The concept of dynamics

4 Jul, 2020 at 08:59 | Posted in Economics, Politics & Society | 7 Comments

adornThe concept of dynamics, which complements bourgeois “ahistoricity,” is raised to something absolute, while it nevertheless, as the anthropological reflex of the laws of production, must be critically confronted in the emancipated society with need. The idea of unfettered doing, of uninterrupted creating, of chubby-cheeked insatiability, of freedom as intense activity, feeds on the bourgeois concept of nature, which from time immemorial has served to proclaim social violence as irrevocable, as a piece of healthy eternity. It was due to this and not any presumed equalization that the positive designs of socialism, against which Marx bristled, remained in barbarism. What is to be feared is not the slackening of humanity in a life of luxury, but rather the dessicated expansion of what, in the guise of the all-natural, is social – the collectivity as the blind rage of making. The naively mandated unambiguity of the tendency of development towards the raising of production is itself a piece of that bourgeois nature [Bürgerlichkeit], which permits development only in one direction, because, integrated into the totality, ruled by quantification, it is hostile to the qualitative difference. If one thinks of the emancipated society as one emancipated precisely from such a totality, then alignments become visible, which have little in common with the raising of production and its human mirror-images.

T. W. Adorno

Central banks and fiscal policies

3 Jul, 2020 at 12:50 | Posted in Economics | 18 Comments

Suppose a UK government became extremely irresponsible, and enacted large tax cuts during an economic boom. The Bank would, following its remit, attempt to put the lid on inflationary pressure by raising interest rates. Suppose further that the markets panicked, and refused to buy UK government debt except at ridiculously high interest rates. In that situation I think it is extremely unlikely that the Bank would intervene and buy government debt, because it would believe that economic stability was best served by the government cutting its deficit.

fsAcademics have sometimes speculated about such a standoff. In this game of chicken would the government give in and raise taxes or cut spending, or would the Bank give in and “monetise” the deficit by buying government debt? I think this debate is a little academic, because a government so intent on creating an inflationary boom would also think nothing about telling the Bank what to do. The governor would be ordered to monetise the deficit and if he refused he would be replaced by someone who would.

No governor of a central bank wants to be put in that situation. It is for this reason that Mervyn King said: “Central banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy.” Obsession can breed irrationality. Which brings us back to 2010, which is much more like recent events than our hypothetical economic boom. Perhaps this irrational fear of deficits may help explain why during the largest recession since the war King ignored standard macroeconomic theory and practice and encouraged the austerity that proved so disastrous. A lesson may be that while you can trust central bankers to deal with a short-term panic in the government debt market during a recession, you should never trust them to be objective when talking about fiscal policy.

Simon Wren-Lewis / The Guardian

Simply the best

2 Jul, 2020 at 21:30 | Posted in Varia | Leave a comment

 

Bille August’s and Ingmar Bergman’s marvellous​ masterpiece.
With breathtakingly beautiful music by Stefan Nilsson.

Mainstream macroeconomics — rigorously irrelevant

2 Jul, 2020 at 16:57 | Posted in Economics | 6 Comments

be-relevantThere is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.

One might have hoped that humbled by the manifest failure of its theoretical pretenses during the latest economic-financial crises, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. But — empirical evidence still only plays a minor role in mainstream economic theory, where models largely function as a substitute for empirical evidence.

Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists and other DSGE modelers — there are still some real Keynesian macroeconomists to read. One of them — Axel Leijonhufvud — writes:

New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy … Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it … Dynamic stochastic general equilibrium theory has shown itself an intellectually bankrupt enterprise.

If macroeconomic models – no matter of what ilk –  build on microfoundational assumptions of representative actors, rational expectations, market clearing, and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Incompatibility between actual behavior and the behavior in macroeconomic models building on representative actors and rational expectations microfoundations is not a symptom of ‘irrationality.’ It rather shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality.

A gadget is just a gadget – and no matter how brilliantly silly DSGE models you come up with, they do not help us working with the fundamental issues of modern economies.

Inequality and luxury

2 Jul, 2020 at 16:42 | Posted in Politics & Society | Leave a comment

thThus luxury is being hollowed out. For in the middle of general fungibility, happiness clings without exception to what is not fungible. No exertion of humanity, no formal reasoning can alter the fact that the clothing which shimmers like a fairy-tale is worn by the one and only, not by twenty-thousand others. Under capitalism, the utopia of the qualitative — what by virtue of its difference and uniqueness does not enter into the ruling exchange relationship — flees into the fetish character. But this promise of happiness in luxury presupposes once more privilege, economic inequality, precisely a society based on fungibility. That is why the qualitative itself turns into a special case of quantification, the not-fungible into the fungible, luxury into comfort and in the end into senseless gadgets. In such a circle the principle of luxury goes to pieces even without the leveling tendency of mass society, over which the reactionaries sentimentally fuss and fume. The inner composition of luxury is not indifferent to what useless things, through their total embedding in the realm of usefulness, experience. Its remainders, even objects of the greatest quality, already look like junk.

T. W. Adorno

Postmodern thinking

1 Jul, 2020 at 15:08 | Posted in Theory of Science & Methodology | 1 Comment

adornoThe compulsive types there correspond to the paranoids here. The wistful opposition to factual research, the legitimate consciousness that scientism forgets what is best, exacerbates through its naïvété the split from which it suffers. Instead of comprehending the facts, behind which others are barricaded, it hurriedly throws together whatever it can grab from them, rushing off to play so uncritically with apochryphal cognitions, with a couple isolated and hypostatized categories, and with itself, that it is easily disposed of by referring to the unyielding facts. It is precisely the critical element which is lost in the apparently independent thought. The insistence on the secret of the world hidden beneath the shell, which dares not explain how it relates to the shell, only reconfirms through such abstemiousness the thought that there must be good reasons for that shell, which one ought to accept without question. Between the pleasure of emptiness and the lie of plenitude, the ruling condition of the spirit [Geistes: mind] permits no third option.

Long before ‘postmodernism’ became fashionable among a certain kind of ‘intellectuals’, Adorno wrote searching critiques of this kind of thinking.

When listening to — or reading — the postmodern mumbo-jumbo​ that surrounds​ us today in social sciences and humanities, I often find myself wishing for that special Annie Hall moment of truth:

An interview with Stephanie Kelton

1 Jul, 2020 at 13:25 | Posted in Economics | 2 Comments

Cody Fenwick: What drives the biggest misunderstandings about government debt in our national conversation?

mythEverything is wrong. The way we talk about federal government debt is, from my perspective, we say things like we’re borrowing from China and foreigners. Hillary Clinton said when she was secretary of State that it’s a national security threat. People talk about it representing a liability to all of us, so we hear people talk about “your share [of the national debt],”  a burden on future generations, that it ultimately has to be paid back, that it’s going to require higher taxes in the future. I could keep going.

So what connects all these misunderstandings? Are we thinking of the government too much like a household or a business?

Yes, of course. We think that the government has borrowed, and we think that this is real debt. And neither of those things is correct. I say in the book that if I walk into a bank and borrow money, I’m borrowing money because I don’t have it. Right? That’s why I got to the bank to take out a loan. The federal government is not borrowing money because it needs money. It’s not borrowing because it doesn’t have the capacity to finance whatever it wants to spend money on. It has the fiscal capacity; it can just spend. And not only that, the government sells the bonds. And by the time the government sells the bonds, the spending has already taken place. So the bonds cannot possibly be the tool with which the government raises money in order to spend. It’s selling the bonds after the spending had already taken place. Why does it do that? It doesn’t need to borrow, it has already financed the spending.

So we don’t really understand — the public and most economists get this wrong — we don’t even understand what the purpose of selling bonds is. We treat it as a borrowing operation. It’s not. The purpose of selling the bonds is to drain off the reserves, the dollars, to remove some of the dollars the government has spent into the economy and replace them with treasuries. It’s a subsidy to the rich, is what it is.

AlterNet

To Keynes — as to Abba Lerner and MMT today — it was evident that the state had the ability to promote full employment and a stable price level – and that it should use its powers to do so. If that meant that it had to take on ​debt and 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 per se, 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.

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is com­monly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authori­ty, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

J. M. Keynes

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.

Throughout history public debts have gone up and down, often expanding in periods of war or large changes in basic infrastructure and technologies, and then going down in periods when things have settled down.

The pros and cons of public debt have been put forward for as long as the phenomenon itself has existed, but it has, notwithstanding that, not been possible to reach anything close to consensus on the issue — at least not in a long time-horizon perspective.

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few ask the question if maybe there is also a problem if public debt becomes too low.

The government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

To view government debts in terms of the ‘functional finance’ concept introduced by Abba Lerner, is to consider their role in the macroeconomic balance of the economy. In simple, bare bones terms, the function of government debts that is significant for the macroeconomic health of an economy is that they provide the assets into which individuals can put whatever accumulated savings they attempt to set aside in excess of what can be wisely invested in privately owned real assets. A debt that is smaller than this will cause the attempted excess savings, by being reflected in a reduced level of consumption outlays, to be lost in reduced real income and increased unemployment.

William Vickrey

NAIRU — a non-existent unicorn

30 Jun, 2020 at 17:27 | Posted in Economics | 8 Comments

powemp3In our extended NAIRU model, labor productivity growth is included in the wage bargaining process … The logical consequence of this broadening of the theoretical canvas has been that the NAIRU becomes endogenous itself and ceases to be an attractor — Milton Friedman’s natural, stable and timeless equilibrium point from which the system cannot permanently deviate. In our model, a deviation from the initial equilibrium affects not only wages and prices (keeping the rest of the system unchanged) but also demand, technology, workers’ motivation, and work intensity; as a result, productivity growth and ultimately equilibrium unemployment will change. There is in other words, nothing natural or inescapable about equilibrium unemployment, as is Friedman’s presumption, following Wicksell; rather, the NAIRU is a social construct, fluctuating in response to fiscal and monetary policies and labor market interventions. Its ephemeral (rather than structural) nature may explain why the best economists working on the NAIRU have persistently failed to agree on how high the NAIRU actually is and how to estimate it.

Servaas Storm & C. W. M. Naastepad

Many politicians and economists subscribe to the NAIRU story and its policy implication that attempts to promote full employment is doomed to fail since governments and central banks can’t push unemployment below the critical NAIRU threshold without causing harmful runaway inflation.

Although this may sound convincing, it’s totally wrong!

One of the main problems with NAIRU is that it essentially is a timeless long-run equilibrium attractor to which actual unemployment (allegedly) has to adjust. But if that equilibrium is itself changing — and in ways that depend on the process of getting to the equilibrium — well, then we can’t really be sure what that equilibrium will be without contextualizing unemployment in real historical time. And when we do, we will — as highlighted by Storm and Naastepad — see how seriously wrong we go if we omit demand from the analysis. Demand policy has long-run effects and matters also for structural unemployment — and governments and central banks can’t just look the other way and legitimize their passivity re unemployment by referring to NAIRU.

The existence of long-run equilibrium is a very handy modeling assumption to use. But that does not make it easily applicable to real-world economies. Why? Because it is basically a timeless concept utterly incompatible with real historical events. In the real world, it is the second law of thermodynamics and historical — not logical — time that rules.

This importantly means that long-run equilibrium is an awfully bad guide for macroeconomic policies. In a world full of genuine uncertainty, multiple equilibria, asymmetric information, and market failures, the long-run equilibrium is simply a non-existent unicorn.

NAIRU does not hold water simply because it does not exist — and to base economic policies on such a weak theoretical and empirical construct is nothing short of writing out a prescription for self-inflicted economic havoc.

NAIRU is a useless concept, and the sooner we bury it, the better.

Enlighten the night

30 Jun, 2020 at 09:24 | Posted in Varia | Leave a comment

 

P-value — a poor substitute for scientific reasoning

28 Jun, 2020 at 23:16 | Posted in Statistics & Econometrics | Leave a comment


All science entails human judgment, and using statistical models doesn’t relieve us of that necessity. Working with misspecified models, the scientific value of significance testing is actually zero — even though you’re making valid statistical inferences! Statistical models and concomitant significance tests are no substitutes for doing real science.

In its standard form, a significance test is not the kind of ‘severe test’ that we are looking for in our search for being able to confirm or disconfirm empirical scientific hypotheses. This is problematic for many reasons, one being that there is a strong tendency to accept the null hypothesis since they can’t be rejected at the standard 5% significance level. In their standard form, significance tests bias against new hypotheses by making it hard to disconfirm the null hypothesis.

And as shown over and over again when it is applied, people have a tendency to read “not disconfirmed” as “probably confirmed.” Standard scientific methodology tells us that when there is only say a 10 % probability that pure sampling error could account for the observed difference between the data and the null hypothesis, it would be more “reasonable” to conclude that we have a case of disconfirmation. Especially if we perform many independent tests of our hypothesis and they all give ​the same 10% result as our reported one, I guess most researchers would count the hypothesis as even more disconfirmed.

Statistics is no substitute for thinking. We should never forget that the underlying parameters we use when performing significance tests are model constructions. Our p-values mean next to nothing if the model is wrong. Statistical​ significance tests do not validate models!

monte_carloIn many social sciences, p-values and null hypothesis significance testing (NHST) is often used to draw far-reaching scientific conclusions — despite the fact that they are as a rule poorly understood and that there exist alternatives that are easier to understand and more informative.

Not the least using confidence intervals (CIs) and effect sizes are to be preferred to the Neyman-Pearson-Fisher mishmash approach that is so often practiced by applied researchers.

Running a Monte Carlo simulation with 100 replications of a fictitious sample having N = 20, confidence intervals of 95%, a normally distributed population with a mean = 10 and a standard deviation of 20, taking two-tailed p-values on a zero null hypothesis, we get varying CIs (since they are based on varying sample standard deviations), but with a minimum of 3.2 and a maximum of 26.1, we still get a clear picture of what would happen in an infinite limit sequence. On the other hand p-values (even though from a purely mathematical-statistical sense more or less equivalent to CIs) vary strongly from sample to sample, and jumping around between a minimum of 0.007 and a maximum of 0.999 doesn’t give you a clue of what will happen in an infinite limit sequence!

[In case you want to do your own Monte Carlo simulation, here’s an example I’ve made using Gretl:
nulldata 20
loop 100 –progressive
series y = normal(10,15)
scalar zs = (10-mean(y))/sd(y)
scalar df = $nobs-1
scalar ybar=mean(y)
scalar ysd= sd(y)
scalar ybarsd=ysd/sqrt($nobs)
scalar tstat = (ybar-10)/ybarsd
pvalue t df tstat
scalar lowb = mean(y) – critical(t,df,0.025)*ybarsd
scalar uppb = mean(y) + critical(t,df,0.025)*ybarsd
scalar pval = pvalue(t,df,tstat)
store E:\pvalcoeff.gdt lowb uppb pval
endloop
]

Golden ratio (student stuff)

28 Jun, 2020 at 18:58 | Posted in Statistics & Econometrics | Leave a comment

 

Mandy

28 Jun, 2020 at 16:28 | Posted in Varia | Leave a comment

 

 
Old loves never die …

Hicks’ chef-d’oeuvre

28 Jun, 2020 at 16:15 | Posted in Economics | 2 Comments

When we cannot accept that the observations, along the time-series available to us, are independent, or cannot by some device be divided into groups that can be treated as independent, we get into much deeper water. For we have then, in strict logic, no more than one observation, all of the separate items having to be taken together. For the analysis of that the probability calculus is useless; it does not apply. We are left to use our judgement, making sense of what has happened as best we can, in the manner of the historian. Applied economics does then come back to history, after all.

hicksI am bold enough to conclude, from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed. We have no business to turn to them automatically; we should always ask ourselves, before we apply them, whether they are appropriate to the problem at hand. Very often they are not. Thus it is not at all sensible to take a small number of observations (sometimes no more than a dozen observations) and to use the rules of probability to deduce from them a ‘significant’ general law. For we are assuming, if we do so, that the variations from one to another of the observations are random, so that if we had a larger sample (as we do not) they would by some averaging tend to disappear. But what nonsense this is when the observations are derived, as not infrequently happens, from different countries, or localities, or industries — entities about which we may well have relevant information, but which we have deliberately decided, by our procedure, to ignore. By all means let us plot the points on a chart, and try to explain them; but it does not help in explaining them to suppress their names. The probability calculus is no excuse for forgetfulness.

John Hicks’ Causality in economics is an absolute masterpiece. It ought to be on the reading list of every course in economic methodology.

Top 15 Economics Blog of The World

25 Jun, 2020 at 08:34 | Posted in Economics | 3 Comments

Top-15Random Observations for Students of Economics
This blog is run by Gregory Mankiw …

Macro Musings Blog
Run by David Beckworth, a senior research fellow at George Mason University …

Confessions of a Supply-Side Liberal
Run by Miles Kimball, the Emeritus Professor Economics at Michigan University …

Marginal Revolution 
Alex Tabarrok and Tyler Cowen, both professors of economics at George Mason University, run this blog …

Naked Capitalism 
This blog was started in 2006 as a joint initiative of various economic scholars to address the issue of underreporting of the extent and severity of the underpricing of risk of all credit instruments in the US …

New Economic Perspectives
This blog is written by multiple authors and provides articles and analyses from several renowned economists, finance gurus, legal scholars, and academicians …

The Enlightened Economist
This blog is run by Dr. Diane Coyle at Cambridge University …

Real-Time Economics
This blog is run by a wing of the Wall Street Journal …

The Intelligent Economist
This blog is run by a group of economic students and graduates who wanted to share their love for their subject with the rest of the world …

The Undercover Economist
This blog is written by Tim Hardford …

Thoughts on Economics
This blog mostly features articles on Post Keynesian economic theories …

Ed Dolan’s Econ Blog
Dr Dolan has had the experience of teaching in some of the world’s finest universities in colleges …

Worthwhile Canadian Initiative
This is an economics blog with a focus on Canadian economic issues …

Lars P. Syll
Dr. Syll, a professor of economics at the Malmo University in Sweden, runs this blog to educate and enlighten his followers on subjects like realist social science, theories of distributive justice, and the methodology and philosophy of economics …

Mainly Macro
Written by Dr. Wren-Lewis, the Emeritus Professor of Economics and Fellow of Merton College at Oxford University …

The Brand Boy

The Deficit Myth

24 Jun, 2020 at 10:41 | Posted in Economics, Politics & Society | 15 Comments

keltonSoon after joining the Budget Committee, Kelton the deficit owl played a game with the staffers. She would first ask if they would wave a magic wand that had the power to eliminate the national debt. They all said yes. Then Kelton would ask, “Suppose that wand had the power to rid the world of US Treasuries. Would you wave it?” This question—even though it was equivalent to asking to wipe out the national debt—“drew puzzled looks, furrowed brows, and pensive expressions. Eventually, everyone would decide against waving the wand.”

Such is the spirit of Kelton’s book, The Deficit Myth. She takes the reader down trains of thought that turn conventional wisdom about federal budget deficits on its head. Kelton makes absurd claims that the reader will think surely can’t be true…but then she seems to justify them by appealing to accounting tautologies. And because she uses apt analogies and relevant anecdotes, Kelton is able to keep the book moving despite its dry subject matter. She promises the reader that MMT opens up grand new possibilities for the federal government to help the unemployed, the uninsured, and even the planet itself…if we would only open our minds to a paradigm shift …

Precisely because Kelton’s book is so unexpectedly impressive, I would urge longstanding critics of MMT to resist the urge to dismiss it with ridicule. Although it’s fun to lambaste “magical monetary theory” on social media and to ask, “Why don’t you move to Zimbabwe?” such moves will only serve to enhance the credibility of MMT in the eyes of those who are receptive to it.

Robert P. Murphy / Mises Institute

Can a government go bankrupt?
No. You cannot be indebted to yourself.

Can a central bank go bankrupt?
No. A central bank can in principle always ‘print’ more money.

Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.

Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.

Does maintaining full employment mean the government has to increase its debt?
No.

dec3bb27f72875e4fb4d4b62daebb2fd161b36392c1a0626f00cfd2ece207d84As the national debt increases, and with it the sum of private wealth, there will be an increasingly yield from taxes on higher incomes and inheritances, even if the tax rates are unchanged. These higher tax payments do not represent reductions of spending by the taxpayers. Therefore the government does not have to use these proceeds to maintain the requisite rate of spending, and can devote them to paying the interest on the national debt …

The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (possibly through a corporation in which he has shares), and who regards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income …

If for any reason the government does not wish to see private property grow too much … it can check this by taxing the rich instead of borrowing from them, in its program of financing government spending to maintain full employment.

Abba Lerner

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