Top 10 economic books of the 20th century

Find the errors

Lars Syll had a while ago a top 10 list of econ books. So here is my list of the best from the 20th century. Some are there because they are influential, some because I think they are truly the best, and all because in some way they influenced my views. The list by chronological order:

1. Imperial Germany and the Industrial Revolution (1915) by Thorsten Veblen
2. The General Theory of Employment, Interest and Money (1936) by John Maynard Keynes
3. The Great Transformation (1944) by Karl Polanyi
4. American Capitalism: The Concept of Countervailing Power (1952) by John K. Galbraith
5. The Theory of Economic Dynamics (1954) by Michal Kalecki
6. The Production of Commodities by Means of Commodities (1960) by Piero Sraffa
7. Essays in the Theory of Economic Growth (1962) by Joan Robinson
8. The Crisis in Keynesian Economics (1974) by John Hicks
9. Stabilizing and Unstable Economy (1986) by Hyman Minsky
10. An Essay on Money and Distribution (1991) by Massimo Pivetti

There are, admittedly, some odd choices. Hicks more influential book is Value and Capital, while a close contender in my view for his best book would be his A Contribution to the Theory of the Trade Cycle. But The Crisis in Keynesian Economics is his best post-Keynesian book, and I prefer it over Paul Davidson's Money and the Real World, a close contender for the list. I also almost had Gerschenkron's Economic Backwardness in Historical Perspective, but preferred Veblen's Imperial Germany, that anticipates some of the important concepts, but it's not the obvious choice regarding Veblen. I also prefer Robinson's Essays to her The Accumulation of Capital. I prefer the first of Galbraith's trilogy, rather then the last and more popular The New Industrial State. There is no book by Nicholas Kaldor, but he tended to write articles, and there is only one book that I considered including, a pamphlet on The Economic Consequences of Mrs. Thatcher, which collects his speeches at the Lords. The list also is limited to books in English. I would have had Celso Furtado's classic on Brazil, published in English as The Economic Growth of Brazil.The same could be said about Pierangelo Garegnani, whose Il Capitale nelle Teorie della Distribuzione, to my knowledge, was not published in English (I have the version in Spanish).

Some Brief Thoughts on Paul Romer and Mathiness

Catching up with work after grading. Posting will continue slow for a few weeks. Just a brief note on the brouhaha that the Romer (Paul) paper has led to. I mostly read it in Lars blog. Lars quotes Romer as saying:

"About math: I have an undergraduate degree in physics.* I’ve seen clear evidence that math can facilitate scientific progress toward the truth. If you think that math is worthless or dangerous, I’m sure that there are people who will be happy to discuss this with you. I’m not interested. I’m busy. 

About truth and science: My fundamental premise is that there is an objective notion of truth and that science can help us make progress toward truth. If you do not accept this premise, I’m sure that there are people who would be happy to debate it with you. I’m not interested. I’m busy."

I should say that I only looked cursorily at the paper, which seems poor at best. The notion that: "Joan Robinson (1956) was engaged in academic politics when she waged her campaign against capital and the aggregate production function," misses the quite important logical point of the capital debates, which were acknowledged by none other than Paul Samuelson in his 1966 "Summing Up" (subscription required).

It seems clear that the very concept of mathiness is murky at best.** Some mathematical concepts are fine, some aren't. The criteria seems to be Romer's personal preferences. Mind you, the quote above is one of the few things in that post that is clear and on the mark. Math is just an instrument. If Romer spent the time to read Sraffa's short monograph, he would have to conclude (mathematical logic requires it) that mainstream notions about relative prices associated to relative scarcity are not logically tenable. Progress would imply discarding illogical models. He is busy, though.

I should add that, in general, I'm in agreement with Lars critique of Romer. However, the problem to me seems to be less concerned with the use of mathematical models because "the real world is fuzzy, vague and indeterminate," which it clearly is, but with the logical inconsistencies of the neoclassical model per se. It is the kind of models that Romer uses (and the authors he criticizes too) that are problematic, not the fact that he formalizes his ideas in mathematical models. That's why it's a bit funny that he thinks that some RBC or New Classical authors are the problem, because presumably they fool you with math or, as one of the definitions of mathiness suggests, the words that these authors use to describe their mathematical results do not accurately convey what the math shows.

Sure enough, there are important elements in economic theory that cannot be easily formalized, and that does not mean that objective understanding is impossible. I haven't seen the formalization of the concept of mode of production, but that does not mean that the definition of capitalism is devoid of meaning. My two cents.

* This has been amended in the last version. Now reads: "I studied physics as an undergraduate." As it turns, some economists DO have physics envy. But you know what this means. He knows math people. He is an authority. Arguments of authority are so sciency, aren't they?

** At least two definitions are possible it seems. Logically incorrect mathematical arguments that are defended anyway (Romer would incur on this version of mathiness), or a discrepancy between the mathematical model and the underlying economic theory (the one Romer suggests some in the mainstream incur). They are not necessarily equivalent.

Lars P. Syll on how wrong Krugman & Mankiw are on loanable funds

By Lars P. Syll

Earlier this autumn yours truly was invited to participate in the New York Rethinking Economics conference. A busy schedule didn’t allow me to “go over there.” Fortunately some of the debates and presentations have been made available on the web, as for example here. Listening a couple of minutes into that video one can hear Paul Krugman strongly defending the loanable funds theory. Unfortunately this is not an exception among “New Keynesian” economists. Neglecting anything resembling a real-world finance system, Greg Mankiw — in the 8th edition of his intermediate textbook Macroeconomics — has appended a new chapter to the other nineteen chapters where finance more or less is equated to the neoclassical thought-construction of a “market for loanable funds."

Read rest here.

For an explication and presentation of the extent to which LFT is derivative of modern neo-Wicksellian macroeconomics, see here.

Krugman is actually right on ISLM and Minsky

I tend to disagree a lot with Krugman, at least on theoretical issues. His brand of Keynesianism supposes that the system doesn't work because of imperfections. For him, the current slow recovery is due to the fact that the natural rate of interest is basically negative and you cannot use monetary policy to stimulate the economy (see critique of this here). However, on his recent debate with Lars Syll (and here; Brad De Long also posted here), a post-Keynesian, with whom I probably share a more radical interpretation of Keynes and its relevance for economic theory, Krugman seems to get things right.

The main points in Lars initial post, based on Minsky's book John Maynard Keynes is that traditional representations of Keynes do not emphasize the cyclical component of Keynes' theory and that true or fundamental (non-probabilistic) uncertainty is often ignored. Lars adds a little bit more on his response to Krugman and De Long, but essentially is the same argument. Keynes didn't like the ISLM (which is from a historical point of view difficult to defend, after all the only stuff he wrote on this, to Hicks, was quite positive, even if it is of little relevance), that it is static (not paying attention to cyclical or dynamic phenomena), and perhaps more interestingly that the interaction of real and monetary variables in the model is simplistic.

Krugman points out that the General Theory (GT) is NOT about cyclical fluctuations per se. It is about the determination of the long run level of output and employment, around which the economy fluctuates, and he correctly notes that cycles only appear as an afterthought in chapter 22 of the GT. And that is precisely correct. The GT is revolutionary because it suggests that with price flexibility (not price rigidity as in the old Neoclassical Synthesis or the New Keynesian stories) the system gets stuck in a situation of unemployment equilibrium. Emphasis on equilibrium. Yes, unemployment at less than full employment and output below its potential level are both together in an equilibrium situation.

Patinkin suggested that Keynes meant unemployment disequilibrium, since within the neoclassical framework, unless there is a rigidity of some sort, and the system should go to its long run equilibrium position with full employment. Minsky (1975, p. 268), in the book cited above, says that Keynesian economics should be seen as the: "economics of permanent disequilibrium." That has no basis on the GT. Actually, the GT would be a less radical book if it only said that with instability the system might be always in a disequilibrium position. Keynes was very radical since he argued that the very notion of a natural rate should be abandoned (on this Paul and Brad have a lot to learn). Some Post Keynesians tend to dislike the idea of equilibrium (echoes of Joan Robinson's late critique of the idea), which ends up making them closer in many respects to the modern mainstream authors with their dislike for long term equilibrium positions.

So the GT is not about cycles (Keynes' Treatise on Money, a very conventional and Wicksellian book was about cyclical disequilibrium caused by differences between the natural and banking rates of interest, which, interestingly enough is closer to Krugman's way of thinking than the GT, or than to Lars, who is aware of the limitations of the natural rate concept). But that's not all that Krugman got right this time.

He quotes the famous passage in which Keynes says that the system is not violently unstable (GT, p. 249). And while Post Keynesians are correct to note the relevance of fundamental uncertainty, it is important also to consider the stabilizing role of conventions and institutions, to which Keynes alludes. Expectations play a role, but investment is not completely volatile, and it was a problem for Keynes only when "the capital development of a country becomes the by product of the activities of a casino" (GT, p. 159). In fact, given the relevance of the accelerator in determining investment, the central role of expectations is about the level of demand. For example, in the US investment has been subdued since demand is not growing fast and there are not reasonable expectations that it will any time soon.

Where New Keynesians go wrong, and in this case is actually Brad, not Paul (but he would certainly agree) is on the relevance of the marginal efficiency of capital, criticized by Minsky (even though it's far from clear that Minsky abandoned it). Brad thinks that Minsky critique of it is myopic and basically a PR problem. He says that it is: 

"Short-sighted, in that it is not Hicks who would be Minsky’s long-run intellectual adversary but rather Freidman [sic], Lucas, and Hayek, and so building bridges to the Hicksians ought to be a very high priority."

Probably true, but from a policy point of view. From a theoretical point of view, Hicks use of the marginalist notion of an investment function inversely related to the rate of interest (something Keynes also used) implies that there would be a rate of interest low enough that would produce full employment, that is a natural rate, which would preclude Keynes' claim about unemployment equilibrium (and the absence of a natural rate). In other words, with the marginal productivity of capital you have that unemployment must be a disequilibrium situation caused by some imperfection that inhibits the system from reaching the natural rate.

And yes the capital debates are relevant since they show that the inverse relation is only possible in a one commodity world. No natural rate, and no need to think about imperfections. And that's why the comment by Lars on the connection between real and monetary variables being simplistic within the ISLM is right on the mark. The idea that the central bank controls a monetary rate, that may get out of whack with the natural, and that by manipulating it can affect real variables is limited at best.

PS: For my previous defense of a modified ISLM go here and here. 

Lars Syll On Methodological Critique of Austrian Economics

By Lars Syll [h/t] Jan Milch

This is a fair presentation and critique of Austrian methodology. But beware! In theoretical and methodological questions it’s not always either-or. We have to be open-minded and pluralistic enough not to throw out the baby with the bath water — and fail to secure insights like this:

What is the problem we wish to solve when we try to construct a rational economic order?… If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic…

This, however, is emphatically not the economic problem which society faces…The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is…a problem of the utilization of knowledge which is not given to anyone in its totality.

This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory…Many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature…

Read rest here (and be sure to check out the comments made by Paul Davidson!).

Krugman and the neoclassical theory of distribution: will he recant on the natural rate of interest

In the previous post I noted that Krugman suggests incoherently that: "saying that capital gets its marginal product in no way says that the people who own that capital deserve what they get." The point is exactly that if you receive according to productivity, it cannot be blamed on exploitation or other social factors. Capital gets higher profits because it is productive, and unskilled labor does not for the reverse reason.

If we do not mince words about the meaning of deserve, 'to be worthy' in my dictionary, by the way, it is evident that a theory that says that remuneration is accrued according to productive capacity, and again we take productive to mean, using the same dictionary, doing or achieving a lot: working hard and getting good results, then you have that those that work hard are worthy of their remuneration. But does Krugman believe in the notion that productivity determines pay you, enlightened reader, might ask.

From the 2014 3rd edition of Krugman's Essentials of Economics:

The factor market most of us know best is the labor market, in which workers are paid for their time. Besides labor, we can think of households as owning and selling the other factors of production to firms. For example, when a corporation pays dividends to its stockholders, who are members of households, it is in effect paying them for the use of the machines and buildings that ultimately belong to those investors. In this case, the transactions are occurring in the capital market, the market in which capital is bought and sold. As we’ll examine in detail later, factor markets ultimately determine an economy’s income distribution, how the total income created in an economy is allocated between less skilled workers, highly skilled workers, and the owners of capital and land [italics added].

Fair enough, Krugman said back in 2007 in his book The Conscience of a Liberal that: "there is something wrong with textbook economics." Apparently he has not read his textbook.

So, yes Galbraith, Palley, Syll, and others that have pointed out the connection of neoclassical economics with the specific idea that inequality results from market forces, and represent what people deserve are correct. That is why this blog has insisted that Krugman's notion of a natural rate of interest undermines his own policy views on the need for social policies to redress inequality.

Krugman on Palley's Gattopardo Economics

So Krugman has weighed in on Tom's review of Piketty's Capital, which is all the rage now. Krugman's defense of Piketty is based on denying that neoclassical economics is a theory of distribution, on the one hand, and on the other suggesting that using mainstream models to discuss inequality might be a strategy, that is a politically calculated plan of action, that would put the discussion of inequality at the center of the political agenda. This without necessarily, he argues, stop discussing the methodological issues on how to do economics.

On the first topic, he is obviously disscusing the issue that is central to the capital debates (and central to Piketty's book) which was discussed by Tom, and also by Jamie Galbraith, and Lars Syll and in my own post on the topic, that linked to Jamie's review. According to Krugman:

There are a few economists on the left who seem to believe that: 

1. You need to believe in the existence of a perfectly well-defined aggregate measure of capital to believe in the marginal productivity theory of income distribution; 

2. If you believe in, or even use, marginal productivity theory, you are conceding that capitalists deserve their income. 

Neither of these things are true. Nothing about marginal productivity theory depends on the exact truth of a simple aggregate production function with capital defined by a single number. And saying that capital gets its marginal product in no way says that the people who own that capital deserve what they get.

First of all. It is NOT an issue of right and left. It is a question of logic and evidence. And yes, you may very well  have a disaggregate intertemporal version of the marginalist analysis, and you still have to show that there is a rate of interest (a natural one, that Krugman always cites, and says it has been negative, by the way), that equilibrates investment to full employment savings.

So yes dude, marginal productivity implies that the remuneration of capital, its natural rate of interest, produces full utilization of capital (and to derive that you need full utilization of labor, since if labor was not utilized its price would fall, and substitution would imply more demand of cheap labor rather than capital), and that by definition capital receives according to its productivity. Distribution is endogenous. As much as labor receives according to its productivity (Krugman should read the stuff in his Principles book, by the way, in which he teaches exactly that).

Also, Krugman says that:

You can be perfectly conventional in your economics — or, my own attitude and what I think is Piketty’s, willing to use conventional models when they’re convenient and seem useful without treating them as irrefutable truth — while still taking inequality very seriously.

This is a repetition of an old arguments of his about using flawed theoretical models to say reasonable policy propositions. He argued before that:

By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote. So you could do exchange rate models that actually had realistic assumptions about prices and employment, but put the focus on rational expectations in the currency market, so that people really didn’t notice. Or you could model optimal investment choices, with the underlying framework fairly Keynesian, but hidden in the background. And so on.

And that it a nutshell is what Tom is criticizing. The need to make things look respectable, in Piketty's book, are what make his contribution very likely Gattopardo economics.

PS: Krugman has more on Palley here, and more to follow from NK on that later; also if you want to understand why Krugman does not understand the limitations of mainstream economics go here for a primer on the capital debates.

Lars P. Syll: Piketty and the Cambridge capital controversy

 

By Lars P. Syll

Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.  The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.

Read rest here.

Lars P. Syll: Shiller & Roubini's Fears of Swedish Housing Bubble Justified

By Lars P. Syll

The Swedish Riksbank has according to Lars E.O. Svensson been pursuing a policy during the last fifteen years that in reality has made inflation on average more than half a percentage units lower than the goal set by the Riksbank. The Phillips Curve he estimates shows that unemployment as a result of this overly “austere” inflation level has been almost 1% higher than if one had stuck to the set inflation goal of 2%. What Svensson is saying, without so many words, is that the Swedish Fed for no reason at all has made people unemployed. As a consequence of a faulty monetary policy the unemployment is considerably higher than it would have been if the Swedish Fed had done its job adequately. So far, so good — I have no problem with Svensson’s argument about the inadequacy of the Swedish inflation targeting policies. However, what makes the picture more complicated is that we do have a housing bubble in Sweden — it’s not just a figment of imagination the “bad guys” use to intimidate us with. [That said, I, of course, in no way want to imply that central bank interest rate targeting (and/or accommodations) is the best way to counteract housing bubbles. Far from it.]

Read the rest here.

Lars P. Syll On What’s wrong with IS-LM?

By Lars. P. Syll

Yesterday, David Fields of Naked Keynesianism wondered what was my position on the fact that many heterodox economists would consider the IS-LM framework “to still be relevant if given enough flexibility without neoclassical synthesized elements.”

I will sure come back on this when time admits a more thorough analysis, but let me start by giving at least a tentative answer — focusing on where I think IS-LM doesn’t adequately reflect the width and depth of Keynes’s insights on the workings of modern market economies.

Read the rest here.

ISLM: a further explanation and a defense

I noted before  the traditional representation of the ISLM is problematic. Yet as I also noted the ISLM model can accommodate changes that incorporate the criticisms of classical-Keynesian, post-Keynesian and other heterodox groups. There is no need for an investment function based on the marginal productivity of capital and the principle of substitution. The accelerator can be incorporated, and the inverse relation with the rate of interest would result from the effects of interest rates on other components of demand. Also, endogenous money can be incorporated easily, and for the most part this has been done in New Keynesian models (the ISMP).

In the post (linked by David here) that prompted this sort of defense of a changed ISLM, Lars Syll correctly notes that New Keynesians are often right on policy, but incorrect on theory. And I for the most part agree with Lars intentions. Yet, he suggests that the problem lies in that:

"If macroeconomic models – no matter of what ilk – assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable."

As I noted in my debate with Noah Smith, the problem with marginalism (neoclassical economics) is NOT rationality, utility maximization or supply and demand (not quite the same list raised by Lars). Here I would add that although one can certainly add heterogenous agents, assumptions that simplify and assume representative agents maximizing profits, for example, are not really problematic at all. Classical political economists and Marx did assume something like that and still did not reach the conclusion that the system was efficient in the sense of providing full utilization of resources.

Also, the idea that agents use all information per se is not necessarily bad (Tom Palley favors some sort of rational expectations, which he refers to as model consistent; see his old manual here). The problem is that the model used, by New Classical and other mainstream authors, has logical problems. Last but not least equilibrium per se is not a bad concept (on this there is the whole thing that Post Keynesians have inherited from Joan Robinson that makes things confusing for many heterodox economists). Equilibrium is actually quite essential for long-term analysis. And I would actually argue that it is relevant since it DOES have real world applications. In other words, real economies do fluctuate around long-term equilibrium positions that are sub-optimal.

The problem with mainstream theory is the notion of a natural rate, which is based on the principle of substitution which allows for 'factors of production' to be fully utilized. These are the problems that Keynes, by negating the idea of a natural rate, and Sraffa, by showing the logical problems of the principle of substitution, undermined. An ISLM without the natural rate is not only possible, but actually reasonably good as a tool for analyzing real economies.

PS: Note that Keynes wrote to Hicks on the ISLM that: "I found it very interesting and really have next to nothing to say by way of criticism." Keynes did not criticize the investment function in Hicks model, but note that this problem also was integral to the General Theory (GT). And yes Keynes was being nice, but he was nice too about Harrod's review of the GT, but did tell him that he did not mention effective demand.

Lars P. Syll On Krugman's Fuddy Duddy Defense of Economic Orthodoxy

By Lars P. Syll

“Sorta-kinda New Keynesian” economist Paul Krugman now has learned from Francesco Saraceno — who links to yours truly — that “some people are attacking” him for “defending an economic orthodoxy that has failed.” Let me just start with an observation on Krugman’s allusion (“simple models”) to IS-LM. This, of course, comes as no surprise, since we who have followed Krugman’s writings over the years, know that he is very fond of referring to and defending the old and dear IS-LM model.

Read rest here.

Lars P. Syll On How to Get Away With Scientific Fraud With Economics Textbooks

By Lars P. Syll

As is well-known, Keynes used to criticize the more traditional economics for making the fallacy of composition, which basically consists of the false belief that the whole is nothing but the sum of its parts. Keynes argued that in the society and in the economy this was not the case, and that a fortiori an adequate analysis of society and economy couldn’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts. This fact shows up already when orthodox – neoclassical – economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.

This could only be conceivable if there was in essence only one actor – the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!

Read rest here.

Lars P. Syll: Krugman dismisses heterodox economics students

By Lars P. Syll

Paul Krugman today rides out — like his brother in arms, Simon Wren-Lewis — to defend mainstream economics. According to Krugman, yours truly and others of that ilk are wrong in blaming mainstream economics for not being relevant and not being able to foresee the crisis. To Krugman there is nothing wrong with “standard theory” and “economics textbooks.” If only policy makers and economists stick to “standard economic analysis” everything would be just fine. I’ll be dipped! If there’s anything the last five years have shown us, it is that economists have gone astray in their shed of tools. Krugman’s “standard theory” — neoclassical economics – has contributed to causing todays’s economic crisis rather than to solving it. [...] So now all you young economics students that want to see a real change in economics and the way it’s taught — now you know where you have Krugman & Co. If you really want something other than the same old neoclassical catechism, if you really don’t want to be force-fed with neoclassical mumbo jumbo, you have to look elsewhere.

Read the rest here.

Lars Syll on Loanable Funds Theory

By Lars Syll

The classical theory of the rate of interest [the loanable funds theory] seems to suppose that, if the demand curve for capital shifts or if the curve relating the rate of interest to the amounts saved out of a given income shifts or if both these curves shift, the new rate of interest will be given by the point of intersection of the new positions of the two curves. But this is a nonsense theory. For the assumption that income is constant is inconsistent with the assumption that these two curves can shift independently of one another. If either of them shift, then, in general, income will change; with the result that the whole schematism based on the assumption of a given income breaks down … In truth, the classical theory has not been alive to the relevance of changes in the level of income or to the possibility of the level of income being actually a function of the rate of the investment.

There are always (at least) two parts in an economic transaction. Savers and investors have different liquidity preferences and face different choices — and their interactions usually only take place intermediated by financial institutions. This, importantly, also means that there is no “direct and immediate” automatic interest mechanism at work in modern monetary economies. What this ultimately boils done to is — iter — that what happens at the microeconomic level — both in and out of equilibrium — is not always compatible with the macroeconomic outcome. The fallacy of composition has many faces — loanable funds is one of them.

Read the rest here.

Lars Syll on Krugman as An Apologetic Defender of Esoteric Mathematization

By Lars P. Syll

Paul Krugman had a post up on his blog a while ago where he argued that “Keynesian” macroeconomics more than anything else “made economics the model-oriented field it has become.” In Krugman’s eyes, Keynes was a “pretty klutzy modeler,” and it was only thanks to Samuelson’s famous 45-degree diagram and Hicks’s IS-LM that things got into place. Although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” he still vehemently defends — and always have — the mathematization of economics.

See rest here.

Lars Syll on Krugman, Wren-Lewis and the New Keynesian apologetics

By Lars P. Syll

Is academic (mainstream neoclassical) macroeconomics flourishing? “New Keynesian” macroeconomist Simon Wren-Lewis had a post up not that long ago on his blog, answering the question affirmatively:

Consider monetary policy. I would argue that we have made great progress in both the analysis and practice of monetary policy over the last forty years … However, it has to be acknowledged that policymakers who look at the evidence day in and day out believe that New Keynesian theory is the most useful framework currently around. I have no problem with academics saying ‘I know this is the consensus, but I think it is wrong’. However to say ‘the jury is still out’ on whether prices are sticky is wrong. The relevant jury came to a verdict long ago… 

It is obvious that when it comes to using fiscal policy in short term macroeconomic stabilisation there can be no equivalent claim to progress or consensus. The policy debates we have today do not seem to have advanced much since when Keynes was alive… 

What has been missing with fiscal policy has been the equivalent of central bank economists whose job depends on taking an objective view of the evidence and doing the best they can with the ideas that academic macroeconomics provides…The contrast between monetary and fiscal policy tells us that this failure is not an inevitable result of the paucity of evidence in macroeconomics. I think it has a lot more to do with the influence of ideology…

And today another sorta-kinda “New Keynesian” — Paul Krugman — has a post up arguing that the problem with the academic profession is that some macroeconomists aren’t “bothered to actually figure out” how the New Keynesian model with its Euler conditions — ”based on the assumption that people have perfect access to capital markets, so that they can borrow and lend at the same rate” — really works. According to Krugman, this shouldn’t be hard at all — “at least it shouldn’t be for anyone with a graduate training in economics.”

Read the rest here.

Lars Syll on the Sveriges Riksbank Prize

Lars Syll had a nice post recently on the forthcoming (next Monday) Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He argues that a likely candidate would be Eugene Fama, for exactly all the wrong reasons, which is apparently what guides most of these prizes in economics anyway. And indeed Fama has perennially been in the short list. Reuters (here) has a different list with three teams of possible winners: Angrist, Card and Krueger for labor economics, Hendry, Pesaran and Phillips for time series econometrics, and Peltzman and Posner for economic regulation (deregulation more likely). And Reuters was correct on the Physics prize, but this year Higgs was a shoe-in.

PS: The 'Nobel' might up for grabs, but Janet Yellen will be the next chairperson of the Fed.

Krugman vs. Galbraith via Lars Syll

Lars dug up this on-line debate from the 1990s between Paul and Jamie. He linked to the full debate here. The part he posted is about the use of math and models in economics. There are other interesting parts in the debate, even if it is dominated by a discussion of the effects of free trade policies on manufacturing wages in the US (these was after the publication of Adrian Wood's book on North and South trade; mind you my problem with Wood's book is that it still uses Heckscher-Ohlin, but that is a different discussion).

Here is a brief comment by Jamie on two other topics that are quite relevant today, and that 'serious' economists did not (and still don't) agree.

"The merits of cutting the budget deficit. Do serious economists all agree that cutting the budget deficit will raise savings and investment, and increase the rate of productivity growth? They do not. The late, great Bill Vickrey, who died just three days after receiving this year's Nobel Memorial Prize in Economic Sciences, was only one of many who think our present preoccupation with deficit reduction is dangerously counterproductive. I'm another. 

The 'natural rate of unemployment.' Do serious economists agree that there exists a 'natural rate of unemployment?' No. Do those who do believe in this concept agree on what the natural rate is? No. Do those who have estimated the natural rate agree on how quickly inflation will accelerate if unemployment goes below the natural rate? Again, no. (The next issue of the Journal of Economic Perspectives will carry a symposium airing this argument.)"

I actually think that on the second most 'serious' economists do agree on the existence of the natural rate (including Paul), but not on what it is. As I referred to before, Bob Solow once said during a talk at the New School that the natural rate of unemployment didn't exist, but then by the end of the talk he suggested that it was 5.2% (this was in 2000).

The natural rate is actually the key issue for the mainstream suggestion that markets are efficient, and the more reasonable policy activists within the mainstream (like Paul or Brad DeLong, that are for fiscal activism, even if in very limited conditions) that think that imperfections (price or wage rigidities, lack of information, etc) preclude markets left alone to be self-regulating.

PS: Philip Pilkington has also posted on this here. Worth reading.

Lars Syll on the meaning of neoclassical economics

Lars Syll also replied to Noah Smith on the meaning of neoclassical economics here and here.