Richard D. Wolff — The Narrowness of Mainstream Economics Is About to Unravel

Recent extreme volatility and sharp drops in US stock markets underscore the instability of capitalism yet again. As many commentators now note, another economic downturn looms. We know that all the reforms and regulations imposed in the wake of the Great Depression of the 1930s failed to prevent both smaller downturns between 1941 and 2008 and then another big crash in 2008. Capitalism’s instability has, for centuries, resisted all efforts to overcome it with or without government interventions. Yet mainstream economics mostly evades an honest confrontation with the social costs of such economic instability. Worse, it evades a direct debate with the Marxian critique that links those costs to an argument that system change would be the best and most “efficient” solution....

Truthout
The Narrowness of Mainstream Economics Is About to Unravel

Richard D. Wolff | professor of economics emeritus at the University of Massachusetts, Amherst, and currently a visiting professor in the Graduate Program in International Affairs of the New School University, New York City

Diane Coyle — Finance, the state and innovation

Yesterday brought the launch of a new and revised edition of Doing Capitalism in the Innovation Economy by William Janeway. Anybody who read the first (2012) edition will recall the theme of the ‘three player game’ – market innovators, speculators and the state – informed by Keynes and Minsky as well as Janeway’s own experience combining an economics PhD with his experience shaping the world of venture capital investment.

The term refers to how the complicated interactions between government, providers of finance and capitalists drive technological innovation and economic growth. The overlapping institutions create an inherently fragile system, the book argues – and also a contingent one. Things can easily turn out differently.... 

Bingo.

The fundamental assumption of a free enterprise system ("capitalism") is that entrepreneurship drives innovation, which accelerates growth and overall prosperity.

Looking at the historical record, this is obviously true. But it is more complicated than that, and a lot things can go wrong if all the gears in the machine are not always in sync. History also shows that they are not as evidence by cycles, where all cycles are a combination of business (economic) and financial factors that are influenced by a number of contingencies in a dynamic environment, including policy and its application.

The Enlightened Economist

Finance, the state and innovation

Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

also

The problem I have with this type of reasoning is that assumes away contingency. Technological innovation land the creation of a consumer society through marketing and advertising lead to the creation of mass markets, which changed the dynamic in a way that models did not anticipate and likely could not have because the new technology that made this possible was emergent and foreseeable in advance.

I don't think that this vitiates Marx and Engels' approach, but rather strengthens the argument for the need for conceptual models that are based on "fuzzy logic" to complement formal modeling based on technically defined analytical concepts and precise measurement to delimit the boundaries of sets.

Contingency implies uncertainty. Uncertainty implies the need to use fuzzy logic rather than the strict formalization that conventional economics as "science" demands. Both are necessary tools, especially as scale increases — which is what the fallacy of composition is about. Macro is not and cannot be scaled up micro analysis.

Of course, what can be formalized usefully should be used. But not everything is capable of being modeled formally in a dynamic way when contingency is involved, and static models are mostly gadgets when cet. par. is assumed.

Michael Roberts Blog
The fallacy of composition and the law of profitability
Michael Roberts

Ray Dalio — Back to the future

The coming demise of neoliberalism as the present order owing to ideological resistance to using fiscal policy. Dalio expects this to result in financial and economic conditions reminiscent of the 1930's. Recall what happened after that.

MMT to the rescue with functional finance. If only.

The World in 2017

Back to the future

Ray Dalio, founder, Bridgewater Associates
ht Yves Smith at Naked Capitalism

The Arthurian — Hey Jude. Hey Noah.

"It's the private debt level, stupid."

The New Arthurian Economics

Hey Jude. Hey Noah.
The Arthurian

Noah Smith — A big sweeping theory of modern history

I like big sweeping theories although I would not say they are "theories" in the scientific sense since as Noah observes they are not testable.

Rather these kinds of explanation are frameworks on which to hang explanation of past events in terms of patterns that may reflect some consistency in human behavior, even through contingency plays a greater role in history than determinism.

If this is your thing, it's worth a read even through Noah is an amateur in this field. But he is highly intelligent, well-informed and understands modeling, so his contribution is worth considering.

It's just an outline that would need to be worked out, but there is a solid basis for it in political economy as a major historical factor. It's an interesting excursion into linking historical cycles with economic cycles.

It's also a good sign that at least some pretty mainstream economists are looking out the window and thinking out of the box. I hope it gets some notice and gets others thinking about such matters.

Noahpinion

A big sweeping theory of modern history
Noah Smith

David Keohane — Where are my (business cycle) dragons?

Did Keynes read the I Ching? There seems to be very little chance that the present Chinese leadership is unaware of it.

The Financial Times — FT Alphaville
Where are my (business cycle) dragons?
David Keohane

Atif Mian and Amir Sufi — Why the Income Distribution Matters for Macroeconomics

Obvious to everyone but conventional economists. (See Manfred's comment on March 27, 2014 at 11:01)

House of Debt
Why the Income Distribution Matters for Macroeconomics
Atif Mian and Amir Sufi

Steve Roth comments:

STEVE ROTH ON MARCH 27, 2014 AT 12:10 PMI

Thanks for these great links to the empirical literature. Got my reading cut out for me.

On the theory: the arithmetic of this is inexorable — roughed out in a simple model here:

http://www.asymptosis.com/does-upward-redistribution-cause-secular-stagnation.html

As the post says, this is only one economic effect being illustrated. But the potential power of this effect seems massive — especially over decades — and it seems to be almost universally ignored and even pooh-poohed by economists, even liberal economists.

http://www.asymptosis.com/a-liberal-is-someone-who-doesnt-know-how-to-take-his-own-side-in-an-argument.html

http://www.asymptosis.com/underconsumption-income-wealth-and-capital-gains.html

Stagflationary Mark — Once Again, This Is Not 1982

An argument that this is as good as it gets this round and it's pretty bad. No telling what the next downturn will bring starting from here.

Illusion of Prosperity
Once Again, This Is Not 1982
Stagflationary Mark

Lars Syll — Macroeconomic quackery (from Robert Lucas)

In a recent interview Robert Lucas says he now believes that “the evidence on postwar recessions … overwhelmingly supports the dominant importance of real shocks.”

So, according to Lucas, changes in tastes and technologies should be able to explain the main fluctuations in e.g. unemployment that we have seen during the last six or seven decades.

Lars P. Syll's blog
Macroeconomic quackery
Lars P. Syll | Professor of Economics, Malmo University