An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Thursday, January 18, 2018
Robert Skidelsky — How [Conventional] Economics Survived the Economic Crisis
How did conventional economics survive the crisis? Handwaving.
Criticism of Paul Krugman and New Keynesian economics, which is based on "rational behavior and market equilibrium as a baseline" (Krugman).
Skidelsky concludes, "Macroeconomics still needs to come up with a big new idea."
I would rephrase that as "a new big idea." Theories are based on a "big idea" that constitutes the architecture of the framework. Rationality and equilibrium isn't it.
Project Syndicate
How [Conventional] Economics Survived the Economic CrisisRobert Skidelsky | Professor Emeritus of Political Economy at Warwick University, fellow of the British Academy in history and economics, member of the British House of Lords, and author of a three-volume biography of John Maynard Keynes
Big new idea? What's wrong with Keynes's "print money and spend it and/or cut taxes" idea?
ReplyDeleteEconomists, stupid or corrupt or both?
ReplyDeleteComment on Robert Skidelsky on ‘How [Conventional] Economics Survived the Economic Crisis’
Economics of the last 200 years is the most embarrassing failure in the history of modern science.
The basic question of economics is whether “the existing economic system is, in any significant sense, self-adjusting.” (Keynes) Walrasian economics failed to prove this. The lethal methodological blunder of standard economics has been to put equilibrium (and other nonentities) into the premises. This blunder is known since antiquity as petitio principii.#1
Keynes realized that the classical microfoundations approach had led into a cul-de-sac and therefore switched to macrofoundations. This was ― in principle ― the right first step towards a paradigm shift, except for the fact that Keynes messed up his macrofoundations. This is why Keynesianism, too, is a failure.#2
Because the four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/formally inconsistent, economic policy guidance never had sound scientific foundations from Adam Smith/Karl Marx onward. This applies, of course, to the so-called free-market ideology.
There is political economics and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics, the scientific standards of material and formal consistency are observed.
Economics claims to be a science but is NOT. Theoretical economics (= science) had been hijacked from the very beginning by political economists (= agenda pushers). Political economics is scientifically worthless. It is pretty obvious that Keynes, Hayek,#3 Friedman,#4 etcetera were not scientists but clowns in the political Circus Maximus.
True economic theory tells us how the economic system works. The economist needs the true theory, i.e. the humanly best mental representation of reality: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)
Keynes, Hayek, Friedman, and their heirs/parrots up to DSGE and MMT never rose above the proto-scientific level of common-sense rhetoric, opinion, and political agenda pushing. The claim as expressed in the title “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel” is a joint Walrasian/Keynesian/Marxian/Austrian deception of the public.
Economics did not survive as science — it is scientifically dead since Adam Smith — but only as agenda-pushing, sitcom blather, and infotainment.
Egmont Kakarot-Handtke
#1 Petitio principii — economists’ biggest methodological mistake
http://axecorg.blogspot.de/2016/05/petitio-principii-economists-biggest.html
#2 What Keynes really meant but could not really prove
https://axecorg.blogspot.de/2016/05/what-keynes-really-meant-but-could-not.html
#3 Austrian idiocy ― the case of Hayek
http://axecorg.blogspot.de/2017/12/austrian-idiocy-case-of-hayek.html
#4 Milton Friedman, fake scientist
http://axecorg.blogspot.de/2017/08/milton-friedman-fake-scientist.html
Theoretical physics is not really a true science, it is mathematics which is the arts. It is awesome and I would love to be a theoretical physicist. Many outstanding theoretical physics theories end up being overturned by experimental physics. What field research have you done to validate your theories?
DeleteBig new idea? What's wrong with Keynes's "print money and spend it and/or cut taxes" idea?
ReplyDeleteWhat's wrong is that no one in conventional economics is espousing it, and the conventional economists have a lock on policy advise.
MMT is a new big idea along those lines, but it has no traction in the establishment.
The big problem is that the dominant narrative is dominated by the dominant ideology of the elites factions. The elite factions are not ideological homogeneous but they agree on where the boundaries should be drawn to exclude rivals.
JFTR
ReplyDeleteSkidelsky concludes, “Macroeconomics still needs to come up with a big new idea.”
• Public Deficit = Private Profit, is Keynesianism/MMT a social hoax?
Keynesianism as ultimate profit machine
http://axecorg.blogspot.de/2015/07/keynesianism-as-ultimate-profit-machine.html
Who or what exactly did Keynes save?
https://axecorg.blogspot.de/2016/11/who-or-what-exactly-did-keynes-save.html
MMT: Money-making for the one-percenters
https://axecorg.blogspot.de/2017/09/mmt-money-making-for-one-percenters.html
• Paradigm shift is the big new idea
The new macroeconomic paradigm
http://axecorg.blogspot.de/2017/09/the-new-macroeconomic-paradigm.html
Egmont Kakarot-Handtke
#Economics #FailedScience #FakeScience #ScientificIncompetence #BogusScience #PoliticalEconomics #Keynes #Keynesianism #PostKeynesianism #MMT #ProfitTheory #PrivateSectorSurplus #ParadigmShift #MacroFoundations #Axiomatization
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DeleteI can see how Egmont might be right about government deficits ended up as money in the elites pockets. I try to imagine a better society and it has people being much better off. But what will they do with the money?
DeleteWe all love houses, I love houses, and as soon as people get more money they buy a bigger house.
So, as soon as people get more money many will buy a bigger house and prices will shoot up. Even if there was plenty of houses this would still happen because people like bigger houses. Then everyone gets maxed out on their mortgages again and end up dead poor, at least with available money.
Now not everyone will buy a bigger house, they will stay put and have a higher standard of living, but those that do move will push house prices up and eventually everyone gets stuck with bigger mortgages. The winners are the bankers, the One Percent. The extra money that people got went straight to the banker's pockets. But only the first few who went up the housing ladder end up with a better house. All the house prices go up and the cheaper ones too, then society on the whole hasn't benefited from the extra money.
I emailed Michael Hudson about this problem and if you give him an interesting question he usually replies. He said the tax system is all wrong and the main tax should be put on land and property, and the house duty stamp duty should be increased too. This would take the heat out of the housing market, he said.
So there are solutions and we can create a better society.
Theoretical physics is not really a true science, it is mathematics which is the arts. It is awesome and I would love to be a theoretical physicist. Many outstanding theoretical physics theories end up being overturned by experimental physics. What field research have you done to validate your theories?
ReplyDeleteOn Feyerabend's anarchistic approach to philosophy of science, this is nonsense.
There are no absolute criteria determining the meaning of words and there is no rule-setter.
Meaning and rules are set by context, custom, and agreement and it is a hallmark of the liberal tradition, which has been wildly successful, to keep the boundaries flexible to accommodate innovation and discovery.
Mat is a good example. There is no universal agreement over where to place math as a category among more abstract categories.
Math doesn't fit the definition of science, since it is not subject to empirical falsification. Falsification in logic and math are formal, based on contradiction, that is, logical impossibility.
But Math doesn't fit neatly into the not-science categories of arts and humanities either.
Math is a kind of language. It functions as the language of science and partly business, with the other language of business being accounting, which is a kind of math.
Theoretical physics is heavily dependent not only on math but also innovation in math. Discoveries have to expressed, and if a suitable notation is lacking, one must be found.
One solution is "fuzzy logic," where the boundary conditions are, well, fuzzy. Ordinary language typically operates this way and logicians are working on extending that to logic also.
So logic and math are not sciences but types of "language," specifically a form of syntactics, that itself is constituted of sets of sets of forms.
Saying that theoretical physics is not a science when only highly specialized scientists are qualified to pursue it is nonsense. It is based on application of strict definitions (stipulations) and arbitrary rules that are also stipulated. On what authority?
This comment has been removed by the author.
DeleteI was just trying to keep it simple. I've always considered theoretical physics to be a science. But I've been watching some physics videos recently and this leading theoretical physicist has a theory of how the universe came from nothing. He then went in to say that many theoretical physics theories get disproven by experimental physicists and his theory might get disproven too. So if these mathematical theories often bear no resemblance to reality, then they are science, but also conjecture, and this makes it similar to abstract mathematics, and for some reason the academics considered maths to be an art.
DeleteBut the real point I was making is that an economist may have some brilliant theories but do they correspond with reality.
I can see how Egmont might be right about government deficits ended up as money in the elites pockets.
ReplyDeleteMMT says essentially the same thing. Government deficits accommodate non-government saving, most of which is done by those that are well-off if not rich.
The way to get around this to some degree within a modern "capitalistic" system is through making the deficit large enough to accommodate full employment and welfare programs from the government side.
Yes, the well-off will also benefit from government largess but that is the cost of making a capitalistic society functional socially and politically as well as economically.
Does this mean that there can be justification to tax the rich at much higher rates to get the money back? It sounds fair.
DeleteI emailed Michael Hudson about this problem and if you give him an interesting question he usually replies. He said the tax system is all wrong and the main tax should be put on land and property, and the house duty stamp duty should be increased too. This would take the heat out of the housing market, he said.
ReplyDeleteWhat he is saying is that to make contemporary capitalism (financial and managerial) work it is necessary to address economic rents and rent-seeing.
There are two ways to do this. The first is preemptively, which is best, e..g., anti-trust legislation, and the second is claw-backs.
To the degree that rent extraction is not address, then redistribution is required to maintain social and political functionality. But it is better to address distributional equity preemptively.
"So, as soon as people get more money many will buy a bigger house and prices will shoot up."
ReplyDeleteThat's a fallacy of composition, which is controlled simply by enforcing a lending and access limit. When you do that then you get a controlled volume of money chasing a controlled volume of bricks. And the relative price will stabilise - generally around five time earnings.
The distortions to the equilibrium are caused by lending multiples and the power to exclude, i.e. hoarding.
If you allow ownership, but remove the power to exclude (i.e. the state can take an empty building and give it to somebody to live in cheaply).
They used to say that three and a half times your salery should be the max which will leave some for quality of life. Five times sounds a lot.
DeleteBut the real point I was making is that an economist may have some brilliant theories but do they correspond with reality.
ReplyDeleteThis is the issue with neoclassically based economics that assumes rationality and equilibrium as a framework. Formally, it is quite ingenious. But the interface of the theory with data is somewhat tangential and it's been a failure predictively at key junctures that the theory dismisses as the result of "unforeseeable" shocks.
But the bottomline issue is that many neoclassically based economists argue that the theory doesn't correspond well to reality because of bad policy influencing reality and that policy needs to be implemented to bring reality more into line with neoclassical theory. That is the basis for neoliberalism as a political theory based on economic theory.
Theoretical physicists say no such things about bringing reality into line with the theory.
There is nothing wrong with theorizing. That is how discovery and innovation takes place. The problems arise from privileging knowledge and method based on ideology and bias.
It was pretty daft of me to suggest that theoretical physics is more of an art than a science. It is both an art and a science, but Stephen Hawking is a scientist, not an artist. All theoretical physics is science. The experiments produce the data and the maths validates it. Then the maths might signal other possibilities and so the experimental physicists set up their experiments to see if the maths is right. It's fantastic science. I might post more videos on physics here sometime.
DeleteThe mathematics is beautiful, so it's like art.
DeleteDoes this mean that there can be justification to tax the rich at much higher rates to get the money back? It sounds fair.
ReplyDeleteUnder functional finance, taxation has two uses, control inflation and to discourage behavior that is taxed.
Even if every dollar of stimulus did end up in the pockets of the rich, that would not stop stimulus working. To illustrate, assume 10% of all government spending ends up as profit which is hoarded by the rich. That means 90% initially goes to the “non-rich”. In the next “round” so to speak, 10% is again hoarded by the rich.
ReplyDeleteIt’s going to take several “rounds” before anywhere near 100% of a particular tranche of stimulus is in the pockets of the rich, during which time plenty of employment has been created for everyone else.
The above “hoard” ends up as base money and national debt, the latter being much larger than the former. But national debt relative to GDP is lower than immediately after WWII. Thus it does not appear that there is any sort of dangerously large and ever expanding “hoard”.
Ralph Musgrave
ReplyDeleteYou say “Even if every dollar of stimulus did end up in the pockets of the rich, that would not stop stimulus working. To illustrate, assume 10% of all government spending ends up as profit which is hoarded by the rich. That means 90% initially goes to the “non-rich”. In the next ‘round’ so to speak, 10% is again hoarded by the rich.”
This is a nice try to play down the fact that Public Deficit = Private Profit and that, by consequence, MMT is essentially a social bluff package for the agenda of the one-percenters.
Your error/mistake/blunder consists in applying the old Keynesian multiplier which, unfortunately, is false since 80+ years.#1, #2, #3
To cut the meticulous formal derivation short, the most elementary version of the axiomatically correct Employment Law for the economy as a whole is given on Wikimedia:
https://commons.wikimedia.org/wiki/File:AXEC62.png
From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction of the household sector.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF≡W/PR leads to higher employment.
The complete employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.
The correct employment multiplier consists of TWO elements: the expenditure ratio and the factor cost ratio. Now, the following may happen simultaneously: the expenditure ratio goes up and the factor cost ratio goes down such that the combined multiplier effect is zero. That means, deficit spending has NO effect on employment but only on profit. All that is necessary for annihilating the employment effect of deficit spending is a one-off price hike.
So, deficit spending ALWAYS benefits the one-percenters because Public Deficit = Private Profit is absolutely certain while the employment effect is very uncertain and may well be zero.
Egmont Kakarot-Handtke
#1 Full employment through the price mechanism
https://axecorg.blogspot.de/2017/11/full-employment-through-price-mechanism.html
#2 Debunking MMT’s hallucinatory income-expenditure model
https://axecorg.blogspot.de/2017/08/debunking-mmts-hallucinatory-income.html
#3 For a comprehensive overview see cross-references Employment
http://axecorg.blogspot.de/2015/08/employmentphillips-curve-cross.html
Tom Hickey
ReplyDeleteYou say “I can see how Egmont might be right about government deficits ended up as money in the elites pockets. MMT says essentially the same thing. Government deficits accommodate non-government saving, most of which is done by those that are well-off if not rich.”
The smarter part of humanity, in turn, can see now that you, Kaivey, Musgrave, Kelton, Mosler, Mitchell, Tcherneva, Wray, Fullwiler, Forstater, Kaboub, Pettifor, Keen, Tymoigne, Willingham, Grumbine and all the blogging and tweeting MMT rest have NO idea how the economy works.
The axiomatically correct balances equation reads Qm=Yd+I−Sm+(G−T)+(X−M); Legend: Qm total monetary profit, Yd distributed profit, I investment expenditures, Sm monetary saving, G government expenditures, T taxes, X exports, M imports. This translates into Public Deficit = Private Profit given the balances of the other sectors.#1
The government deficit does NOT “acommodate” household sector saving Sm because the household sector as a whole may also run a deficit = dissaving = Sm negative. In this case holds macroeconomic profit = public sector deficit PLUS household sector deficit. And exactly this was the case in the USA in the last decades.
The MMT headline government deficit = private sector surplus is crappy soapbox economics or worse.#2
Egmont Kakarot-Handtke
#1 The Law of Interdependent Budgets
https://axecorg.blogspot.de/2017/11/the-law-of-interdependent-budgets.html
#2 Are MMTers stupid or corrupt or both?
https://axecorg.blogspot.de/2018/01/are-mmters-stupid-or-corrupt-or-both.html
The government deficit does NOT “acommodate” household sector saving Sm because the household sector as a whole may also run a deficit = dissaving = Sm negative. In this case holds macroeconomic profit = public sector deficit PLUS household sector deficit. And exactly this was the case in the USA in the last decades.
ReplyDeleteAccording to MMT, the HH sector balance can become unsustainable if incomes do not keep pace with debt.
The solution is for government debt to accommodate saving desire to maintain a sustainable balance at full employment.
According to conventional thinking government debt is problem because it is unsustainable in the long run, which false for a currency sovereign.
It is private debt that can become unsustainable and government can prevent that.
Yes, this increases firm profits, but that is capitalism.
According to MMT, the way to moderate capitalism is through increasing the welfare state, increasing labor bargaining power, and adding a JG. This would preemptively distribute wages so that rising incomes could sustainable consumption desire at full employment.
Tom Hickey
ReplyDeleteYou say “According to MMT, the way to moderate capitalism is through increasing the welfare state, increasing labor bargaining power, and adding a JG. This would preemptively distribute wages so that rising incomes could sustainable consumption desire at full employment.”
In the political realm, everybody can climb on a soapbox and tell the audience how the world can be made a better place and how the economy can be fixed ― except an economist.
The mission of the economist ― understood as scientist ― is to figure out how the economy works and NOT to push a political agenda. The monstrous failure of both orthodox and heterodox economists is that they have NOT developed anything resembling the true theory in the last 200 years but crawl in endless loops at the proto-scientific level. MMT is just a case in point.
Because they do not have the true (= materially and formally consistent) theory economists’ contribution to policy is worthless or even counterproductive. It is just like the storytellers of old who never contributed anything to aviation but only entertained their audience with stories about flying carpets.
In the political realm, MMT is the deficit-does-not-matter storyteller, but in the scientific realm MMT does not even get the elementary mathematics of macroeconomic accounting right.#1
MMT’s claim to rectify capitalism is laughable. MMT is a flying carpet story just like Walrasianism, Keynesianism, Marxianism, and Austrianism.#2
Egmont Kakarot-Handtke
#1 Down with idiocy!
http://axecorg.blogspot.de/2017/12/down-with-idiocy.html
#2 Rethinking macro
https://axecorg.blogspot.de/2018/01/rethinking-macro.html
It’s easy to imagine in 500~1000 years time current economic ‘reality’ being akin to today’s view of beads and shells. There goeth ‘economic science’ E.
ReplyDeleteImagine a world in which human beings were actually kind to one another; respected others as themselves. Above all, loved Life! The focus was evolution of the human consciousness and the consciousness in all living forms down to the atom, in cooperation with Life. Born of direct insight and mental acuity. I see that world breaking the horizon even over the smoke and darkness. No one in their wildest imagination, dreaming what reality can feel, and look like. Just as a caveman could never have imagined the one percent, the surrealism of PER (politics, economics, religion) and the built environment, electricity and light, communication and transport networks covering the skin of the planet ‘doing business’..
A human being is first of all experience.