David Ricardo’s explanation of the case for free trade rests on some basic economic principles, but also has a big public policy blind spot — Miles Corak

There are more issues with David Ricardo's theory of trade than Miles Corak observes, but it highlights an important one. Worth a read.

To summarize, Ricardo built a toy model that is useful for thinking a simplified level but it is too simplistic to useful as a model for the actual practice of political economy.

Miles Corak points out that failure of trade specialists, not to mention economists that don't specialize in trade, can be traced to their being overly influenced by Ricardo's model without seeing the limitations imposed by its assumptions.

Note further than conventional economics is based on assuming scarcity, opportunity costs, and marginal reasoning," and, I would add, maximization and equilibrium, as the starting points. This severely limits the scope of economy theory and vitiates its use as it stands for political economy and policy formulation.

Economics for public policy
David Ricardo’s explanation of the case for free trade rests on some basic economic principles, but also has a big public policy blind spot
Miles Corak

The old guard trying to stay relevant and failing — Bill Mitchell

So just a brief comment on the latest fiasco from ‘Mr Spreadsheet’ Kenneth Rogoff as he stares into the abyss of irrelevance and is trying to hand on like grim death to any shred of credibility. He has none. If he ever did, the spreadsheet scandal finished it. But he never did anyway....

Bill Mitchell – billy blog
The old guard trying to stay relevant and failing
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Is There Really A Trade-Off Between Inflation And Unemployment? — Brian Romanchuk

Rather than attempt to explain what the mainly neoclassical economists are going on about, I want to step back and try to translate their debate into terms that would be understood by people who do not share the same assumptions. I am pretty sure that post-Keynesian economists have a lot to say about the topic as well, but once again, they tend to be discussing wonkish points that would elude an outsider.…

I have an engineering background, and engineering is largely the science of trade-offs. I have no strong objections to qualitative discussions, but I would argue that we need to at least know the sign of the exchange ratio between two variables in order to say that there is a trade-off between them.

Very simply, if we can have a policy that lowers both the unemployment rate and the inflation rate (or at least leaves inflation unchanged), we cannot pretend there is a meaningful "trade-off" between them.

And this is hardly theoretical: in the United States, we saw a near monotonic decrease in the unemployment rate after the Financial Crisis, yet the inflation rate has done absolutely nothing interesting....

Bond Economics
Is There Really A Trade-Off Between Inflation And Unemployment?
Brian Romanchuk

Lars P. Syll — Arrow-Debreu and the Bourbaki illusion of rigour

It's about mathematical economics and its limitations. Don't let the title scare you off. Not at all wonkish (no math), although it helps if have some background in the controversy.

Basically, it's Plato (formalism) versus Aristotle (empiricism). Most mathematicians today are Platonists, while most scientists are Aristotelians. But that is another story.

Lars P. Syll’s Blog
Arrow-Debreu and the Bourbaki illusion of rigour
Lars P. Syll | Professor, Malmo University

The Fall of the Economists' Empire — Robert Skidelsky

The problem is not so much with the modeling, actually. People are free to construct any models that please for whatever reason. The problem is with the conclusions that are drawn from the model when they exceed the limitations of the of the assumptions.

This is not a problem with modeling but with logic. Drawing conclusions that exceed the scope and scale of the premises in a context other than the model is flat out illogical, and any inferences drawn on this basis are unsound, that is, do not follow from the premises of the argument and the reasoning about them.

Models don't automatically transfer to the world that they purport to model. This is a fundamental of scientific method. Semantic interpretation is required, along with methodological rigor, and hypothesis testing is necessary.

Project Syndicate
The Fall of the Economists' Empire
Robert 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
ht Lars Syll

Eric Liu and Nick Hanauer — Complexity Economics Shows Us Why Laissez-Faire Economics Always Fails

Traditional economic theory is rooted in a 19th- and 20th-century understanding of science and mathematics. At the simplest level, traditional theory assumes economies are linear systems filled with rational actors who seek to optimize their situation. Outputs reflect a sum of inputs, the system is closed, and if big change comes it comes as an external shock. The system’s default state is equilibrium. The prevailing metaphor is a machine.

But this is not how economies are. It never has been. As anyone can see and feel today, economies behave in ways that are non-linear and irrational, and often violently so. These often-violent changes are not external shocks but emergent properties—the inevitable result—of the way economies behave....

Machine view [physical] : Wealth = individuals accumulating moneyGarden view [biological] : Wealth = society creating solutions

One of the simple and damning limitations of traditional economics is that it can’t really explain how wealth gets generated. It simply assumes wealth. And it treats money as the sole measure of wealth. Complexity economics, by contrast, says that wealth is solutions: knowledge applied to solve problems. Wealth is created when new ideas— inventing a wheel, say, or curing cancer—emerge from a competitive, evolutionary environment. In the same way, the greatness of a garden comes not just in the sheer volume but also in the diversity and usefulness of the plants it contains.

In other words, money accumulation by the rich is not the same as wealth creation by a society. If we are serious about creating wealth, our focus should not be on taking care of the rich so that their money trickles down; it should be on making sure everyone has a fair chance—in education, health, social capital, access to financial capital— to create new information and ideas. Innovation arises from a fertile environment that allows individual genius to bloom and that amplifies individual genius, through cooperation, to benefit society. Extreme concentration of wealth without modern precedent that has undermined equality of opportunity and thus limited our overall economic potential.…

Economist Kenneth E. Boulding joined biologist Ludwig von Bertalanffy in founding the discipline of general systems theory. It was the precursor of evolutionary economics also known as complexity economics. Kenneth Boulding's economics was close to MMT, and MMT economists have recognized him as a precursor. Boulding and his wife Elise were prominent Quaker peace activists. Boulding also worked in conflict studies and emphasized love as a foundation of well-functioning society and economy.

Evonomics
Complexity Economics Shows Us Why Laissez-Faire Economics Always Fails—Markets are a type of ecosystem that is complex, adaptive, and subject to the same evolutionary forces as nature
Eric Liu and Nick Hanauer

Brad DeLong — I have been a "China is unlikely to keep its model going for more than another five years—a decade tops" perma-bear since 1988.

I have been a "China is unlikely to keep its model going for more than another five years—a decade tops" perma-bear since 1988. All I understand is that I do not understand the Chinese economy. I wish I did understand it:

Arvind Subramanian and Josh Felman: R.I.P. Chinese Exceptionalism?: "Over the past few decades, China’s growth has appeared to violate certain fundamental laws of economics.... China’s debt keeps on rising.... For any normal country, the build-up of extensive surplus capacity would lead to sharp declines in investment and GDP growth. And that, in turn, would produce financial distress, followed by a crisis if the warning signs were ignored. But China has had a different experience...

Ha ha ha. Maybe they aren't laws?

Grasping Reality
I have been a "China is unlikely to keep its model going for more than another five years—a decade tops" perma-bear since 1988
Brad DeLong | Professor of Economics, UCAL Berkeley

George H. Blackford — Economists Should Stop Defending Milton Friedman’s Pseudo-science

Recommended reading on the history and philosophy of science, the philosophy of economics, and Milton Friedman's instrumentalism.

Evonomics
Economists Should Stop Defending Milton Friedman’s Pseudo-science

George H. Blackford | former Chair of the Department of Economics at the University of Michigan-Flint

Bill Mitchell — The divide between mainstream macro and MMT is irreconcilable – Part 3

This is Part 3 (and final) of my series responding to an iNET claim that Modern Monetary Theory (MMT) and mainstream macroeconomics were essentially at one in the way they understand the economy but differ on matters of which policy instrument (fiscal or monetary) to assign to counter stabilisation duties. In Part 1, I demonstrated how the core mainstream macroeconomic concepts bear no correspondence with the core MMT concepts, so it was surprising that someone would try to run an argument that the practical differences were really about policy assignment. In Part 2, we saw how the iNET authors created a stylised version of mainstream macroeconomics that ignored the fundamental building blocks (how they reach their conclusions about the real world), which means that they ignore important differences in the way MMT economists and mainstream macroeconomists interpret a given economic state. I will elaborate on that in this final part. Further, by reducing the body of work now known as MMT to be just ‘functional finance’, the iNET authors also, effectively, abandon any valid comparison between MMT and the mainstream, although they do not acknowledge that sleight of hand....

Bill Mitchell – billy blog
The divide between mainstream macro and MMT is irreconcilable – Part 3
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — The divide between mainstream macro and MMT is irreconcilable – Part 2

This is Part 2 of a three-part response to an iNET article (September 6, 2018) – Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them?. In Part 1, I considered what we might take to the core body of mainstream macroeconomics and used the best-selling textbook from Gregory Mankiw as the representation. The material in that textbook is presented to students around the world as the current state of mainstream economic theory. While professional papers and policy papers might express the concepts more technically (formally), it is hard to claim that Mankiw’s representation is not representative of what current mainstream macroeconomics is about. Part 1 showed that there is little correspondence between the core propositions represented by Modern Monetary Theory (MMT) and the mainstream. Yet, the iNET authors want to claim that the differences between the two approaches to macroeconomics only really come down to a difference in “assignment of policy instruments” – jargon for MMT prefers fiscal policy while the mainstream prefers monetary policy as the primary counter-stabilising tool. Given the lack of conceptual and theoretical correspondence demonstrated in Part 1, it would seem surprising that there is really only just this difference in policy preference dividing MMT from the mainstream. If that was the case, then what is all the fuss about? Clearly, I consider the iNET article presents a sleight of hand and that the differences are, in fact, significant. So, in Part 2, I am tracing how the iNET authors came to their conclusion and what I think is problematic about it. This discussion will spill over into Part 3....

Bill Mitchell – billy blog

The divide between mainstream macro and MMT is irreconcilable – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — The divide between mainstream macro and MMT is irreconcilable – Part 1

My office was subject to a random power failure for most of today because some greedy developer broke power lines in our area. So I am way behind and what was to be a two-part blog series will now have to extend into Wednesday (as a three-part series). That allows me more time today to catch up on other writing commitments. The three-part series will consider a recent intervention that was posted on the iNET site (September 6, 2018) – Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them?. 

At the outset, the iNET project has been very disappointing. Very little ‘new’ economic thinking comes from it – its offerings are virtually indistinguishable from the New Keynesian consensus that dominates my profession. The GFC revealed how impoverished that consensus is. It has also given space for Modern Monetary Theory (MMT) to establish itself as a credible alternative body of theory (and practice). The problem is that the iNET initiative has been captured by the mainstream. And so the Groupthink continues.

The article I refer to above is very disappointing. It claims to offer a synthesis between Modern Monetary Theory (MMT) and mainstream macroeconomics by way of highlighting “what really divides” the two schools of thought. You might be surprised to know that according to these authors there is not much difference – only that mainstream economists think that monetary policy should be privileged to look after full employment and price stability and MMT economists (apparently) think fiscal policy should have that role. The authors claim that for the on-looker these minor differences are opaque in terms of outcomes (if the policies are applied properly) and suggest that there is really no reason for any debate at all. Accordingly, the New Keynesian consensus is just fine and the mainstream economists knew all the MMT stuff all along.

It is an extraordinary exercise in sleight of hand engineered by constructing the comparison in terms of two ‘approaches’ that cull the main aspects of each. The real issue is why would they waste their time. Degenerative paradigms (or research programs in Imre Lakatos’ terminology) typically try to absorb challenging paradigms that, increasingly have more credibility and appeal, back into the mainstream through various dodges – ‘special case’, ‘we knew it all before’, ‘really nothing new’, etc.

This is Part 1 of my response. It won’t be an easy three-part series but stick with it and I hope it gives you a lot of insights into the abysmal state of the mainstream macroeconomics profession.

I wasn’t surprised by the discussion. Resistance from the dominant paradigm is part of the evolution of a new idea....

I figured that Bill would be all over this.

BTW, I introduced some paragraphing into the above for easier online reading.

Bill Mitchell – billy blog
The divide between mainstream macro and MMT is irreconcilable – Part 1
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — Jayadev/Mason Article On MMT

I just want to comment briefly on a few points that I saw some disagreements.

Bond Economics
Jayadev/Mason Article On MMT
Brian Romanchuk

Lars P. Syll — Mainstream economics – peddling fake knowledge

Say's Law ("money is a hot potato").

Lars P. Syll’s Blog
Mainstream economics — peddling fake knowledge
Lars P. Syll | Professor, Malmo University

Brian Romanchuk — The Curious Profit Accounting Of DSGE Models

One of the more puzzling aspects of neo-classical economic theory is the assertion that profits are zero in equilibrium under the conditions that are assumed for many models. One should re-interpret this statement as "excess profits" are zero, but there are still some awkward aspects to the treatment of profits in standard macro models. This article works through the theory of profits for an example dynamic stochastic general equilibrium (DSGE) model, and discusses the difficulties with the mathematical formulation.

The example is taken from Chapter 16 ("Optimal Taxation With Commitment") in the textbook Recursive Macroeconomic Theory, by Lars Ljungqvist and Thomas J. Sargent (I have the third edition). For brevity, the text will be abbreviated as [LS2012] herein. If the reader is mathematically trained and wishes to delve into DSGE models, this textbook is the best place to start. The mathematics is closer to the original optimal control theory that DSGE macro is based upon, whereas other treatments follow the mathematical standards of academic economics, the difficulties with which are discussed later in this article....

Bond Economics
The Curious Profit Accounting Of DSGE Models
 Brian Romanchuk

Se also

Lars P. Syll’s Blog
Ricardian equivalence — nothing but total horseshit!
Lars P. Syll | Professor, Malmo University

Michael Roberts — The macro: what’s the big idea?

What Skidelsky and other critics of mainstream economics (both in its micro and macro parts) fail to recognise is that no new big idea willappear because mainstream economics is a deliberate result of the need to avoid considering the reality of capitalism. Its theories are ideological justifications of capitalism( its supposed tendency to harmonious growth, equilibrium and equality). When reality does not bear out the mainstream, it is ignored. That’s because ‘mainstream’ means support for the existing dominant ideology.

‘Political economy’ started as an analysis of the nature of capitalism on an ‘objective’ basis by the great classical economists Adam Smith, David Ricardo, James Mill and others. But once capitalism became the dominant mode of production in the major economies and it became clear that capitalism was another form of the exploitation of labour (this time by capital), then economics quickly moved to deny that reality. Instead, mainstream economics became an apologia for capitalism, with general equilibrium replacing real competition; marginal utility replacing the labour theory of value and Say’s law replacing crises.

Even the so-called Keynesian revolution that came out of the experience of the Great Depression was hardly ever applied and was soon dumped when capitalism faced renewed crisis in the 1970s. The Keynesians are now either advocates of theory that is ‘good enough’ or critics with no ‘big new idea’.

The new "big idea" needs to be a framework for generating competing theories. Rationality based on microfoundations and general equilibrium assuming full employment isn't it. Now the question is what the next iteration is.

That would require admitting the nature of contemporary financial and managerial capitalism, for one thing, and, more specifically, the role of power in rent extraction, which the "mainstream" is so far unwilling to do.

This would involve integrating economics and finance, rather than treating them as separate and unrelated disciplines owing to the erroneous assumption of money neutrality. As a consequence, this would necessitate operational analysis of monetary regimes based on the difference between currency issuer and currency users.

I would envision the new big idea being a fusion of Post Keynesianism and Institutionalism as MMT has done, along with Marxian economics based on class power.

Michael Roberts Blog
The macro: what’s the big idea?
Michael Roberts

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

Lars P. Syll — Neoclassical economics is great — if it wasn’t for all the caveats!

The good (ideal) and the bad (real) of conventional economics.

The policy consequences are essentially two-fold.

The first is in not recognizing the disjunction between the ideal (formal) and the real (empirical), which violates the basic requirement of a scientific approach and makes the undertaking an excursion in philosophy rather than science, even though it is dressed put to look like science. The consequence is policy formulation that doesn't lead to the predicted results, since it is based on errors built into the assumptions.

The second is in recognizing the disconnect and trying to fit the real to the ideal through policy, which is a fool's errancy, since the assumptions as such that framework cannot generate models that are feasible to implement socially and politically because homo economicus is a fictional construct with little resemblance to the actual homo socialis. This leads to policy that is impractical and the results are the evidence of this.

Lars P. Syll’s Blog

Neoclassical economics is great — if it wasn’t for all the caveats!

Lars P. Syll | Professor, Malmo University

Peter Radford — 1937

Hayek, Coase and uncertainty.

In any case I find it fascinating that the two, Hayek and Coase, both in their own way, brought the impact of uncertainty to the fore in the same year.

It’s a shame that economics has never fully embraced, nor realized, the full richness of their ideas. Neither author was willing to step into the world that they clearly understood existed. Hayek was right about universal central planning: it is an impossibility. He was wrong to assert that this implied anything about the market place or prices. By his own argument we simply cannot know whether something is optimal. Uncertainty makes such a thing inscrutable too us. And Coase was equally correct when he saw the need for local central planning: it is the only way we can organize production adequately in the face of uncertainty. But his focus on transactions was a legacy of the classical emphasis on exchange. It ignored the need for active coordination. He missed the requirement for management. He should have talked about “management cost” not “transaction cost”. They’re different animals.

So: an interesting question is this: what happens to Coase’s “institutional structure of production” when information, and by association knowledge, is less clumpy in the economic landscape? Does something like the Internet, which is a vector for information and knowledge, obviate the need for such structure? Does it smooth that landscape out sufficiently for firms not to exist?

We need to think about that.

We need a new version of the discussion that ought to have taken place in 1937.

The Radford Free Press
1937
Peter Radford

Michael Roberts — The economics of Luther or Munzer?

History lesson. Trading one dogmatism for another?

Michael Roberts Blog
The economics of Luther or Munzer?
Michael Roberts

Jason Smith — On these 33 theses

The other day, Rethinking Economics and the New Weather Institute published "33 theses" and metaphorically nailed them to the doors of the London School of Economics. They're re-published here. I think the "Protestant Reformation" metaphor they're going for is definitely appropriate: they're aiming to replace "neoclassical economics" — the Roman Catholic dogma in this metaphor — with a a pluralistic set of different dogmas — the various dogmas of the Protestant denominations (Lutheran, Anabaptist, Calvinist, Presbyterian, etc). For example, Thesis 2 says:

2. The distribution of wealth and income are fundamental to economic reality and should be so in economic theory.

This may well be true, but a scientific approach does not assert this and instead collects empirical evidence that we find to be in favor of hypotheses about observables that are affected by the distribution of wealth. A dogmatic approach just assumes this. It is just as dogmatic as neoclassical economics assuming the market distribution is efficient.

In fact, several of the theses are dogmatic assertions of things that either have tenuous empirical evidence in their favor or are simply untested hypotheses. These theses are not things you dogmatically assert, but rather should show with evidence:

I wonder whether economics should be taught as a science, especially since conventional economists seem to think that economics is more like physics than the social sciences.

There are problems with assuming that, which I won't repeat. But to my mind, the most obvious difficulty is well-known among the public. Perhaps the most powerful argument for "science" is demonstrated not in words, or through experiment, but rather in the success of technology that everyone uses all the time to change the world.

Is there anything like this with respect to economics? Not only no, but also the opposite in many cases.

The study economics is not even a required in most business schools, because business schools have discovered that time is better spent in getting results. If it got results, business schools would be hiring the top economists. They are not.

The teaching of economics needs to be rethought in light not only of the failure of economists to deliver results but also in their making bad situations worse. The dismal handling of the aftermath of the global financial crisis is a case in point. In addition, conventional economists and policymakers have literally laid waste entire European countries and their economies.

A lot of people are likely thinking, if this science we want none of it. Monkeys throwing darts could probably do better.

And ironically, Western economists and policymakers were put to shame by the positive result that China showed using a command economy to address the issues promptly and avoid contraction. But Western economists explain this by "cheating."

Information Transfer Economics

On these 33 theses

Jason Smith