Noah Smith — How the New Classicals drank the Austrians' milkshake

I was recently reflecting on the similarity of the assumption of rationality is to Mises the principle of action in Human Action, which he holds to be synthetic a priori, based on self-evidence rather than empirics. That was too far a stretch even for Hayek, who agreed with Popper on its (assumed) exemption from being able to be disconfirmed.

Noah parses the similarities and differences of Mises and New Classicalism, finding that while the two are significantly different, New Classicalism is in the same boat with Mises on the side of rationalism versus empiricism.

Noahpinion
How the New Classicals drank the Austrians' milkshake
Noah Smith

Bill Mitchell — Unemployment and Inflation – Part 10

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text during 2013 (to be ready in draft form for second semester teaching). Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

This is the continuation of the Chapter on unemployment and inflation – the series so far is:
▪ Unemployment and inflation – Part 1
▪ Unemployment and inflation – Part 2
▪ Unemployment and inflation – Part 3
▪ Unemployment and inflation – Part 4
▪ Unemployment and inflation – Part 5
▪ Unemployment and Inflation – Part 6
▪ Unemployment and Inflation – Part 7
▪ Unemployment and Inflation – Part 8
▪ Unemployment and Inflation – Part 9 

I am now continuing the discussion of the Phillips Curve …

Chapter 12 – Unemployment and Inflation 

Advanced material – The Rational expectations hypothesis

Bill Mitchell – billy blog
Unemployment and Inflation – Part 10
Bill Mitchell

Washington's Blog — Mainstream Economics is a Cult

Washington's Blog coming into the fold. Profusely quotes Steve Keen, Michael Hudson, Bill Black, and Philip Pilkington

Read it at WashingtonsBlog
Mainstream Economics is a Cult
Posted by WashingtonsBlog

Interestingly, Washington's Blog is reposted on a regular basis at Zero Hedge and less regularly at Naked Capitalism, kind of opposite ends of the spectrum.

INET: Financial Instability Mini-Documentary

INET: Financial Instability Mini-Documentary (8 min.)

(h/t David Lawson at Steve Keen's DebtWatch)

In Economics, You Are What You Model

Jonathan Schlefer’s new book, “The Assumptions Economists Make,” is a welcome attempt to sort through some of this confusion. Mr. Schlefer, a research associate at Harvard Business School, is a political scientist by training, with an undergraduate degree in math and a long-standing engagement with economics. He is, in other words, well equipped to serve as a translator.

“This book is about what economists do in their secret lives as economists, when they aren’t dashing off op-eds to tell everybody else what to believe, pulling the wool over undergraduates’ eyes in textbooks, or otherwise engaging in public relations,” he writes. “What economists otherwise do is make simplified assumptions about our world, build imaginary economies based on those assumptions – otherwise known as models – and use them to draw practical lessons.”

Read it at The New York Times | Economix
In Economics, You Are What You Model

By Binyamin Appelbaum

(h/t Mark Thoma)

Good post on debunking mainstream macro. Stephanie Kelton and Bill Black have commented. I submitted a comment on the Godley model that predicted the crisis, but it is not up yet.

Greg Hannsgen — Another view on “policy pragmatism” in mainstream economics

Read it at Multiplier Effect | The Levy Economics Institute Blog
Another view on “policy pragmatism” in mainstream economics
by Greg Hannsgen

Ha-Joon Chang— "Economics, as it has been practised in the last three decades, has been positively harmful for most people."

"Over the last three decades, economists played an important role in creating the conditions of the 2008 crisis (and dozens of smaller financial crises that came before it since the early 1980s, such as the 1982 Third World debt crisis, the 1995 Mexican peso crisis, the 1997 Asian crisis and the 1998 Russian crisis) by providing theoretical justifications for financial deregulation and the unrestrained pursuit of short-term profits. More broadly, they advanced theories that justified the policies that have led to slower growth, higher inequality, heightened job insecurity and more frequently financial crises that have dogged the world in the last three decades... On top of that, they pushed for policies that weakened the prospects for long-term development in developing countries... In the rich countries, these economists encouraged people to overestimate the power of new technologies..., made people's lives more and more unstable..., made them ignore the loss of national control over the economy..., and rendered them complacent about de-industrialization... Moreover, they supplied arguments that insist that all these economic outcomes that many people find objectionable in this world - such as rising inequality..., sky-high executive salaries... or extreme poverty in poor countries... - are really inevitable, given (selfish and rational) human nature and the need to reward people according to their productive contributions.

In other words, economics has been worse than irrelevant. Economics, as it has been practised in the last three decades, has been positively harmful for most people." -- Ha-Joon Chang, 23 Things They Don't Tell You About Capitalism. Bloomsbury Press (2011). [emphasis added]

Quoted by Robert Vienneau at Thoughts on Economics

Economists Working To Increase The Pain And Misery Of Billions

Victoria Chick — Keynes v. Schumacher, and both v. the mainstream

Recently I had occasion to compare the respective visions of the economists JM Keynes and EF Schumacher for our economic future. They differed on how they thought the economy should develop: Keynes was prepared to carry on as usual until a good standard of living was reached, while Schumacher's response to what he saw as overcapitalised, dehumanising methods of production was to propose a radical transformation of the structure of our economic system. But they held similar values. Both viewed economics as a secondary feature of our lives. Both were concerned with the good life, how it should be conceived and how it could be lived.

For Keynes, solving the "economic problem" was merely a precondition for being able to concentrate on higher values. For Schumacher, work should be part of the good life itself. The cultivation of friendship, the enjoyment of the arts, participation in useful work, caring for others, the pursuit of self-fulfilment and enabling the fulfilment of others were examples of the things that really mattered, not the acquisition of goods beyond basic needs. Nor did they support the macroeconomic aim of continual growth in material production. 

Their thinking is in sharp contrast to today's mainstream economists. Economics has developed along a single line of thought, in which individuals, isolated from society, have "preferences" for a collection of goods and are motivated by self-interest to pursue the acquisition, at the lowest prices, of the most goods that their economic circumstances allow. Competing businesses, likewise, pursue maximum profit. Economic theory then "proves" that "markets" will establish prices that lead to the most "efficient" allocation of scarce resources. This will maximise growth for the economy as a whole.

Mainstream economics claims to be "value-free". Students are cautioned not to mix normative propositions with their "positive" analysis. But self-interest is itself a value. This fact is cleverly disguised by putting forward the theory of consumer choice as a uniquely rational response to economic information such as prices, interest rates, tax rates and the like. Any behaviour not conforming to this theory is deemed irrational; other motivations such as altruism, love, the greater good or aesthetic appreciation are not considered: they are not the province of economics.

Such a value system might be just about tolerable if economics were restricted to a narrow sphere of inquiry. But over the past few decades economics has colonised not only much academic inquiry in the social sciences, but also public debate as a whole. Most notably, it has colonised politics. By giving "scientific" support to programmes of deregulation and privatisation over the past 40 years, it has managed to transform our economic structures to conform to its ideal of free markets, in the belief that competition between rational consumers and producers would enforce "correct" prices and lead to an economic optimum ....

Read the rest at The Guardian (short)
Economics is lost – it must rediscover life's values
by Victoria Chick
(h/t Kevin Fathi via email)

I've long been a fan of E. F. Schumacher. His book A Guide For The Perplexed is a great intro to philosophy and Small Is Beautiful is great introduction to economics. Schmacher gets right to the nub of it.

In this five paragraph introduction, Victoria Chick sums up the issues separating orthodox and heterodox economics and philosophy of economics as they impact the issues of the day. The rest fleshes it out.

Paragraph six expresses my own conclusion on the matter.

This theory of how the economy would work if there were free competition has thus been put to the test. The result is what I believe will prove to be the worst economic disruption in the history of the developed world.

The presuppositions of New Classicalism are simply wildly off the mark and the consequences on human life are bound to be life-damaging in the extreme, as they already are for many. There will be many more.