Peter Radford — A Little Knowledge

Knowledge as a factor of production. Knowledge is broader than information. Knowledge includes tacit knowledge, skill, and critical and creative thinking. In other words, the study of knowledge involves epistemology, logic and language, psychology, and other relevant fields in addition to information. 

Information can be formalized but a great deal of knowledge cannot, at least given present limitations and future prospects through technology.

Labor as the human component of productions that complements capital (land included) had been conceived in terms of time, strength and ability to preform tasks. In this view, labor and capital are substitutable.

In the expanded view that includes knowledge in the broad sense, this is not the case. Accumulated knowledge is the bedrock on which the foundations of a society or civilization are erected. This is what differentiates the human species from other species of sentient beings with whom humans share the planet.

Accumulated knowledge is largely a commons, the shared inheritance, so to speak, of humankind. Innovation is based on adding to that accumulation. Intellectual property—patents, copyright, trade secrets and so forth — may isolate some of this innovation for a time, but eventually it all gets added to the storehouse of knowledge.

Without considering this factor and including it to the degree possible, economics remains an oversimplification that is not capable of dealing with the key factor.

The Radford Free Press
A Little Knowledge
Peter Radford

John T. Harvey — The Nobel Prize And Keeping Economics Real

I wholeheartedly agree with our newest Nobel Laureate. Quite right that a large chunk of mainstream macroeconomics has made itself irrelevant. I’m not sure about the thirty years estimate as my feeling is that it goes back even further, but that’s an academic question. Regardless of when it started, the bottom line is that we are in a terrible place today. Economics graduate students are increasingly avoiding taking specializations in macroeconomics and our discipline was hopelessly ill-prepared to predict or explain the financial crisis.…

It’s kind of hard to understand a crisis that occurs in a sector you don’t bother to model....

If this is the current state of affairs, how can we possibly avoid another breakdown? We can do so by listening to other opinions. This is the one place where I want to disagree with Dr. Romer. He laments on page 20 that there are “few other voices saying what I say.” Actually, there are many others, but they lie outside of the mainstream and thus remain unheard. Mainstream economics has become an extremely closed club, to its (and the general public’s) great detriment....

Forbes — Pragmatic Economics

The Nobel Prize And Keeping Economics Real
John T. Harvey | Professor of Economics, Texas Christian University

Lars P. Syll’s — At last–Paul Romer got his ‘Nobel prize’​

Must-read.

How does it relate to MMT? Through institutionalism. Institutionalism takes culture (informal determined and flexible) and institutional arrangements (formally determined and rigid until changed) into consideration. Ideas are the foundation of both.

Society, while materially embedded, is socially constructed. Karl Marx is almost alone among economists to get this. See David Norman Smith, Sharing, not selling: Marx against value. Humans are bounded rationally by what they can think. Aquinas had observed that knowledge is in accordance with the mode of the knower (Summa Theologiae, I, 14, Res. 3.) Marx added that humans are also bounded by material conditions, in particular, the current mode of production. Individuals are materially embedded, being embodied, and society is also materially embedded in its institutions, the most significant of which is the current mode of production, which determines its legal structure, for instance, through property relations.

Marx was not a strict materialist in the sense of everything being materially determined. That is to say, he was not arguing freedom versus determinism. "Bounded" or "shaped" is a better term for his thinking than "determined," which is the usual translation of the German term "bestimmt" that he used, which some have interpreted as a statement of strict determinism.

It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness. [Es ist nicht das Bewußtsein der Menschen, das ihr Sein, sondern umgekehrt ihr gesellschaftliches Sein, das ihr Bewusstsein bestimmt.] — Preface to A Contribution to the Critique of Political Economy (Wikiquote)

 David Norman Smith argues that for Marx, economic value is socially constructed in a monetary production economy, the economic foundation for society after the primitive tribal era, when commodity production for exchange was dominated goods production for use. For Marx, the notion of commodity is key in understanding economics as primarily social rather than chiefly material, as most presume it to be. As Marx wrote: "...their social being ... determines their consciousness…."

This is key in that both the classical economist on whom Marx built, Smith and Ricardo in particular, missed this. According to David Norman Smith, Marx regarded catching this and elucidating it as his chief contribution. Economists subsequent to Marx either did not understand him or ignored him on this point. But, as David Norman points out, part of the fault lies with Marx owing to his potentially confusing expository writing, which Norman sets about clearing up.

As a result, economics came to be viewed as entirely materialistic, that is, about material systems alone. Everything could potentially be measured quantitatively in concrete terms and expressed numerically in stocks and flows using mathematical models. Society itself was even denied as a relevant concept in the interest of maintaining the assumption of methodological individualism and microfoundations.

In this view, institutions don't count, and money is neutral. Economics can be reduced to barter of goods in the production, distribution, consumption cycle, where distribution can be ignored when perfect competition in free markets is assumed, even though admitting the potential for "market imperfections," since it is also assumed that imperfections can be eliminated.

Marx had pointed out that economics is concrete at the level of individuals (producers) but not when commodities are produced for exchange in a monetary production economy and wage labor. The concrete value of utility (use)  becomes the abstract value of price (exchange value). Abstract value is  thus socially constructed and markets are socially embedded. From this, Marx was able to derived his concept of surplus value and worker expropriation. That was anathema in a capitalist system, so Marx was sidelined and demonized.

The Institutionalists. beginning with Veblen, also attempted to show the futility of the neoclassical project ignoring the social aspects of economics, but they remained "heterodox."

Keynes introduced the concept of the monetary production economy in which money is not neutral, undercutting the barter-based neoclassical models that assume money is neutral and doesn't influence exchange in the long run. This is needed to maintain the foundational assumption of long run general equilibrium. Strict Keynesians (not New Keynesians, who assume general equilibrium and money neutrality) are also considered "heterodox."

In his "design science," R. Buckminster ("Bucky") Fuller introduced the distinction between physical and metaphysical resources, physical resources being material and metaphysical resources non-material. Knowledge and ideas are metaphysical resources. Physical resources are finite and scarce, leading to rivalry and exclusion. Metaphysical resources are potentially infinite and constitute free goods. While they are non-rivalrous, they can be made exclusive by making them proprietary, that is, converting them into a form of property, e.g. intellectual property.

Lars Syll's post explains how Paul Romer won the prize for his work on the key economic importance of ideas and scaling ideas. Since this cannot be integrated into neoclassical modeling, they are missing a foundation aspect of economic reality.

The value of this understanding merit much more than a prize. It is essential in coming to the realization that the level of consciousness in a society is determinative. Humans are materially bounded, rationally bound, and socially bounded, but they have much more space to maneuver and innovate than conventional wisdom acknowledges.

Creativity is an aspect of rationality. So Romer's prize is potentially a big deal. Let's see how it gets picked up on. What MMT reveals is that money (affordability) is no problem. The constraints are creativity and availability of real resources. Public funding can and must address this through public investment for public purpose, e.g., in education, R&D, infrastructure, and quality of life in order to create a good society.

Lars P. Syll’s Blog
At last — Paul Romer got his ‘Nobel prize’​Lars P. Syll | Professor, Malmo University

See also

Despite his ignorance of the Cambridge Capital Controversy, Paul Romer's recent criticisms of mainstream macroeconomics have some good points. Typical Dynamic Stochastic General Equilibrium (DSGE) model time series, with exogenous shocks to certain parameters with specified probability distributions. And those parameters are named to suggest they have common language meanings. But there is no reason to think any such correspondence between the mathematics and the labels exist.

I assume, however, that his Nobel prize is for explaining economic growth as the result of some combination of endogenous innovation, the accumulation of human capital, and an increasing variety of capital goods embodying technical progress. Admirers of Adam Smith, Karl Marx, Piero Sraffa, Nicholas Kaldor and those with some grasp of economic history should applaud this emphasis on increasing returns to scale. Mainstream economists, however, claim not to be producing mere descriptive prose, but rigorous formal models that embody their ideas. And mainstream endogenous growth models, including those developed by Paul Romer are, deficient....

Thoughts On Economics
Paul Romer, 2018 "Nobel" LaureateRobert Vienneau

Timothy Taylor — Some Thoughts About Economic Exposition in Math and Words

Avoiding mathiness and economism.

Conversable Economist
Some Thoughts About Economic Exposition in Math and Words
Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

Bill Mitchell — Mainstream macroeconomics in a state of ‘intellectual regress’

At the heart of economic policy making, particularly central bank forecasting are so-called Dynamic Stochastic General Equilibrium (DSGE) models of the economy, which are a blight on the world and are the most evolved form of the nonsense that economics students are exposed to in their undergraduate studies. Paul Romer recently published an article on his blog (September 14, 2016) – The Trouble With Macroeconomics – which received a fair amount of attention in the media, given that it represented a rather scathing, and at times, personalised (he ‘names names’) attack on the mainstream of my profession. Paul Romer describes mainstream macroeconomics as being in a state of “intellectual regress” for “three decades” culminating in the latest fad of New Keynesian models where the DSGE framework present a chimera of authority. His attack on mainstream macroeconomics is worth considering and linking with other evidence that the dominant approach in macroeconomics is essentially a fraud.…

Bill Mitchell – billy blog
Mainstream macroeconomics in a state of ‘intellectual regress’
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Lars P. Syll — Paul Romer — favourite candidate for ‘Nobel prize’ 2016

The astonishing thing about this is that most economists had to be told and some still don't get it — like many other matters that are vital to economics, for example, the relationship of money and banking, and finance to economics, as well as how banking works.

Economics needs a Martin Luther to shake it out of its dogmatic slumbers and institutional rigidity. We are still waiting for the Reformation. The priesthood is deeply entrenched.

BTW, the other issue is that while knowledge is non-rival, it is excludable through intellectual property rights.

Lars P. Syll’s Blog
Paul Romer — favourite candidate for ‘Nobel prize’ 2016

Lars P. Syll | Professor, Malmo University

Matias Vernengo — The Trouble with Paul Romer's Angriness

The good. Paul Romer is using his bully pulpit as incoming World Bank chief economist to criticize the economics profession. 

The bad. Paul Romer is clueless himself.

Naked Keynesianism
The Trouble with Paul Romer's Angriness
Matias Vernengo | Associate Professor of Economics, Bucknell University

Lord Keynes — Paul Romer’s Plan For Sweden: Are You Kidding Me?!

Just when you were beginning to think that Paul Romer was one of the sane voices in economics and political economy. Now this head scratcher.

Social Democracy For The 21St Century: A Post Keynesian Perspective
Paul Romer’s Plan For Sweden: Are You Kidding Me?!
Lord Keynes

Paul Romer — Trouble with Macroeconomics, Update

One suggestion is that it would have been better if I had written one of those passive-voice “mistakes were made” documents that firms issue after a PR disaster.

I name names because this is how science works. The standard practice calls for an individual to put his or her reputation behind a claim; to listen to the claims that others make; and to admit that the claim is false when this is what the evidence shows. I did try to restrict my criticism to people who have received Nobel Prizes in Economics or to Smets and Wouters, who have received wide recognition for their work, so it is not like I’m picking off the stragglers at the back of the head.

And I hope we can agree that if we go too far in the direction of passive-voice science we are not going to be happy about ending up with anonymous-sewer-science.…

Getting serious in the economics profession and redefining VSP (Very Serious Person).

Paul Romer Blog
Trouble with Macroeconomics, Update
Paul Romer, chief economist at the World Bank

Andrew Lainton — The Only Way out of the Romer Conundrum is to Dump Wicksells Rocking Horse

All of these models are based on a parable of equilibrium based on Wicksell’s Rocking Horse model. We now know this to be mathematically false, so why don’t we just replace it?

His famous quote from 1918

“If you hit a rocking horse with a stick, the movement of the horse will be very different from the stick. The hits are the cause of the movement, but the system’s own equilibrium laws condition the form of movement”

Wicksells model was one of damped equilibrium. In nature equilibrium is a state of rest, so a pendulum for example will eventually stopped swinging. So the only way to make the rocking horse rock is to hit it with a stick.

The rocking horse symbolizes a system, an economy in this example, The stick represents an exogenous shock. This approach assumes that cycles have exogenous causes. That approach would be incorrect if cycles have endogenous causes.

To get away from models where change is generated by philosogen and chaloric we have to abandon the assumption that what drives cycles is outside the model. To get a rocking horse to rick requires energy, and how much it swings depends on its centre of mass. The economy is much more like a powered rocking horse where its centre of gravity is subject to rare but violent shifts to new equilibria.

Decisions, Decisions, Decisions

The Only Way out of the Romer Conundrum is to Dump Wicksells Rocking Horse

Andrew Lainton

Jason Smith — Of phlogiston and frameworks

…This could be summarized as simply saying there is no framework for macroeconomics. Frameworks, like string theory and quantum field theory, do two things: they tell you how to start looking at a problem, and they represent a shorthand for capturing the empirical successes of the field. My first criticism above says that string theory is a framework, so you can't make an analogy with macro which doesn't have a framework. My second criticism above says that until you have a working framework, you should be skeptical of any "natural experiments" because the interpretation of the natural experiments change with the framework.

In spite of this, for the most part I liked Romer's take on macroeconomics and I think he delivered some powerful arguments.…

Information Transfer Economics
Of phlogiston and frameworks
Jason Smith

Brian Romanchuk — Paul Romer's Criticisms of Mainstream Macro Are Weak

Although this paper has generated a fair amount of headlines, the criticisms are extremely weak from the perspective of mainstream economics, and there is no reason to expect it to cause changes in behaviour. Whatever debates it spawns will be a distraction from the deeper problems associated with DSGE macro.

Bond Economics
Paul Romer's Criticisms of Mainstream Macro Are Weak
Brian Romanchuk

David F. Ruccio — Phlogiston, the identification problem, and the state of macroeconomics

The problem is similar in macroeconomic models, and Romer finds that many mainstream economists rely on models that require and presume exogenous shocks—imaginary shocks, which “occur at just the right time and by just the right amount” (hence phlogiston)—to generate the desired results. Thus, in his view, “the real business cycle model explains recessions as exogenous decreases in phlogiston.”

The issue with phlogiston is that it can’t be directly measured. Nor, as it turns out, can many of the other effects invoked by mainstream economists. Here’s how Romer summarizes these imaginary effects/ A general type of phlogiston that increases the quantity of consumption goods produced by given inputs:

• An “investment-specific” type of phlogiston that increases the quantity of capital goods produced by given inputs
• A troll who makes random changes to the wages paid to all workers
• A gremlin who makes random changes to the price of output
• Aether, which increases the risk preference of investors
• Caloric, which makes people want less leisure

So, there you have it: in Romer’s view, contemporary mainstream economists rely on various types of phlogiston, a troll, a gremlin, aether, and caloric. That’s how they attempt to solve the identification problem in their models.…

Occasional Links & Commentary
Phlogiston, the identification problem, and the state of macroeconomics
David F. Ruccio | Professor of Economics, University of Notre Dame

Merijn Knibbe — Insider critiques of neoclassical macro models

Some history of economics and the shoulders of giants. Links, too.

Real-World Economics Review Blog
Insider critiques of neoclassical macro models
Merijn Knibbe

Lars P. Syll — Lazy theorizing and useless macroeconomics

Lars Syll chimes in on Paul Romer's article.

In physics it may possibly not be straining credulity too much to model processes as ergodic – where time and history do not really matter – but in social and historical sciences it is obviously ridiculous. If societies and economies were ergodic worlds, why do econometricians fervently discuss things such as structural breaks and regime shifts?

That they do is an indication of the unrealisticness of treating open systems as analyzable with ergodic concepts.

The future is not reducible to a known set of prospects. It is not like sitting at the roulette table and calculating what the future outcomes of spinning the wheel will be.… 

Lars P. Syll’s Blog
Lazy theorizing and useless macroeconomics
Lars P. Syll | Professor, Malmo University

Jason Smith — Macro is not like string theory

Another bad analogy. Jason Smith explains why.

Information Transfer Economics
Macro is not like string theory
Jason Smith

Noah Smith — The new heavyweight macro critics

Noah Smith weighs in on the side of Paul Romer.

So what seems to unite the new heavyweight macro critics, besides a lingering annoyance with Bob Lucas and his associates, is an emphasis on realism. Basically, these people are challenging the idea, very common in econ theory, that models shouldn't worry about being realistic. (Paul Pfleiderer is another economist who has recently made a similar complaint, though not in the context of macro.) They're not saying that economists need 100% perfect realism - that's the kind of thing you only get in physics, if anywhere. As Paul Krugman and Dani Rodrik have emphasized, even the people advocating for more realism acknowledge that there's some ideal middle ground. But if Romer, Kocherlakota, etc. are to be believed, macroeconomists aren't currently close to that optimal interior solution.

Maybe ontology is due to make a comeback.

Noahpinion
The new heavyweight macro critics

Noah Smith

Ramanan — Physics Envy

Ramanan schools Paul Romer.

The Case for Concerted Action
Physics Envy
V. Ramanan

Bill Black — White-Collar Criminologists Answer the call of Conventional Macroeconomists: An Open Letter to Dr. Kartik Athreya, Research Director of the Richmond Fed

I want to thank two prominent “freshwater” macroeconomists, Dr. Narayana Kocherlakota (until recently the President of the Minneapolis Fed and previously the Chair of the University of Minnesota’s economics department) and Dr. Kartik Athreya (Research Director of the Richmond Fed) for their article (2010) and book (2013) , respectively, designed to convey the current status of macroeconomics. Reading their descriptions, and reviewing the work of Oliver Williamson, Roger Myerson, and Leonid Hurwicz in light of the discussion of macroeconomics has made it clear to me that the central difficulties in micro and macroeconomics are with concepts that are the core of what we study as white-collar criminologists and what I dealt with as a financial regulator. There is, therefore, an opportunity for substantial advances should economics draw on the findings of the discipline (white-collar criminology) and the insights of the professionals (successful financial regulators) with the preeminent expertise in these problem areas. Athreya also stresses the key role of law and how the effort to contain fraud explains significant portions of the legal rules for commerce. I also have expertise in law.

Since I combine those three forms of expertise and teach various microeconomics courses, I thought I would write this open letter to orthodox macroeconomists and macroeconomists. For reasons that I will discuss, the perfect person to address is Athreya, with a “cc” to Kocherlakota.

Where economists have drawn on our insights, the results have proven successful. Indeed, I will show that one of the greatest opportunities for the advancement of “modern” macro (and micro) economics would be to cease ignoring George Akerlof and Paul Romer’s 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit.” I can think of no other field in which a Nobel Laureate, writing in his area of greatest expertise (fraud is the most damaging form of “asymmetrical information”), who proved correct and explicitly warned his field about the need to focus on “looting” (via “accounting control fraud”) would be religiously ignored by scholars in his or her discipline.…

Absolutely must-read.

New Economic Perspectives
White-Collar Criminologists Answer the call of Conventional Macroeconomists: An Open Letter to Dr. Kartik Athreya, Research Director of the Richmond Fed
William K. Black | Associate Professor of Economics and Law, UMKC

Mike Sankowski — Not Everybody Does It And Feynman Integrity

If you haven't been following this recently — and I haven't — here is  a short update on the debate initiated by Paul Romer on "mathiness." 

Romer and Krugman (Saltwater) are winning. The ball is in the Freshwater court.

Monetary Realism
Not Everybody Does It And Feynman Integrity

Mike Sankowski