Timothy Taylor — US Not the Source of China's Growth, China Not the Source of America's Problems

A sizeable portion of the US discussions about economic policy toward China seem to me based on two conceptual mistakes. One mistake is that China's rapid economic growth fundamentally depends on trade with the US. The other mistake is that the bulk of US economic problems depend in some fundamental way on trade with China....

It's worth spelling out the underlying logic here a bit. The formula for economic growth is to invest in human capital, physical capital, and technology, in an economic environment that provides incentives for hard work, efficiency, and innovation. China has made dramatic changes in all of these areas, and they are the main drivers behind China's extraordinary economic growth in the last four decades, and its expectation of above-global-average growth heading into the future.... 

Conversely, the US economy has not done a great job of investing in the fundamentals of economic growth....

These US economic issues and others are in any substantial part not the result of trade with China, or the result of international trade at all. Lasting solutions will not be found in trade squabbles, either…

The great leveling is in full swing as the emerging world catches up, often with leapfrogging. Since capital investment is flowing to the emerging world where returns are greatest, the developed economies are treading water or stagnating as financialization takes over.

Conversable Economist
US Not the Source of China's Growth, China Not the Source of America's Problems
Timothy Taylor | Managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul, Minnesota

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

Lars P. Syll — Polanyi and Keynes on the idea of ‘self-adjusting’ markets

Paul Krugman still wrong. The mainstream model of an economy based on general equilibrium, rational utility maximization, and money neutrality is one of a possible world that doesn't exist and can't exist in a monetary production economy.

There is nothing wrong with constructing models of possible worlds, and, in fact, all models exist in possibility space, not real space. But it is wrong to claim or imply that such models of possible worlds apply to the real world when there is evidence that they do not. This is what science is about, and it is the difference between doing science and doing mathematics.

Conventional economic theory is largely mathematical with an impeccable logic pedigree from axioms, but it not scientific in that it lacks an empirical warrant. The models are attractive but vacant.

Lars P. Syll’s Blog
Polanyi and Keynes on the idea of ‘self-adjusting’ markets
Lars P. Syll | Professor, Malmo University

Brian Romanchuk — Representative Agent Macro And Recessions

J.W. Mason kicked off the latest skirmish in the never-ending macro wars with his Jacobin article "A Demystifying Decade for Economics." (Note: at the time of writing, the article was taken down until its publication in Jacobin.) This prompted a Twitter debate about representative agent macro, which eventually led to this Beatrice Cherrier article on heterogeneous agent models. In my view, the debate about representative agent models is a red herring. Mainstream macroeconomists main skill is in framing debates in a fashion that is congenial to the mainstream; however, the preferred framing leads to dead ends. My current research focus is on recessions, and although I have not gone too far in refreshing my survey of mainstream macro, the value of mainstream macro theory in this debate is limited....

Bond Economics
Representative Agent Macro And Recessions
Brian Romanchuk

J. W. Mason — In Jacobin: A Demystifying Decade for Economics

(The new issue of Jacobin has a piece by me on the state of economics ten years after the crisis. Since it’s not online yet, I’m posting the full text here, plus a few paragraphs that did not make it in. Even though they gave me plenty of space, and Seth Ackerman’s edits were as always superb, they still cut some material that, as king of the infinite space of this blog, I would rather include.)

J. W. Mason's Blog
In Jacobin: A Demystifying Decade for Economics
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

Jason Smith — What do equations mean?

Jason Smith comments on J. W. Mason and Arun Jayadev on MMT and conventional economics from the point of view of scientific modeling in macro.

Information Transfer Economics
What do equations mean?
Jason Smith

Arjun Jayadev and J. W. Mason — Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them?

Abstract

An increasingly visible school of heterodox macroeconomics, Modern Monetary Theory (MMT), makes the case for functional finance – the view that governments should set their fiscal position at whatever level is consistent with price stability and full employment, regardless of current debt or deficits. Functional finance is widely understood, by both supporters and opponents, as a departure from orthodox macroeconomics. We argue that this perception is mistaken: While MMT’s policy proposals are unorthodox, the analysis underlying them is entirely orthodox. A central bank able to control domestic interest rates is a sufficient condition to allow a government to freely pursue countercyclical fiscal policy with no danger of a runaway increase in the debt ratio. The difference between MMT and orthodox policy can be thought of as a different assignment of the two instruments of fiscal position and interest rate to the two targets of price stability and debt stability. As such, the debate between them hinges not on any fundamental difference of analysis, but rather on different practical judgements – in particular what kinds of errors are most likely from policymakers.

Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them?

Arjun Jayadev and J. W. Mason

August 22, 2018

John Jay College - CUNY 

Department of Economics Working Paper 2018-8

Also available at INET

Asad Zaman — Methodology of Modern Economics

My paper is a survey of the huge amount of solid empirical evidence against the utility maximization hypothesis that is at the core of all microeconomics currently being taught today in Economics textbooks at universities all over the world. It is obviously important, because if what it says is true, the entire field of microeconomics needs to be re-constructed from scratch. Nonetheless, it was summarily rejected by a large number of top journals, before being eventually published by Jack Reardon as: ” The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,” in International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414. Speaking metaphorically, my paper documents the solid evidence that the earth is a round sphere in world where educational institutions teach the widely held belief that the earth is flat. Readers of RWER blog will recall that when challenged on the failure of macroeconomics after the Global Financial Crisis, economists retreated to the position that while macro theory may be in a bad shape, at least Microeconomics is solidly grounded. My paper blows this claim out of the water. As a result, nothing is left of Micro and Micro, and of economics as whole. This supports my earlier claim that a Radical Paradigm Shift is required to make progress — patching up existing theories cannot work...

The central question remains of what is to be done. A complex response which requires coordination on multiple fronts is required. The first step has to be the development of a coherent alternative. I have developed a two semester micro coursewhich starts with the Anti-Textbook of Hill & Myatt, and follows up by using two main tools OPPOSED to maximization and equilbrium. Maximization is replaced by behavioral heuristics, which allow operation in environments with genuine uncertainty. Maximization is actually IMPOSSIBLE in uncertain environments. If I have to choose between actions a and b but the outcome to me depends on unknown state of natures and unknown acts of other agents then maximization is not possible. I cannot calculate which of the two actions will yield greater utility because the outcome depends on many thing I do not know, and cannot learn. SIMILARLY, if we equip all agents with heuristic behavior and try to compute what will happen, this can only be done within an Agent Based Model using computer simulations — which will generally lead to disequilibrium outcomes. Using these two tools to replace the central micro tools, one can go quite far in replacing standard micro with sensible alternatives....

WEA Pedagogy Blog
Methodology of Modern Economics

Asad Zaman | Vice Chancellor, Pakistan Institute of Development Economics and former Director General, International Institute of Islamic Economics, International Islamic University Islamabad

Doug Greene — More Than Universal Healthcare: The Meaning of Socialism

Young people are turning to socialism, and Democratic Party politicians are adopting the term. But what is socialism?

My own summary answer is that socialism is the socio-economic system that favors people and the environment as a whole over other factors and and political theory that prioritizes human rights. 

This is in contrast to capitalism, which favors capital over other factors and accords highest priority to property rights.

Doug Greene presents his view of a Marxist-Leninist approach to socialism and capitalism, which seems to me to be past its expiration date. At the very least, it needs repackaging. But without altering the content, the repackaging would still leave the contents stale.

Marx, Engels, Lenin and others of their day had some ideas that still apply but they need to be adapted and integrated with new knowledge and emergent conditions.

But it is useful to review the fundamental principles.

However, where I think that most explorations of these ideas goes off track is due to focusing on objectives and means rather than the kernel of the design problem, which is necessary to elaborate a satisfactory design solutions. 

Basically, the priorities being used now are wrong and lead to social dysfunction, political unrest, and economic inequality that fuels the oligarchic power that is at the bottom of the class struggle between ownership and work.

These priorities are now socially and culturally embedded and institutionally established. Changing these priorities requires a system overhaul. In the West this means the transformation of bourgeois liberalism that resulted from the transition from feudalism to capitalism into a more integrated liberalism that integrates people, the environment and technology. 

Under feudalism, an oligarchy owned the means of production in the form of land during the agricultural age. Under capitalism, a similar oligarchy that owns industrial and financial capital in addition to land controls the means of production and reaps the greatest reward based on ownership rather than work. This also enable the negative externality of environmental degradation to be socialized while the gains are capitalized.

Under socialism, there would be no oligarchy controlling the means of production, workers and the environment would be favored by rights established in law, and there would be no incentive to socialize environmental degradation.

Left Voice
More Than Universal Healthcare: The Meaning of Socialism
Doug Greene

Equilibrium in Economic Theory

Everything you may have wanted to know about equilibrium in economics.

Post Keynesianism generally dismisses the neoclassical assumption of equilibrium in economic theory, but these posts serve to clarify the concept and the debate around it. David Glasner explores the history, while Jason Smith comments on the concept for the POV of physics and explains it in terms of information equilibrium.

Uneasy Money
On Equilibrium in Economic Theory
David Glasner | Economist at the Federal Trade Commission

Information Transfer Economics
An agnostic equilibrium
Jason Smith

See also

The Undercover Historian
What is the cost of ‘tractable’ economic models?
Beatrice

Lars P. Syll — Top 20 heterodox economics books

Good list. Anyone have suggestions to improve upon it, or a different list?

I would include Abba Lerner and, of course, at least one MMT book.

I would change the Galbraith entry to The Good Society.

I would drop Paul Sweezy and replace his entry with Fred Moseley's Money and Totality
A Macro-Monetary Interpretation of Marx’s Logic in Capital and the End of the ‘Transformation Problem’.

Lars P. Syll’s Blog
Top 20 heterodox economics booksLars 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

Brad DeLong — John Maynard Keynes: Essays In Biography

Brad rates this as a should-read. For anyone interested in Keynesianism, Post Keynesianism and MMT, the history of economics, or economic theory, it is a must-read.

Conventional economists have apparently concluded that they don't need to read it if they even thought about, which most probably haven't, being under the spell of the "normal paradigm" in spite of its poor results empirically.

Washington Center for Equitable Growth
John Maynard Keynes: Essays In Biography

Brad DeLong

Here is a link to download Keynes's Essays in Biography (1933) as a PDF.

Another must-read from Brad.

 I think the very smart Jeffrey Friedman gets this… not quite right. The case for the empirical benefits of capitalism is very strong—but only if one is willing to remove libertarian blinders and focus on eliminating the market failures (in distributions, in aggregate demand, in externalities, in information, etc.) that keep the function the market maximizes from being a good proxy for societal well-being. And once one has the market properly supported and disciplined, the philosophical discussion can commence: Jeffrey Friedman: What’s Wrong with Libertarianism: “Libertarian arguments about the empirical benefits of capitalism are, as yet, inadequate…

From the Marxian and Institutionalist points of view,  economic liberalism, of which contemporary Libertarianism is a variant, provides the philosophical framework for bourgeois capitalism. Its fundamental weakness is prioritizing economic liberalism over social and political liberalism, which gives rise to many paradoxes of liberalism that result in illiberality such as have been pointed out many time here at MNE.

Brad also provides another keeper Keynes quote.

Here is an excerpt:

But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice.

Individualism as the pursuit of self-interest does not lead to the greatest good for the greatest number the spontaneous emergence of natural order, unless "natural order" is conceived as the outcome of social Darwinism. This result is so grossly unfair that overtime it becomes unstable politically.

Keynes is saying here that individualism only works as a guiding principle of liberalism if collective consciousness is sufficiently high, which is manifested in a society's culture and institutions. The fact that civil and criminal law are needed goes to show that collective consciousness alone is not that high presently. In addition, the level of social and political dysfunctionality in liberal countries shows that the culture and institutions of the society are insufficient to bridle narrow self-interest to the degree necessary to generate a harmonious society and balanced social, political and economic conditions.

This is a design problem.

Jeffrey Friedman: What’s Wrong with Libertarianism

More from BDL:

Three Books for 2017: Economics for the Common Good, Janesville, Economism

Weekend Reading: Richard Thaler: Behavioral Economics

Chris Dillow — How to defend capitalism

Coaching the opposition. That's only relevant when the opposition is hopeless lost in the weeds, is in power, and is running society into the ground.

The problem is that there are two major forms of capitalism, one based on classical liberalism and the other on neoclassical liberalism.

The first is laissez-faire and the second is neoliberalism.

These are greatly different and conflating them leads to confusion.

Perhaps most significantly, as Michael Hudson constantly reiterates, classical liberalism in economics  was about reducing and eliminating economic rent, while neoliberalism based on neoclassical economics is based on rent extraction.

Classical liberalism was about reducing the role of government in the economy so that economic rent would be competed away in efficiently operating free markets, so that profit would be based on productive contribution rather than market asymmetries.

Neoliberalism is based on using institutional arrangements to favor capital "because growth," the assumption being that growth is the higher priority and growth is the outcome of capital formation, so that capital must be favored as a factor over other factors, namely,  labor (people) and land (the environment). So the formula becomes "capitalize gains and socialize losses." And the means is increasing asymmetries institutionally through capture.

People are beginning to get this now, at least inchoately, owing to the poor results they are experiencing, and voters tend to vote their pocketbooks.

The challenge is to debunk the myths based on conflating classical liberalism with neoliberalism, along with educating the public about how economies actually operate in the real world.

These challenges are getting easier to meet meet in that an increasingly large number of people are realizing that they are holding the short end of the stick, and many of them are young people that will be around for a while and voting. It is also leading in a resurrence of interest in Marx among them, since it is increasingly obvious that these issue reduce to class struggle.

There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning. — Warren Buffett, as quoted in "In Class Warfare, Guess Which Class Is Winning" by Ben Stein, in The New York Times (26 November 2006) [Wikiquote]

Dillow's post is worth reading in full. It's import is not limited to UK politics and the UK economy. As usual he provides useful links regarding the points he makes.

This also shows how bound up economics is with politics.

Stumbling and Mumbling
How to defend capitalism
Chris Dillow | Investors Chronicle

Steve Roth — Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

It’s the debt, stupid = doing economics without balance sheets and awareness of finance.

It’s as if Irving Fisher and Hyman Minsky had never written.

Conventional economists seem to do their thinking without tethering it to the real world though finance as a source of funds and accounting as the record of what actually happens in market exchange. If economists are looking for microfoundations, this is where it is, rather than in "preferences," "expectations" and "confidence."

Asymptosis
Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

Steve Roth

Peter Cooper — Short & Simple 7 – A Fundamental National Accounting Identity

The reason real output (or real GDP) is measured in monetary terms is that there is no good way to add up physical quantities of different goods and services to arrive at a single number. For example, imagine an economy that produces just three goods with the following physical output:

Physical Output = 50 computers + 75 motor vehicles + 40,000 apples

We cannot add up these quantities to arrive at a single measure of physical output. The goods have different units of measurement. They are incommensurable.
But if we know prices, we can express the output of each good in monetary terms. All output will then be measured in a common monetary unit and can be added together.

Obvious maybe, but what are the implications?

heteconomist

Short & Simple 7 – A Fundamental National Accounting Identity

Peter Cooper

Brian Romanchuk — Book Review: The Reformation In Economics

Philip Pilkington published "The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory" in 2016. It is an ambitious book, outlining the structural flaws of mainstream economic theory. He discusses the potential replacement theory, but this reconstruction is somewhat overshadowed by the deconstruction.

Bond Economics
Book Review: The Reformation In Economics
Brian Romanchuk

See also

Occasional Links & Commentary
Economics as religion?
David F. Ruccio | Professor of Economics, University of Notre Dame

Lars P. Syll’s Blog
Economics as a religion
Lars P. Syll | Professor, Malmo University

Barkley Rosser — Comments on Profit and Capital

Summary of the meanings and uses of the terms "capital" and "profit." Barkley Rosser covers a lot of background in a few short paragraphs.

From the logical perspective, the problematic is that "capital" and "profit" are ordinary language terms that are also technically defined differently in various economic and financial accounts. The quest for the "real" meaning as the "essence" denoted by "capital" and "profit" is therefore doomed to failure.  There is no there there.

This is a problem generally in economics and social science. It is very difficult to establish key terms technically in a way that compels general agreement. Therefore, a plethora of competing theories, none of which are able to rule the day since none qualifies as a best explanation in terms of the commonly accepted criteria of 1) consistency/comprehensiveness, 2) correspondence/evidence, 3) usefulness/practicality, and 5) economy/elegance. So it becomes take your pick, or come up with something that purports to be "better."

Angry Bear
Comments on Profit and Capital
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

Diane Coyle — Actually existing capitalism

I read the D.M.Winch book I picked up, Analytical Welfare Economics, on the train yesterday.

 “While perfect competition is sufficient for the achievement of a Pareto optimum, it is not necessary. It is quite possible theoretically to satisfy the necessary conditions in a controlled socialist state. ‘Perfect’ socialism is every bit as good as perfect competition when judged by this criterion. In te real world of course, socialism is far from perfect, but so is competition. Since bith systems are capable of achieving a Paretian optimum in their conceptually perfect forms, the proposition [the 1st welfare theorem] concerning perfect competition does not establish its superiority.”

The Enlightened Economist
Actually existing capitalism
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

Noah Smith — A Better Theory to Explain Financial Bubbles

But to gain wide acceptance, extrapolative expectations will have to overcome years of entrenched convention in the economics profession. The near-ban on using anything other than rational expectations is still very strong. In the hunt for truth, sociology is often the greatest barrier.

The problem is equating nominal market price with underlying value, "the fundamentals."

Nominal market price is determined at the margin and can therefore vary both rapidly and widely.

While it is a truism that "in the long run" prices must approximate fundamentals, in the short run a lot of people can be ruined, and there is no model available that is conclusive — because "animal spirits" (Keynes). Traders call it "momo," signifying "momentum," which measured as changes in velocity and acceleration of trends.

The assumptions involved in current models based on rational expectations are too restrictive to account for observed phenomena which include bubbles and busts. The scope of the models are too narrow and miss the "action."

Economics hate to admit that they don't have a model, so they stick with the "best explanation" — which doesn't work at crucial points.

This is a problem affecting regulation and policy since regulators are often economists‚ think Allan Greenspan and Ben Bernanke, and policy is heavily influenced by conventional economic theory and models. Worse, regulators that warn about uncertainty and overextension are sometimes let go as result of being honest.

Bloomberg View
A Better Theory to Explain Financial Bubbles

Noah Smith, Contributor