it’s perhaps even more sickening that people like Alan Greenspan consider Rand some​ kind of intellectual hero.

Alan Greenspan isn’t just a bad economist. He’s a bad person. What else can one think of a person that considers Ayn Rand — with the ugliest psychopathic philosophy the postwar world has produced — one of the great thinkers of the 20th century? A person that even co-edited a book with her — maintaining that unregulated capitalism is a “superlatively moral system”. A person that in his memoirs tries to reduce his admiration for Rand to a youthful indiscretion — but who actually still today can’t be described as anything else than a loyal Randian disciple.

Ayn Rand and her objectivist philosophy have​ more disciples than Greenspan. But as Hilary Putnam rightfully noticed in The Collapse of the Fact/Value Dichotomy (Harvard University Press, 2002) it’s doubtful if it even qualifies as a real philosophy:

It cannot be the case that the only universally valid norm refers solely to discourse. It is, after all, possible for someone to recognize truth-telling as a binding norm while otherwise being guided solely by ‘enlightened egoism.’ (This is, indeed, the way of life that was recommended by the influential if amateurish philosophizer – I cannot call her a philosopher – Ayn Rand.) But such a person can violate the spirit if not the letter of the principle of communicative action at every turn. After all, communicative action is contrasted with manipulation, and as such a person can manipulate people without violating the maxims of ‘sincerity, truth-telling, and saying only what one believes to be rationally warranted.’ Ayn Rand’s capitalist heroes manipulated people all the time (even if she didn’t consider it manipulation) via their control of capital, for example. Indeed, the person who says, ‘do what I want or I’ll shoot you,’ need not be violating any maxim concerned solely with discourse. But it would be a mistake to use such examples as objections to Habermasian ‘discourse ethics.’

In her diary from 1928, Ayn Rand approvingly quotes a statement made by a William Edward Hickman – “What is good for me is right.” Rand is enthusiastic and writes: “The best and strongest expression of a real man’s psychology I have heard.”

Later she models one of her heroes​  – Danny Renahan – after Hickman. Renahan is portrayed as

born with a wonderful, free, light consciousness — [resulting from] the absolute lack of social instinct or herd feeling. He does not understand, because he has no organ for understanding, the necessity, meaning, or importance of other people … Other people do not exist for him and he does not understand why they should.

Who was this  Hickman that so inspired Rand?

Hickman was a notorious bank robber, child kidnapper and mass murderer. One of the most hated and heinous criminals in U. S. history.

How people like Alan Greenspan and Paul Ryan — not to mention all modern day ‘objectivist’ disciples — can consider Ayn Rand “one of the greatest thinkers of the 20th century” is really beyond comprehension. It’s sickening.

Neoclassical economics and the severity of the coronavirus crisis.

6 Apr, 2020 at 20:01 | Posted in Economics | 3 Comments

This training in economics makes politicians and bureaucrats incapable of understanding a crisis like this. They are, however, very susceptible to the advice of economists. They therefore enacted policies that reduced our capacity to cope with a pandemic, crafted systems of production and distribution that drastically amplified its damaging impact when it did arrive, and ridiculed warnings of people like Garrett as “alarmist” and “Malthusian”. For these reasons, Neoclassical economics itself bears a heavy responsibility for the severity of the coronavirus health and economic crisis.

near-term-impact-on-india-incNeoclassical economists will of course ridicule this claim. One thing I’ve learnt from fifty years of fighting these well-meaning but deluded bastards is that they’re great at taking credit when the economic system is doing well, but quick to deflect criticism by feigning impotence when a crisis actually arises. After it, they will merrily throw around their favourite explanation for why they couldn’t have seen the 2007 Great Financial Crisis coming, that it was caused by an “exogenous shock” …

This isn’t because Neoclassical economists are inherently liars or weasels by the way: it’s because they have a paradigm that they sincerely believe does describe capitalism accurately, and as a result they can’t comprehend that in fact it doesn’t. So whenever their paradigm fails, as it did in 2007, they look for reasons why it didn’t really fail—such as that the crisis couldn’t have been predicted, and that criticizing them for not anticipating it was like criticizing a mathematician for not predicting next week’s winning Lotto numbers …

Economists cannot avoid responsibility for the fact that production is heavily globalized, both via the promotion by economists of free trade over self-sufficiency, and by their support for the relocation of production from the West to the Third World. Consequently, a disease like this hit the whole world when it hit just one country—though it helped that the one country initially was China, to which much of the world’s production was outsourced.

In the aftermath to this crisis, we have to revoke the carte blanche that economists were given to reshape the economy in the image of their textbooks. It’s time to let real sciences manage humanity’s impact upon this planet.

Steve Keen

Ayn Rand — a perverted psychopath

3 Jun, 2019 at 23:25 | Posted in Politics & Society | 5 Comments

 

Now, I don’t care to discuss the alleged complaints American Indians have against this country. I believe, with good reason, the most unsympathetic Hollywood portrayal of Indians and what they did to the white man. They had no right to a country merely because they were born here and then acted like savages. The white man did not conquer this country …

Since the Indians did not have the concept of property or property rights—they didn’t have a settled society, they had predominantly nomadic tribal “cultures”—they didn’t have rights to the land, and there was no reason for anyone to grant them rights that they had not conceived of and were not using …

What were they fighting for, in opposing the white man on this continent? For their wish to continue a primitive existence; for their “right” to keep part of the earth untouched—to keep everybody out so they could live like animals or cavemen. Any European who brought with him an element of civilization had the right to take over this continent, and it’s great that some of them did. The racist Indians today—those who condemn America—do not respect individual rights.

Ayn Rand,  Address To The Graduating Class Of The United States Military Academy at West Point, 1974

It’s sickening to read this gobsmacking trash. But it’s perhaps even more sickening that people like Alan Greenspan consider Rand som kind of intellectual hero.

Alan Greenspan isn’t just a bad economist. He’s a bad person. What else can one think of a person that considers Ayn Rand — with the ugliest psychopathic philosophy the postwar world has produced — one of the great thinkers of the 20th century? A person that even co-edited a book with her — maintaining that unregulated capitalism is a “superlatively moral system”. A person that in his memoirs tries to reduce his admiration for Rand to a youthful indiscretion — but who actually still today can’t be described as anything else than a loyal Randian disciple.

Ayn Rand and her objectivist philosophy have​ — as shown in Reich’s video — more disciples than Greenspan. But as Hilary Putnam rightfully noticed in The Collapse of the Fact/Value Dichotomy (Harvard University Press, 2002) it’s doubtful if it even qualifies as a real philosophy:

It cannot be the case that the only universally valid norm refers solely to discourse. It is, after all, possible for someone to recognize truth-telling as a binding norm while otherwise being guided solely by ‘enlightened egoism.’ (This is, indeed, the way of life that was recommended by the influential if amateurish philosophizer – I cannot call her a philosopher – Ayn Rand.) But such a person can violate the spirit if not the letter of the principle of communicative action at every turn. After all, communicative action is contrasted with manipulation, and as such a person can manipulate people without violating the maxims of ‘sincerity, truth-telling, and saying only what one believes to be rationally warranted.’ Ayn Rand’s capitalist heroes manipulated people all the time (even if she didn’t consider it manipulation) via their control of capital, for example. Indeed, the person who says, ‘do what I want or I’ll shoot you,’ need not be violating any maxim concerned solely with discourse. But it would be a mistake to use such examples as objections to Habermasian ‘discourse ethics.’

In her diary from 1928, Ayn Rand approvingly quotes a statement made by a William Edward Hickman – “What is good for me is right.” Rand is enthusiastic and writes: “The best and strongest expression of a real man’s psychology I have heard.”

Later she models one of her heroes  – Danny Renahan – after Hickman. Renahan is portrayed as

born with a wonderful, free, light consciousness — [resulting from] the absolute lack of social instinct or herd feeling. He does not understand, because he has no organ for understanding, the necessity, meaning, or importance of other people … Other people do not exist for him and he does not understand why they should.

Who was this  Hickman that so inspired Rand?

Hickman was a notorious bank robber, child kidnapper and mass murderer. One of the most hated and heinous criminals in U. S. history.

How people like Alan Greenspan and Paul Ryan — not to mention all modern day ‘objectivist’ disciples — can consider Ayn Rand “one of the greatest thinkers of the 20th century” is really beyond comprehension. It’s sickening.

Hyman Minsky and the IS-LM obfuscation

17 Mar, 2019 at 11:18 | Posted in Economics | 39 Comments

As young research stipendiate in the U.S. yours truly had the great pleasure and privilege of having Hyman Minsky as a teacher. He was a great inspiration at the time. He still is.

The concepts which it is usual to ignore or deemphasize in interpreting Keynes — the cyclical perspective, the relations between investment and finance, and uncertainty, are the keys to an understanding of the full significance of his contribution …

miThe glib assumption made by Professor Hicks in his exposition of Keynes’s contribution that there is a simple, negatively sloped function, reflecting the productivity of increments to the stock of capital, that relates investment to the interest rate is a caricature of Keynes’s theory of investment … which relates the pace of investment not only to prospective yields but also to ongoing financial behavior …

The conclusion to our argument is that the missing step in the standard Keynesian theory was the explicit consideration of capitalist finance within a cyclical and speculative context. Once capitalist​ finance is introduced and the development of cash flows … during the various states of the economy is explicitly examined, then the full power of the revolutionary insights and the alternative frame of analysis that Keynes developed becomes evident …

The greatness of The General Theory was that Keynes visualized [the imperfections of the monetary-financial system] as systematic rather than accidental or perhaps incidental attributes of capitalism … Only a theory that was explicitly cyclical and overtly financial was capable of being useful …

If we are to believe Minsky — and I certainly think we should — then when people like Paul Krugman and other ‘New Keynesian’ critics of MMT and Post-Keynesian economics think of themselves as  defending “the whole enterprise of Keynes/Hicks macroeconomic theory,” they are simply wrong since there is no such thing as a Keynes-Hicks macroeconomic theory!

There is nothing in the post-General Theory writings of Keynes that suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thoughts. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE-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. So, of course,​ there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” — simply because “Keynes/Hicks” never existed.

To be fair to Hicks, we  shouldn’t forget that he returned to his IS-LM analysis in an article in 1980 — in Journal of Post Keynesian Economics — and self-critically wrote:

sir_john_hicksThe 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. I have deliberately interpreted the equilibrium concept, to be used in such analysis, in a very stringent manner (some would say a pedantic manner) not because I want to tell the applied economist, who uses such methods, that he is in fact committing himself to anything which must appear to him to be so ridiculous …

When one turns to questions of policy, looking toward the future instead of the past, the use of equilibrium methods is still more suspect … It may be hoped that, after the change in policy, the economy will somehow, at some time in the future, settle into what may be regarded, in the same sense, as a new equilibrium; but there must necessarily be a stage before that equilibrium is reached …

We now know that it is not enough to think of the rate of interest as the single link between the financial and industrial sectors of the economy; for that really implies that a borrower can borrow as much as he likes at the rate of interest charged, no attention being paid to the security offered. As soon as one attends to questions of security, and to the financial intermediation that arises out of them, it becomes apparent that the dichotomy between the two curves of the IS-LM diagram must not be pressed too hard.

In his 1937 paper Hicks actually elaborates four different models (where Hicks uses I to denote Total Income and Ix to denote Investment):

1) “Classical”: M = kI   Ix = C(i)   Ix = S(i,I)

2) Keynes’ “special” theory: M = L(i)   Ix = C(i)    I = S(I)

3) Keynes’ “general” theory: M = L(I, i)   Ix = C(i)   I = S(I)

4) The “generalized general” theory: M = L(I, i)   Ix =C(I, i)  Ix = S(I, i)

It is obvious from the way Krugman and other ‘New Keynesians’ — what a gross misnomer — draw their IS-LM curves that they are thinking in terms of model number 4 — and that is not even by Hicks considered a Keynes-model! It is basically a loanable funds model, that belongs in the neoclassical camp and which you find reproduced in most mainstream textbooks.

Hicksian IS-LM? Maybe. Keynes? No way!

What is missing in Keynes’ General Theory

10 Jan, 2019 at 11:55 | Posted in Economics | 1 Comment

The cyclical succession of system states is not always clearly presented in The General Theory. In fact there are two distinct views of the business cycle, one a moderate cycle which can perhaps be identified with a dampened accelerator-multiplier cycle and the second a vigorous ‘boom and bust’ cycle … The business cycle in chapter 18 does not exhibit booms or crises …

jmkIn chapter 12 and 22, in the rebuttal to Viner, and in remarks throughout The General Theory, a vigorous cycle, which does have booms and crises, is described. However, nowhere in The General Theory or in Keynes’s few post-General Theory articles explicating his new theory are the boom and the crisis adequately defined or explained. The financial developments during a boom that makes a crisis likely, if not inevitable, are hinted at but not thoroughly examined. This is the logical hole, the missing link, in The General Theory as it was left by Keynes in 1937 after his rebuttal to Viner … In order to appreciate the full potential of The General Theory as a guide to interpretation and understanding of moderrn capitalism, we must fill out what Keynes discussed in a fragmentary and casual manner.

The psychopathy of Ayn Rand

15 Jul, 2018 at 16:53 | Posted in Politics & Society | 6 Comments

Now, I don’t care to discuss the alleged complaints American Indians have against this country. I believe, with good reason, the most unsympathetic Hollywood portrayal of Indians and what they did to the white man. They had no right to a country merely because they were born here and then acted like savages. The white man did not conquer this country …

Since the Indians did not have the concept of property or property rights—they didn’t have a settled society, they had predominantly nomadic tribal “cultures”—they didn’t have rights to the land, and there was no reason for anyone to grant them rights that they had not conceived of and were not using …

What were they fighting for, in opposing the white man on this continent? For their wish to continue a primitive existence; for their “right” to keep part of the earth untouched—to keep everybody out so they could live like animals or cavemen. Any European who brought with him an element of civilization had the right to take over this continent, and it’s great that some of them did. The racist Indians today—those who condemn America—do not respect individual rights.

Ayn Rand,  Address To The Graduating Class Of The United States Military Academy at West Point, 1974

It’s sickening to read this gobsmacking trash. But it’s perhaps even more sickening that people like Alan Greenspan consider Rand some​ kind of intellectual hero.

Alan Greenspan isn’t just a bad economist. He’s a bad person. What else can one think of a person that considers Ayn Rand — with the ugliest psychopathic philosophy the postwar world has produced — one of the great thinkers of the 20th century? A person that even co-edited a book with her — maintaining that unregulated capitalism is a “superlatively moral system”. A person that in his memoirs tries to reduce his admiration for Rand to a youthful indiscretion — but who actually still today can’t be described as anything else than a loyal Randian disciple.

Ayn Rand and her objectivist philosophy have​ more disciples than Greenspan. But as Hilary Putnam rightfully noticed in The Collapse of the Fact/Value Dichotomy (Harvard University Press, 2002) it’s doubtful if it even qualifies as a real philosophy:

It cannot be the case that the only universally valid norm refers solely to discourse. It is, after all, possible for someone to recognize truth-telling as a binding norm while otherwise being guided solely by ‘enlightened egoism.’ (This is, indeed, the way of life that was recommended by the influential if amateurish philosophizer – I cannot call her a philosopher – Ayn Rand.) But such a person can violate the spirit if not the letter of the principle of communicative action at every turn. After all, communicative action is contrasted with manipulation, and as such a person can manipulate people without violating the maxims of ‘sincerity, truth-telling, and saying only what one believes to be rationally warranted.’ Ayn Rand’s capitalist heroes manipulated people all the time (even if she didn’t consider it manipulation) via their control of capital, for example. Indeed, the person who says, ‘do what I want or I’ll shoot you,’ need not be violating any maxim concerned solely with discourse. But it would be a mistake to use such examples as objections to Habermasian ‘discourse ethics.’

In her diary from 1928, Ayn Rand approvingly quotes a statement made by a William Edward Hickman – “What is good for me is right.” Rand is enthusiastic and writes: “The best and strongest expression of a real man’s psychology I have heard.”

Later she models one of her heroes​  – Danny Renahan – after Hickman. Renahan is portrayed as

born with a wonderful, free, light consciousness — [resulting from] the absolute lack of social instinct or herd feeling. He does not understand, because he has no organ for understanding, the necessity, meaning, or importance of other people … Other people do not exist for him and he does not understand why they should.

Who was this  Hickman that so inspired Rand?

Hickman was a notorious bank robber, child kidnapper and mass murderer. One of the most hated and heinous criminals in U. S. history.

How people like Alan Greenspan and Paul Ryan — not to mention all modern day ‘objectivist’ disciples — can consider Ayn Rand “one of the greatest thinkers of the 20th century” is really beyond comprehension. It’s sickening.

Robert Lucas — nonsense on stilts

10 Dec, 2017 at 10:16 | Posted in Economics | 2 Comments

In Michel De Vroey’s version of the history of macroeconomics, Robert Lucas’ declaration of the need for macroeconomics to be pursued only within ‘equilibrium discipline’ and declaring equilibrium to exist as a postulate, is hailed as a ‘Copernican revolution.’ Equilibrium is not to be considered something that characterises real economies, but rather ‘a property of the way we look at things.’ De Vroey  — approvingly — notices that this — as well as Lucas’ banning of disequilibrium as referring to ‘unintelligible behaviour’ — ‘amounts to shrinking the pretence of equilibrium theory.’

Mirabile dictu!

Is it really a feasible methodology for economists to make a sharp divide between theory and reality, and then — like De Vroey and Lucas — treat the divide as something recommendable and good? I think not.

Fortunately, there are other economists with a less devoted hagiographic attitude towards Lucas and his nonsense on stilts.

Alessandro Vercelli is one:

The equilibria analysed by Lucas are conceived as stationary stochastic processes. The fact that they are stationary imposes a long series of restrictive hypotheses on the range of applicability of the heuristic model, and these considerably reduce the empirical usefulness of Lucas’s equlibrium method …

9780521074735For such a method to make sense … the stationary ‘equilibrium’ stochastic process must also be ‘dynamically stable,’ or ‘ergodic,’ in the terminology of stochastic processes …

What is worse, if one adopts Lucas’s method of pure equilibrium implying the non-intelligibility of disequilibrium positions, there is no way to argue about the robustness of the alternative equilibria under consideration. In other words, Lucas’s heuristic model, not to mention the analytical models built according to his instructions, prove to be useless for the very purpose for which they were primarily constructed — the evaluation of alternative economic policies.

2-format2010Another one is Roman Freedman, Professor of Economics at New York University and a long time critic of the rational expectations hypothesis. In his seminal 1982 American Economic Review article Towards an Understanding of Market Processes: Individual Expectations, Learning, and Convergence to Rational Expectations Equilibrium — an absolute must-read for anyone with a serious interest in understanding what are the issues in the present discussion on rational expectations as a modeling assumption — he showed that the kind of models that Lucas recommends — models founded on ‘equilibrium discipline’ and the rational expectations hypothesis — is inadequate as a representation of economic agents’ decision making.

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. As yours truly has tried to show in On the use and misuse of theories and models in economics there is really no support for this conviction at all. 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.

In one of their latest books on rational expectations, Roman Frydman and his colleague Michael Goldberg write:

Beyond_Mechanical_MarketsThe belief in the scientific stature of fully predetermined models, and in the adequacy of the Rational Expectations Hypothesis to portray how rational individuals think about the future, extends well beyond asset markets. Some economists go as far as to argue that the logical consistency that obtains when this hypothesis is imposed in fully predetermined models is a precondition of the ability of economic analysis to portray rationality and truth.

For example, in a well-known article published in The New York Times Magazine in September 2009, Paul Krugman (2009, p. 36) argued that Chicago-school free-market theorists “mistook beauty . . . for truth.” One of the leading Chicago economists, John Cochrane (2009, p. 4), responded that “logical consistency and plausible foundations are indeed ‘beautiful’ but to me they are also basic preconditions for ‘truth.’” Of course, what Cochrane meant by plausible foundations were fully predetermined Rational Expectations models. But, given the fundamental flaws of fully predetermined models, focusing on their logical consistency or inconsistency, let alone that of the Rational Expectations Hypothesis itself, can hardly be considered relevant to a discussion of the basic preconditions for truth in economic analysis, whatever “truth” might mean.

There is an irony in the debate between Krugman and Cochrane. Although the New Keynesian and behavioral models, which Krugman favors, differ in terms of their specific assumptions, they are every bit as mechanical as those of the Chicago orthodoxy. Moreover, these approaches presume that the Rational Expectations Hypothesis provides the standard by which to define rationality and irrationality.

In fact, the Rational Expectations Hypothesis requires no assumptions about the intelligence of market participants whatsoever … Rather than imputing superhuman cognitive and computational abilities to individuals, the hypothesis presumes just the opposite: market participants forgo using whatever cognitive abilities they do have. The Rational Expectations Hypothesis supposes that individuals do not engage actively and creatively in revising the way they think about the future. Instead, they are presumed to adhere steadfastly to a single mechanical forecasting strategy at all times and in all circumstances. Thus, contrary to widespread belief, in the context of real-world markets, the Rational Expectations Hypothesis has no connection to how even minimally reasonable profit-seeking individuals forecast the future in real-world markets. When new relationships begin driving asset prices, they supposedly look the other way, and thus either abjure profit-seeking behavior altogether or forgo profit opportunities that are in plain sight.

Beyond Mechanical Markets

And in a recent article the same authors write:

Contemporary economists’ reliance on mechanical rules to understand – and influence – economic outcomes extends to macroeconomic policy as well, and often draws on an authority, John Maynard Keynes, who would have rejected their approach. Keynes understood early on the fallacy of applying such mechanical rules. “We have involved ourselves in a colossal muddle,” he warned, “having blundered in the control of a delicate machine, the working of which we do not understand.”

In The General Theory of Employment, Interest, and Money, Keynes sought to provide the missing rationale for relying on expansionary fiscal policy to steer advanced capitalist economies out of the Great Depression. But, following World War II, his successors developed a much more ambitious agenda. Instead of pursuing measures to counter excessive fluctuations in economic activity, such as the deep contraction of the 1930’s, so-called stabilization policies focused on measures that aimed to maintain full employment. “New Keynesian” models underpinning these policies assumed that an economy’s “true” potential – and thus the so-called output gap that expansionary policy is supposed to fill to attain full employment – can be precisely measured.

But, to put it bluntly, the belief that an economist can fully specify in advance how aggregate outcomes – and thus the potential level of economic activity – unfold over time is bogus …

Roman Frydman & Michael Goldberg

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 à la Lucas by assuming equilibrium and rational expectations, and treating uncertainty as if it was possible to reduce to stochastic risk. That is scientific cheating. And it has been going on for too long now.

Trading in Myths

21 Aug, 2017 at 18:57 | Posted in Economics | 2 Comments

Pretending that the distribution of income and wealth that results
from a long set of policy decisions is somehow the natural workings of the
market is not a serious position. It might be politically convenient for
conservatives who want to lock inequality in place. It is a more politically
compelling position to argue that we should not interfere with market
outcomes than to argue for a system that is deliberately structured to make
some people very rich while leaving others in poverty.

rigged_coverPretending that distributional outcomes are just the workings of the market is convenient for any beneficiaries of this inequality, even those who consider themselves liberal …

But we should not structure our understanding of the economy around political convenience. There is no way of escaping the fact that
levels of output and employment are determined by policy, that the length
and strength of patent and copyright monopolies are determined by
policy, and that the rules of corporate governance are determined by policy. The people who would treat these and other policy decisions determining the distribution of income as somehow given are not being honest. We can debate the merits of a policy, but there is no policy-free option out there.

This may be discomforting to people who want to believe that we
have a set of market outcomes that we can fall back upon, but this is the
real world. If we want to be serious, we have to get used to it.

austerity22No one ought to doubt that the idea that capitalism is an expression of impartial market forces of supply and demand, bears but little resemblance to actual reality. Wealth and income distribution, both individual and functional, in a market society is to an overwhelmingly high degree influenced by institutionalized political and economic norms and power relations, things that have relatively little to do with marginal productivity in complete and profit-maximizing competitive market models.

Why not even Paul Krugman is a real Keynesian

7 Jul, 2017 at 12:00 | Posted in Economics | 3 Comments

Keynes’s insights have enormous practical importance, according to Lance Taylor and Duncan Foley …

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.

Jonathan Schlefer

Iy is difficult not to agree with Taylor and Foley. 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 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.”

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. Outside man-made mathematical-statistical nomological machines, economic “laws” 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):

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:

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 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.

Why we can’t avoid another financial crisis

6 May, 2017 at 10:38 | Posted in Economics | 2 Comments

If there’s anything the last decade has shown us, it is that mainstream economists have gone astray in their tool shed. Mainstream neoclassical economics has contributed to causing today’s economic crisis rather than to solving it.

So we are in dire need of rethinking economics. An important building block in working out a new — more realist and relevant — economic theory, is Hyman Minsky’s thoughts on the inherent instability of our financial economic system. In the spirit of Minsky, Steve Keen offers a radical challenge to mainstream economic theory in his latest book:

The late Hyman Minsky described capitalism as an inherently unstable system. The Australian-born economist Steve Keen was a prominent follower of Minsky’s long before the global financial crisis made his unorthodox views fashionable. Thus, we can anticipate the answer to the question posed in the title of Keen’s new book, “Can We Avoid Another Financial Crisis?” A capitalist economy can no better avoid another financial crisis than a dog can avoid picking up fleas – it’s only a matter of time. And, if Keen is correct, we don’t have long to wait before the next blowup arrives.

1509513728Mainstream economists notoriously failed to anticipate the subprime debacle … Why did Keen get it right when the grandees of his profession flunked? Institutional dominance appears to have placed the mainstream economists at an intellectual disadvantage. Long before they were blindsided by the Lehman Brothers bust, many in the economics elite had become a self-regarding bunch, worldly from a careerist perspective, eager to dominate policy discussions but cut off from the real world, inhabiting an echo chamber where only received opinions were entertained.

Last year, one of the clerisy broke ranks. In a withering speech, Paul Romer, the chief economist of the World Bank and a former New York University professor, accused his fellow macroeconomists of forming a monolithic intellectual community, which deferred to authority, disregarded the opinions of those outside of their group and ignored unwelcome facts. They behaved more like cult members than genuine scientists. Romer compared modern macroeconomics to string theory, famously described as “not even wrong.”

The preference for high theory and abstruse mathematical modeling meant that mainstream economics had come to rest on a number of gloriously improbable assumptions. In their models, millions of households were reduced to a single “representative agent,” a God-like being, omniscient and immortal. This unreal creature inhabited a world where peace – or equilibrium – ruled. Crises were impossible in such an Eden, unless a mischievous serpent entered from abroad. But such an outcome was naturally impossible to predict.

Both Romer and Keen agree that the most serious error of modern macroeconomics is that it ignores finance. Money is seen as a “veil” placed over the activities of the real economy, a mere contrivance to get around the inconveniences of barter. Minsky, by contrast, saw capitalism as a financial system in which millions of balance sheets and cash flows were intertwined in a highly complex fashion. Money and credit are the essence of capitalism: economic transactions can only take place after financing.

The trouble is that credit is inherently unstable, prone to expand excessively and to inflate asset price bubbles, which in time collapse, causing a cascade of defaults throughout the economy. In Minsky’s world, the tail of finance wags the real economy dog.

Edward Chancellor/Reuters

As a young research stipendiate in the U.S. yours truly had the great pleasure and privelege of having Hyman Minsky as teacher.

He was a great inspiration at the time.

He still is.

The concepts which it is usual to ignore or deemphasize in interpreting Keynes — the cyclical perspective, the relations between investment and finance, and uncertainty, are the keys to an understanding of the full significance of his contribution …

minskys keynesbok

The conclusion to our argument is that the missing step in the standard Keynesian theory was the explicit consideration of capitalist finance within a cyclical and speculative context. Once captalist finance is introduced and the development of cash flows … during the various states of the economy is explicitly examined, then the full power of the revolutionary insights and the alternative frame of analysis that Keynes developed becomes evident …

The greatness of The General Theory was that Keynes visualized [the imperfections of the monetary-financial system] as systematic rather than accidental or perhaps incidental attributes of capitalism … Only a theory that was explicitly cyclical and overtly financial was capable of being useful …

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