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Showing posts from May, 2014

Chick & Tily on whatever happened to Keynes’s monetary theory?

New Cambridge Journal of Eeconomics paper by Victoria Chick and Geoff Tily.

From the abstract:
Some see a return to Keynes’s ideas in response to the crisis that began in 2007, but we argue that the resurrected ideas belong to that betrayal of Keynes’s thought known as ‘Keynesian’ economics. What happened is almost a reversal of the Whig history view of economics, in which past knowledge is embodied in later theory: Keynes has been made a pre-Keynesian. We trace this transformation mainly through his monetary theory, though we range more widely where necessary. We state what we consider to be his monetary theory, then identify and summarize the key contributions to its destruction. Then, in a speculative section, we suggest a variety of motivations for this subversion of his ideas. We end by assessing what has been lost, in particular his monetary policy, and suggest social and political pressures that may have been partly responsible. Read the rest here (subscription required).

Not even the IMF believes in Reinhart and Rogoff debt limits

From the intro to a new paper by two economists from the research department at the IMF:
"Influential papers such as Reinhart and Rogoff (2010) and Reinhart, Reinhart, and Rogoff (2012) argue that there is a threshold effect: when debt in advanced economies exceeds 90 percent of GDP there is an associated dramatic worsening of growth outcomes. Others dispute the notion that there is such a clear threshold and suggest that it is weak growth that causes high debt rather than high debt that causes weak growth (Panizza and Presbitero, 2012; Herndon, Ash, and Pollin, 2013). Using a new approach we found little evidence that there is any particular debt ratio above which growth falls sharply." Not that there was much of a debate at this point.

Steve Keen on why Krugman needs a new school of thought

Professor Steve Keen on Krugman's brush-off of heterodox economics. 
In his latest blog, Paul Krugman slings off at non-mainstream economists -- and the students at Manchester University campaigning for change to the economics curriculum -- for wanting fundamental change in economics. The status quo is fine, he reckons: move along folks, nothing to see here. Says Krugman in his latest post, Frustrations of the Heterodox: “Here’s the story they tell themselves: the failure of economists to predict the global economic crisis (and the poor policy response thereto), plus the surge in inequality, show the failure of conventional economic analysis. So it’s time to dethrone the whole thing -- basically, the whole edifice dating back to Samuelson’s 1948 textbook -- and give other schools of thought equal time. “Unfortunately for the heterodox (and arguably for the world), this gets the story of what actually happened almost completely wrong. “It is true that economists failed to predict …

Galbraith on capitalism, economic policy and inequality

Jamie Galbraith on how policy, rather than capitalism per se, is the real cause of inequality. In other words, a more equalitarian version of capitalism is possible (anybody remembers the Golden Age?). He says:
"Finance has driven income inequality, because credit booms accelerate economic growth and because bankers tend to be rich. In the US income inequalities sharpened in the information-technology boom in 2000, again in the housing-finance bubble in 2007, and yet again as the banks and the stock market recovered after 2010. Across the world, income inequality became more marked in the two decades from 1980. The trend started with the global debt crisis in Latin America and Africa, swept through central and eastern Europe, and moved on to Asia. Only countries that were outside the global financial system (notably China and India) were largely unaffected in the 1980s – though in the 1990s inequality rose with market reforms in both places. Worldwide, as a very broad generalis…

Shapiro and Moreno-Brid on Alice Amsden's legacy

Helen Shapiro and Juan Carlos Moreno-Brid have written a paper (available here) on "Alice Amsden's Impact on Latin America." From the abstract:
"On March 15 2012, we lost Professor Alice Amsden, a great intellectual power in development economics. Her work was systematically marked by creativity, origi- nality, relevance and her fearless commitment to always speak truth to power both in academic as well as in policy-making arenas. This In Memoriam concentrates on just one part of her great intellectual legacy: her impact to better understanding Latin America’s development challenges, obstacles and policy options. Our paper focuses on three broad areas of her main influence in the region: the role of transnational corporations, the importance of manufactured exports for development, and industrial policy. As we here argue, in all of them, her work is and continues to be a substantial contribution to knowledge that policy makers will be well advised to take into acco…

A Taxonomy of Piketty's reviews

Brad DeLong wrote a lengthy review of Piketty's Capital, paraphrasing in the title the famous ISLM (ISLL in Hick's original terminology) paper by John Hicks, which deserves a review by itself. In particular the discussion of Piketty's analytical model, which is, as noted before, incredibly problematic. It is worth noticing that Brad argues somehow that there two kind of reviews, namely: those that are useful and worth reading, in which he includes Tyler Cowen's review (which I've only indirectly alluded to here and here), and the ones that are wrong and are 'distracted by irrelevances,' which include Galbraith and Palley's reviews.*

Brad's idea is not bad, I mean of a taxonomy of the reviews of Piketty, but his take is neither useful to understand the differences, nor constructive for dialogue. So here is my very brief taxonomy.
There are only a few that I included, not because these are the more important necessarily, but because they seem to be r…

More on Murphy, and Rowe on the Natural Rate of Interest

My post on Robert Murphy's critique of Piketty generated a few comments, and a good debate (see the comments section here). But there are a few things worth clarifying, and also Robert pointed out a post by Nick Rowe, which is also worth discussing in more detail.

As I noted before there seems to be a confusion among Austrians, which think that their notion of the rate of interest is purely based on intertemporal consumption (savings) preferences, and is not open to the problems of the capital debates (this is as old as Austrian economics, by the way; for more below). It would not be, in their view, equivalent to the natural rate of interest of Wicksell and the Loanable Funds Theory of the rate of interest.

First, let me get back to Robert Murphy's original post, which led to my previous post. Just to remind you his argument was that the non-Austrian mainstream (and Piketty, as a result) confused financial or monetary measures of capital with purely physical ones. It's wo…

New Levy Working Paper: Shadow Banking - Policy Challenges for Central Banks

By Thorvald Grung Moe*
Central banks responded with exceptional liquidity support during the financial crisis to prevent a systemic meltdown. They broadened their tool kit and extended liquidity support to non-banks and key financial markets. Many want central banks to embrace this expanded role as “market maker of last resort” going forward. This would provide a liquidity backstop for systemically important markets and the shadow banking system that is deeply integrated with these markets. But how much liquidity support can central banks provide to the shadow banking system without risking their balance sheets? I discuss the expanding role of the shadow banking sector and the key drivers behind its growing importance. There are close parallels between the growth of shadow banking before the recent financial crisis and earlier financial crises, with rapid growth in near monies as a common feature. This ebb and flow of shadow-banking-type liabilities are indeed an ingrain…

Class of 2014, You're Screwed

By Heidi Shierholz, Alyssa Davis, and Will Kimball
The Great Recession officially ended in June 2009, nearly five years ago. However, the labor market has made agonizingly slow progress toward a full recovery, and the slack that remains continues to be devastating for workers of all ages. The U.S. labor market still has a deficit of more than 7 million jobs, and the unemployment rate has been at 6.6 percent or higher for five-and-a-half years. (In comparison, the highest unemployment rate in the early 2000s downturn was 6.3 percent, for one month in 2003.) The weak labor market has been, and continues to be, very tough on young workers: At 14.5 percent, the March 2014 unemployment rate of workers under age 25 was slightly over twice as high as the overall unemployment rate, 6.7 percent. Though the labor market is headed in the right direction, it is improving very slowly, and the job prospects for young high school and college graduates remain dim. A key finding of this paper is tha…

Lance Taylor on Piketty's Capital

(Jeff Susman, MV, and Lance Taylor, Beijing, 2001)
A short paper by Lance available here. From the conclusion:
Current flows of taxes on the upper percentiles of the income distribution and transfers to the bottom in the USA are on the order of ten percent of GDP. Meanwhile the income share of the top percentile rose by more than ten percent between 1980 and 2010 (Taylor, et. al., 2014), to a large extent due to a rising profit share. The tax/transfer program would have to be doubled in size (emphasizing estate taxes inparticular) to offset the “autonomous” increase in the profit share. On the policy front such an effort may not be likely.  With regard to political economy, the increase in the profit share (and therefore the profit rate) was not so autonomous after all. It was the outcome of a sociopolitical process which could be reversed. ... public intervention would go a long way toward maintaining aggregate demand and reducing capitalist control. Otherwise, wage repression leads…

Daniele Tavani on Endogenous Business Cycles

Daniele's website is all revamped, and here is a new post, which is based on Goodwin 'Marxist' or Class Conflict business cycle. At some point I should post something about it, since this is one of the seminal profit-led  models, which I have criticized somewhere else. Notice also that Goodwin model suggests that the inflation barrier is at full employment.

As noted by Daniele, an important feature of the model is that cycles are endogenous, something uncommon in mainstream models of the cycle. In his words:
"The key point is that the model generates endogenous cycles, that is fluctuations that are independent of shocks (such as monetary policy, fiscal policy, or supply shocks)." Kaldor (1940) and Goodwin (1951) non-linear multiplier-accelerator models would also fall into that category, by the way.

Prospects of the Global Crisis of Capitalism: Post-Keynesianism vs. Marxism?

A discussion on the prospects of the ongoing global crisis of capitalism, and the convergence and/or divergence between the Post-Keynesian and Marxist views of capitalism between:
Julio Huato -- St. Francis College, David Laibman -- Science & Society, Matías Vernengo -- Bucknell University, David M. Brennan -- Franklin & Marshall
At John Jay College of Criminal Justice, The City University of New York. On Sat 5/31 10:00am - 11:50am in Room 9.68.

Not sure about it, but I think I might be the post-Keynesian in the panel. Oh well, I can play that role too.

The quotable Solow or ridicule and New Classical Economics

So my quote of Monty Python reminded a reader (h/t Brandt) of a famous Solow quote about Friedman: "Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper." Below my favorite Solow quote: "Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it serio…

Robert Murphy, the Austrian theory of the rate of interest and Piketty's 'Capital'

In the comments to another post it was suggested that I checked Robert Murphy's discussion of the relevance of the capital debates for Austrian economics.* The basis for my comments is Murphy's recent post on the topic here. It seems that the capital debates are somehow connected to a critique of Piketty's views on inequality from an Austrian point of view, but the post here, which was also linked in the comments, is less than clear about that.

The question is why would the capital debates, which basically criticize the main tenets of marginalism, be relevant for a marginalist school of thought like the Austrians. Shouldn't the logical flaws of marginalism affect Austrians too? [The answer is yes, by the way, but we'll get to that].

First of all, Murphy gets the main point of the capital debates wrong. He seems to think that the lack of a natural rate of interest results from the difference between aggregate capital, which must be measured in monetary terms (which…

The rise and fall of the Tax State

David asked me about this paper, published in an interdisciplinary book (meaning a book that nobody, in any discipline, reads). It is about what Schumpeter referred to as the Tax State (the paper is "The Crisis of the Tax State" from 1918). By the way, this paper, written right before he actually became Finance Minister in Austria, is by far his best, much more relevant than his cycle theory, which remains essentially Austrian and associated to real shocks (yes there is a link between Schumpeter and the Real Business Cycle School).

My take from the conclusion:
The rise of the tax State can be seen as a struggle over who would carry the burden of taxation. Originally taxation was the sole burden of the working class, while the elites were free from taxes. Public debt as a form of repayable taxes fell on the shoulders of the elite; but that was not an excessive burden. Industrial development, urbanization, the democratization process, the enlargement of the franchise and p…

Asian and Latin American shares of world GDP

Reading the April World Economic Outlook (WEO), a biannual IMF publication (more to be posted soon). You can download all the data, which is always useful. Just playing around. Note that in the last decade the share of World GDP produced by advanced economies shrunk from around 80% to approximately 60%.
On the other hand, developing countries expanded from 20% to closer to 40% of World GDP. The fact that China might be the biggest economy in the world has been in the news recently. Note that most of this increase in the periphery is in Asia, which increased from around 7% or so, essentially the same level than Latin America, to 20%, while Latin America (which did expand in the last decade; the graph doesn't show it well because of scale) remains at the same level than 1980, recovering from the lowest point in the 1990s.

Radical and Heterodox Economics

Radical economics, the term as much as the theories behind it, is fundamentally a phenomenon of the 1960s and the academia in the United States, intrinsically tied to the upheavals of that transformative decade, in particular the Civil Rights movement and the war in Vietnam. The Union for Radical Political Economics (URPE) was the result of that boom in interest for alternative approaches to the mainstream. I don’t intend to write a history of URPE, in this brief post, but I want to contrast Radical Economics with the term Heterodox Economics, which has gained traction more recently (see Ngram viewer figure).

Read rest here.
PS: I started blogging at the URPE blog too. Check it out here.

On why the Golden Age of Capitalism was better than this revived Gilded Age

No need for a lot of discussion. The Golden Age of Capitalism (in the graph 1947-79)--the world that resulted from the reforms to deal with the Great Depression (the New Deal) and the reorganization of the world after the victory against Fascism, with strong unions, high taxes for the rich, and a string of social programs for the poor and minorities--was a better world.

Keynes and the Golden Age vs Greenspan and the Great Moderation

Great video post by Trixie the "Haiku Charlatan," who blogs at Hit or Miss. Enjoy!

What's in a name? that which we call Naked Keynesianism

Someone asked me this week why the blog is named Naked Keynesianism. It was in the very first post in February 2011. The story was on Fox News, about what Jamie Galbraith was teaching his students. Naked Keynesianism! And that seemed the perfect title for the blog.
At the end of the day, names do not matter, the content is what is relevant, but the Fixed News 'journalists' turn out to show a lot about the true content of their views. What was the line? "What’s in a name? that which we call a rose; by any other name would smell as sweet." For Fixed News Keynesianism does NOT smell like roses.

More on the UMKC crisis: a graduate student view

A while ago at the New School I participated on a panel on the role of the Economics Department there in academia. As I said back then I think that heterodox graduate programs are in the business of the production of heterodox economists by means of heterodox economists (my definition of the heterodox camp here). In that respect, UMKC is one of the few departments that continues to do that in the US. As I posted earlier, the retirement of two faculty members and the financial cuts may result in a significant additional burden on the economics department there. Note that this is true whether the cuts are ideologically biased or not, and simply result from the financial burdens associated to the economic crisis.

Below a letter from Christian Dodge a graduate student at UMKC. It represents a view of what is going on more broadly at the University. Note that student mobilization can be, and it has been in other cases, important in preserving the character and vitality of the institutions…

More on flimflam and lack of understanding of the capital debates

Paul Krugman has responded to Tom's article and here is his reply. Let me just add my two cents. Krugman says that:
New Keynesians assert — as Keynes did, although I don’t think it matters for this debate what he said — that both liquidity preference and loanable funds are true. There are conditions under which one or the other is the main one to focus on — at full employment, loanable funds are crucial, in a liquidity trap, liquidity preference. Oh Lord. Paul can you send us the quote were Keynes says that Loanable Funds is correct? And again this is NOT about irrelevant exegesis. If you do have that Investment and Savings are equilibrated by a natural rate of interest, then that means that you must, with interest rate flexibility, reach a point at which investment would equate the full employment level of savings. Krugman and other New Keynesians argue then for a version of what they call a Liquidity Trap (actually a zero lower bound problem), in which the monetary rate of inte…

Academic Freedom Watch: We're NOT in Kansas Anymore

Two faculty members at UMKC are retiring, or so it seems, John Henry and Fred Lee, at the same time that cuts led to a new policy according to which full-time faculty would be replaced as they retire with adjuncts. This can only hurt small departments like the economics one. Students have posted here a Statement against this policy. There is a possibility that this is not unrelated in the case of economics to the type of approach of the department. It would be sad indeed if in the post-crisis period, in which many organizations and economists admitted that change in the way economics is taught if another heterodox department was under attack. The infamous Notre Dame case is still fresh enough, and should serve as a cautionary tale. More on this later.

More on Wren-Lewis flimflam according to Palley

Simon Wren-Lewis replied to Tom's previous post on the flimflam defense of mainstream economics and says he cannot find it (the flimflam). Tom provides in a new post some hints on where to look. Note that Tom raises two points, among others, always emphasized in this blog. Namely:
Marginal productivity theory remains at the core of mainstream distribution and production theory. However, marginal productivity can be adjusted for imperfect competition to yield, what might be called, adjusted marginal products. Thereafter, things remain analytically very similar and those adjusted marginal products then determine the stock demand for capital and drive long-run capital accumulation.  The imperfect competition model of so-called New Keynesians continues to assert price and nominal wage flexibility would restore full employment. In a financialized economy with massive inside debts, that strikes me as an implausible proposition. Both require to be solved and provide a real alternative tha…