Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 9 January 2015

Heterodox laziness (or worse)

Tony Yates has recently been battling with some members and supporters of the heterodox economics community, and is clearly very annoyed by their portrayal of mainstream macro. Now Tony is a fully paid up member of microfounded mainstream macro, while I tend to be more critical of this orthodoxy (although I still work within it, and argue that it is a progressive research programme). So you might expect me to be less annoyed by heterodox attacks on the mainstream. Not so!

Here is an example of what gets me really cross. I would not normally post about a comment to my blog, but this was anonymous, and it is also not atypical. It said, following my criticism of the recent article by Jeffrey Sachs:

“Unfortunately, this is what happens when you contaminate the GT [General Theory] with inter-temporal economics.”

and

“Sachs is very much the quintessential Great Moderation New Keynesian.”

The implication is that modern intertemporal New Keynesian theory is somehow behind the view that austerity will not harm a recovery.

This is absolute and dangerous nonsense. Having spent the last decade or two looking at fiscal policy in intertemporal New Keynesian models, I know that exactly the opposite is true. In these models temporary decreases in government spending have significant negative effects on output for given real interest rates. At the Zero Lower Bound (ZLB) the effects are greater still. I have written chapter and verse on this, and will not repeat any of that here. (For those who are curious, here is a relatively non-technical discussion and here is something more technical.) I was very critical when certain eminent economists associated with the right made the mistake of suggesting otherwise. Judging by the recent exchange, Paul Krugman is much more the “quintessential Great Moderation New Keynesian” than Jeffrey Sachs. Perhaps the problem with Jeffrey Sachs is that he just does not realise what a big difference the ZLB makes (although Paul Krugman has made this point so many times). Anyhow anyone who says that mainstream New Keynesian theory supports austerity does not know what they are talking about.

I get plenty of comments on my posts which display lack of knowledge of key macro models and ideas, and if I have time I like to think that I respond to these in a helpful and positive manner. However this comment (and others like it) makes me cross for the following simple reason. Many economists and non-economists of the right try and portray mainstream economics as naturally supportive of their political programme. Right wing think tanks name themselves after one of the pioneers of economics. It is normally nonsense: mainstream economics is all about market failure, diminishing marginal utility favours redistribution etc. Of course there are counter examples (Pareto optimality), so it would be wrong to say that economics leans to the left as well.

However when some of those on the left say yes, mainstream economics is all the things that those on the right say it is, they share a mutual conspiracy to distort the truth. When you are trying hard to convince policy makers and journalists that what those on the right are arguing for is not implied by mainstream thought, people from the left pop up to undermine what you say.

That last sentence probably exaggerates the importance of heterodox economics. In my view heterodox economics is far more dangerous in giving young students that lean to the left a distorted view of the mainstream which can have lasting damage. Been there, done that (briefly). I actually think that heterodox economists have some important criticisms to make, and I also think that mainstream macro orthodoxy can often discourage such fundamental criticism. However pretending mainstream economics is something that it is not just devalues these criticisms. 

105 comments:

  1. I've made the point a million times, but it bears repeating.
    All that you say here in this post is reasonable, but it smacks of avoiding the key question:

    "How might we stop prominent economists twisting the theory and the evidence to support right-wing policies that don't work?"

    It's telling that in the comments, Tony Yates ends up protesting about "Mediamacro" not being "mainstream" - yet cannot bear to confront how it is running policy.

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    1. Tony can speak for himself, but I do not think you can accuse me of avoiding the question you pose. For example:
      http://mainlymacro.blogspot.co.uk/2012/08/giving-economics-bad-name.html

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    2. Maybe my off the cuff remark was not constructive. If so I apologise. I made the following point to Tony, but he rightly deleted my comment for rudeness, so here's another politer try:

      What's crucial here is that "mainstream economics" has set an agenda for "what matters" and largely "what matters" seems not to be unemployment. And it seems to me that the buzzing of the heterodox flies is not the key problem with that.

      "Keynesians" of some stripes believe unemployment matters, but most of the current mainstream is very happy to ignore the suffering of actual human beings in the pursuit of mathematical balance of abstract objectives. Until the mainstream can be brought back from this, Mainstream Economics will continue to be a net negative for the majority of the human race.

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    3. "Until the mainstream can be brought back from this, Mainstream Economics will continue to be a net negative for the majority of the human race."

      There are other scholars who do take all that into account--anthropologists, historians, sociologists, political scientists. They study economies, too, and have rich knowledge. I suspect that, at some point, mainstream econ will be "blown up"--the foundations will crumble under their imperfections--and something better will come from outside the economics profession.

      There's more SWL could say, and he's smart enough to figure it out and add something. But he'll have to break out of the grip of the current economic paradigm. But hey, he has nothing to lose but his chains.

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    4. Critics of mainstream economics have been waiting for the revolution for at least the last fifty years! What annoys me though is that over the last five years social welfare has been greatly harmed by policy makers ignoring mainstream macro, yet instead of finding common cause with the mainstream too many outside it prefer to pretend this is not true.

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    5. I'm gong to go out on a limb and suggest that part of it is arrogance by many, many economists towards folks from other social sciences. Hard to make common cause when the other party isn't listening because I'm not going to provide a graph with nice curves.

      And intellectual revolutions don't come about just because new ideas upset old ideas. Institutions matter as well. You yourself (like Krugman and others) have complained about the gatekeepers at the journals (and the same gods for publishers). There are a LOT of economists with a LOT to lose if heterodox ideas really did take hold. Plus, there is plenty of cognitive dissonance in the economics profession. I could give a great example, but I'll shut up for now (as this is not my blog).

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    6. Simon,

      one of my main beefs with mainstream macro is how it analyses welfare - I know there are more complete models out there, but the old RBC core whereby when a technology shock hits, we ought to work less (because production less rewarding) and so a welfare-max policy tries to achieve that, still has more influence that it ought (or maybe I'm wrong - hopefully you can say). In other words, mainstream macro does not seem to me to place enough weight on the welfare implications of unemployment.

      I suppose, whilst there are some papers out there that say things like the welfare impact of recessions is small, on dubious grounds, what I have just described might not matter too much if the policy advice that comes out of the models is still: use monetary and fiscal policy to fight recessions. If we then think doing so matters more in welfare terms than the models say, that's of secondary importance.

      although I can't help thinking more serious treatment of unemployment in a heterogeneous agent model might yield stronger policy lessons

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    7. "Critics of mainstream economics have been waiting for the revolution for at least the last fifty years! What annoys me though is that over the last five years social welfare has been greatly harmed by policy makers ignoring mainstream macro, yet instead of finding common cause with the mainstream too many outside it prefer to pretend this is not true."

      There may be some truth in that Simon, but careful with this, it smacks of arrogance and hubris. Perhaps heterodox economists have some legitimate concerns about orthodox and mainstream economics. If they did not exist and western civilisation still did, we would still be on the Gold Standard (which by the way is central bank interference through monetary policy, but to keep the inflationistas and bankers happy). Heterodox economists are a diverse and fragmented group. But many of them have a command of history, political economy and the big intellectual debates in philosophy that are well and truly on a different playing field to the typical mainstream economics PHD. And I hope you do not think these things are not important for understanding economic issues.

      "I'm currently interested in a different question: to what extent are central banks designed to be a barrier to money financing by the state, and is that role still valid or outdated."

      I have been looking at one such case for an economic history paper; I will get back.

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  2. No one doubts New Keynesian theory has been geared to give Keynesian results. The question is does it do so in a plausible way. I am sure somewhere it does. But when you are making the case to the public about rational behaviour and infinite horizons and for a big expansion in a budget deficit at the same time, you have a big job ahead of you. The special case you make for the ZLB simply adds to the mess.

    Market failure is not the starting point of modern economics. They are exceptions to its key principles (clearly outlined by Sargent with his 12 principles) that add to its unwieldy mess.

    Diminishing marginal utility is not an argument per se for government enacted redistribution of resources. First order economic theory says that the market is. Government intervention distorts this redistribution through its effects on incentives.

    Reconciling common sense macro policies with rational choice models is a dead-end.

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    1. "Diminishing marginal utility is not an argument per se for government enacted redistribution of resources. First order economic theory says that the market is."

      I think you need to understand economics better.

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    2. Interesting. I am sure you are right. And It probably applies to almost everyone here. Can you explain this to a non-economist who wants to know whether in basic economic theory, does the reallocation of resources towards activity that generates higher utility automatically call for government intervention? Or is the case made that the market does this more efficiently and government intervention called in only when market determined reallocation fails?

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    3. For once the Wiki entry on the Welfare Theorems is not too bad:
      http://en.wikipedia.org/wiki/Fundamental_theorems_of_welfare_economics
      Perhaps I can try and put it very simply. For any particular initial distribution of wealth, resources etc, the market under lots of idealisations produces an efficient allocation, where no one can be made better off without making someone worse off (=Pareto efficiency). But off course the initial distribution may be horrible (i.e. very unequal). In that case aggregate welfare can be improved by making the rich worse off and the poor better off - easily so, because of diminishing marginal utility.

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    4. "But off course the initial distribution may be horrible (i.e. very unequal). In that case aggregate welfare can be improved by making the rich worse off and the poor better off - easily so, because of diminishing marginal utility."

      Great, many thanks! I could still quibble and say that the theory does not seem to explicitly say that the government will give a better allocation than the initial market one, but as far as I can see it does not rule out the possibility, and that's enough.

      I will leave for someone else to pick up about whether the rational agents assumption is helpful in the anti-austerity debate, but definitely that's enough for now.


      As for the rest of the above, sounds like damn good policy to me!

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    5. I'd be interested in this marginal-utility redistribution argument. Can you please tell me where I can find a consistent way of interpersonal marginal-utility comparisons? Last time I check utility could not be compared between people.

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    6. "the market under lots of idealisations produces an efficient allocation"

      It has always seemed to me that this is where 'mainstream' economists go astray, that is, with the notion that assumptions don't matter, only the validity of the predictions matter a la Friedman.

      The problem is that in spite of the fact that the idealisations make no sense at all in any world that ever has or can exist, and in spite of the fact that there are no predictions that can be shown to validate the use of these idealizations, these idealisations are combined with logic by mainstream economists to arrive at policy recommendations. Mainstream economists find it almost impossible to resist the temptation to do this in spite of the fact that you can prove anything with logic if you start with a false assumption, and the vary foundation underlying this temptation begins with whole set of false assumptions.

      When I try to understand how we got ourselves into the economic mess we are in today I find that on the basis of economic theories, based on idealized assumptions, mainstream economics provided the justification for deregulating our financial systems in spite of the fact that hundreds of years of economic history tells us, or should have told us, that this was not a good idea. Where were the mainstream economists who, at the time, argued that these theories lacked empirical validation and that our financial systems should not be deregulated? I was out of touch with the discipline while most of this debate was going on so I really don't know if there were any, but I haven't run across any evidence so far that there were, and if there were I really would like to know who they are so I can pay more attention to their work.

      I also came to the conclusion that we got to where we are today as a result of the discipline of economics being taken over by ideology at the expense of empiricism or reality testing. That doesn't mean that all 'mainstream' economist became ideologies or were pleased with what they saw, but it does mean that there is something very wrong with mainstream economics, or, more precisely, with what was mainstream economics leading up the financial crisis that reached its climax in 2008.

      That doesn't mean that we should abandon one ideology for another and jump on the heterodox bandwagon, but it does mean that we have to, or at least that we should take a very serious look at what was mainstream economics in the past as we attempt to figure out what it should be in the future, and since Minsky obviously got something right back in 1986 when he explained how the sort of crisis we experienced in 2008 could occur, a good place to start is probably by paying more attention to Minsky.

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    7. What Blackford said. In fact, there were a fair number of economists who really did protest. But the math fetishism and outside money (Koch, Olin, etc.) in the economics profession meant that their voices were drowned out.

      Which means the issue is the sociology and politics of the academic economics profession. But who studies that?

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    8. "For any particular initial distribution of wealth, resources etc, the market under lots of idealisations produces an efficient allocation, where no one can be made better off without making someone worse off (=Pareto efficiency). But off course the initial distribution may be horrible (i.e. very unequal). In that case aggregate welfare can be improved by making the rich worse off and the poor better off - easily so, because of diminishing marginal utility."

      That seems to imply there is an efficiency-equity trade-off. Is that true? Or does "aggregate welfare increased after a redistribution" imply that efficiency can be increased by the redistribution as well? (Probably not answerable without going over welfare theory, but worth asking.)
      A.M.

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    9. "Who told you that?"

      I think standard microeconomics tells you that utility is an ordinal concept that only describes consistent consumers' choice. Ordinal measures cannot be aggregated.

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    10. Anon 11/1/15 7:39

      Then why do many mainstream economists aggregate utility across individuals to construct social welfare functions? I think this is a good example of those on the right trying to suggest economics says something (utility cannot be compared across individuals) which does not represent what mainstream economists actually do.

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    11. "That doesn't mean that we should abandon one ideology for another and jump on the heterodox bandwagon, but it does mean that we have to, or at least that we should take a very serious look at what was mainstream economics in the past as we attempt to figure out what it should be in the future, and since Minsky obviously got something right back in 1986 when he explained how the sort of crisis we experienced in 2008 could occur, a good place to start is probably by paying more attention to Minsky."

      People are doing this now, but unfortunately what we are getting is repackaged optimal agent models. And they are utterly unreadable. Sound familiar?

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    12. @Nathaniel: Marion Fourcade, an economic sociologist at Berkeley, is one person who has studied the culture and politics of the economics profession (comparatively as well). Interesting stuff.

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    13. "Or does "aggregate welfare increased after a redistribution" imply that efficiency can be increased by the redistribution as well?"

      Yes!

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    14. " the central proposition of welfare economics: that free trade in competitive markets leads to outcomes that cannot be improved upon by government intervention."

      Roger Farmer

      Woops, sorry Anon 05.36!

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  3. Perhaps I am naive in thinking Economics just is, and it is those elements most suited to the arguments of the left or right that are supported by the left or right, while the rest is ignored or argued against. Which for me raises the question, what then is the difference between those on the left and those on the right? From where comes the motivation for such enthusiasm to ignore not only established and well-proven theories, but also in many cases good sense? Does ideology really make people that stupid?

    I can imagine there is a certain amount of greed driving many of those on the right for whom small Government means (for them) smaller taxes, and on the other side I can understand there is a fear of poverty, or even perversely, success, but why people ignore facts is hard to understand.

    Psychologists would say it all comes down to childhood. Perhaps some people never left it... (Excuse my perhaps too philosophical contribution, it was sparked by the idea of Economics being either left or right leaning).

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  4. Sadly, most economics seems like politics to the man in the street. As your post clearly shows.

    Markets = failure. Government = success. Yeah, right. Ask a North Korean.

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    1. Ah, the wisdom of market monetarism.

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    2. Markets = failure. Government = success. Yeah, right. Ask a North Korean."

      Where exactly in this post does it even hint at this absurdly extreme view?
      Do you honestly believe that this is he view of SWL or any economist for that matter?

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    3. "mainstream economics is all about market failure" was this irony? Is this what heterdox economics says? Sorry if I msiunderstood. Maybe this post was a private one for Keynesians and heterodox economists only.

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    4. No its a fact. The journals are full of analysis of how best to deal with various forms of market failure, by which I mean the failure of markets to match the ideal required for the Welfare Theorems to hold. Where that involves regulation, there is also a clear recognition of the kinds of regulation failure that can occur. So you will not find many academic economists who say markets should always be unregulated, or that governments should not sometimes intervene.

      Of course in macro this is well understood, because a large part of the subject is about constant state intervention: monetary policy. OK, that bit is kind of ironic.

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    5. But Simon, think about your last sentences. This points to one of the biggest criticisms not only of mainstream econ (micro and macro), but also of heterodox economics (usually): taking "the market" (whatever that is) for granted. There is rich scholarship in history and other social sciences about how market relations and even practices are state constructions (or related to power relations more generally). Karl Polanyi's The Great Transformation is among the more famous works in this tradition, but it is far from alone. Yet here we have a whole subfield (macroeconomics) that just assumes market relations, practices, and mentalities are a state of nature--and so such issues as "when should the state intervene?" end up seeming a little ludicrous, because states are always intervening. No state, no market (or capitalism or any economy). I apologize if this seems to be derailing things, but the topic of heterodoxy vs mainstream invites widening the net. So let me end with this, for now: mainstream micro and macro (and many in institutionalist economics, except for Douglass North, long may he reign) seem to be oriented to these oversimplifications that come close to being fictions and raising constrained questions (and answers).

      Yes, you are right, a large part of macro is about constant state intervention--and this opens up the door for even wider studies of states and economies (and you'll find historians and political scientists already in the room--come in and join!).

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    6. Anon,

      this just reads to me as another example of how het critics mistake mainstream econ. yes sure, fine, as you say, the markets that are modelled in a macro model have important state and other institutional underpinnings. That is well understood by mainstream econ, there's lots written about that. But mainstream macro is addressing a different problem in which it makes sense to take markets and their institutional underpinnings as given and ask questions about monetary and fiscal policy. It makes sense to take the market for granted for many of the purposes econ models are built for, and doing so does not indicate that the economists who do so are unaware of the importance of all that other stuff. Too many heterodox critiques consist of accusing economists of ignoring this or that aspect of reality, without, to my mind, thinking enough about why it might make sense to do that. There is not an alternative out there which takes everything into account at once, and those who eschew maths are kidding themselves if they think verbal reasoning is much better in that regard.

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    7. I think most of the time 'taking the market as given' is just fine, because for the purposes of the exercise (e.g. what tax should we impose) it is. However in other circumstances economists are also quite happy to play around with the nature of markets, and think about the design of markets. Maybe 40 years ago you can have been critical of economists in being naive about politics, but with political economy (and interactions with political science) that has changed. So I think your problem may be more about a simple vision that some economists and non-economists have, rather than the subject in total.

      But this is interesting, so let me again pursue a particular macro issue, related to the one I raised. This is central bank independence. Macroeconomists tend to have a very narrow view of this, related to technical issues about time inconsistency. I'm currently interested in a different question: to what extent are central banks designed to be a barrier to money financing by the state, and is that role still valid or outdated. This is all related to the question of helicopter money and issues involving the ECB. Again I would like to know of things I should read outside economics on this.

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    8. RE: Central banks. Rather than say anything off the cuff at this point, I'll defer to a colleague who has studied Russia's central bank for 20 years: Juliet Johnson. She's a political scientist out of Canada (McGill, I think), and she has documented the various dynamics of institutional design (or lack thereof) and its pitfalls, especially vis-a-vis various political actors. Her work would probably provide a good beginning bibliography for the general politics of central banks, I would think. There is also David Woodruff, currently at LSE, who has written on Russian money and is studying the ECB. He might have some insights that you'd find useful. Or maybe not--I'll leave that to you to judge.

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    9. Lucky for us the central banks are in state hands, otherwise where would we be? Global Financial Cirises, hopeless recoveries, mass unemployment in Europe. Gosh, I'm relieved. What a resounding succcess. I'd hate to see what market failure would look like. (irony alert!)

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    10. Irony understood. But see, this is where economists trip up. They understand that ideologies, or frameworks, or policy lenses, or whatever you want to call them (depends on the scholar and era) are important in how central bankers operate--but there don't fit anywhere in their model, and they don't (cannot) problematize them. Historians, anthropoligists, sociologists, and political scientists can (and do, and cite each other regularly). So, to riff on another comment here, you get Krugman making naive comments. (The elite not following his advice because it's not in their material interests? Really? Look, any student in Sociology 101 or PoliSci 101 could have figured that out in week 1, and been able to theorize it in week 2.)

      Maybe SWL should write a blog entry on social sciences and macro (hint hint), or at least his perspective. Would be interesting and allow this kind of discourse without threatening to hijack the OP (which I fear I have been doing).

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    11. @JiL - that's just hand waving really because, you know, it's the state that issues the currency and guarantees it. So it should allow the central bank to be in private hands? You could always go and play with some bitcoins, I guess.

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    12. @gastro: Irony or not, there's an important point there. Do you want the CB run by technocrats who are "accountable at a distance" (i.e. appointed every X years or held to account in extreme circumstances)? Do you want the legislature and/or executive to have more authority over the CB? Should the CB be totally independent? There is a good literature that problematizes technocracy, in good Weberian tradition. To make sense of central banks, which SWL seems to want to do, you have to break out of this constricting logic of mainstream economic theory and ask really deep and hard questions about "culture" and "institutions."

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    13. "This points to one of the biggest criticisms not only of mainstream econ (micro and macro), but also of heterodox economics (usually): taking "the market" (whatever that is) for granted. There is rich scholarship in history and other social sciences about how market relations and even practices are state constructions (or related to power relations more generally). Karl Polanyi's The Great Transformation is among the more famous works in this tradition, but it is far from alone."

      This is a fantastic comment. A lot of people cannot get their heads around a common, but what seems to classical political economy, an anachronistic phenomenon; on the one hand the state seems more intrusive than ever (surveillance, accountability regulations, bureaucracy and all sorts of paperworkt; and yet at the same time people are complaining about privatisation, reductions in the amount and quality of government services etc. On the one hand we had financial deregulation and light touch regulation from Government, yet on the other hand government to income ratios are bigger than ever and have kept growing since WWII.

      Bureaucratic capitalism is a term used by the Frankfurt philosophers. But to mainstream economists that is an oxymoron.

      We can get round this paradox by getting engaged with political science (and not just on our own terms) and start dropping classical rational choice assumptions. I am not familiar with Polanyi, but I have a feeling this is the way to go.

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    14. @Anon 11:43 - absolutely. There's an important discussion to be had here, both in reality and image. Much is made by some people of central bank independence. But the central bank is owned by the government, and it's senior officers are appointed by the government. Does anybody seriously think that it wouldn't do whatever the government wanted? At the same time, all governments have been happy to hide behind an appearance of technocratic neutrality - when that neutrality ought to be seriously in dispute. As you say this is an institutional question and, at the same time, deeply political.

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    15. @James:
      Now, take your time and read again what you wrote:
      "Markets = failure. Government = success. Yeah, right. Ask a North Korean."
      Think.
      You wrote: "Markets = failure."
      Now, does this notion represent or have the approximately the same meaning as SWLs quote that you use (rather, his words you clearly misinterpret and misunderstand): "mainstream economics is all about market failure"?
      Do you really think that the term 'market failure' can be interpreted or extended to become "markets=failure"??
      Check any basic definition of 'Market failure' and it refers to 'a **situation or occurence**' when markets fail...
      This can in no way can be interpreted as saying that "markets equals failure" - unless you have no idea what the term means and want to misrepresent SWL of course.
      And similarly, where did you get "Government = success" from? Clearly not SWLs post. Was this another misinterpretation that followed your first? As SWL responds to you, various forms of market failure require government interventions (which may or may not be successful of course). No one here is even remotely suggesting that governments running things or incidences of government intervention are always successful.
      So, the key question: what exactly is it that's driving you to deliberately misrepresent people's views and ideas?

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    16. South Korea started off in the 1960s as one of the poorest countries on the entire planet, with much of the population barely above subsistence level. Then it started a programme of quick industrialisation, which was the most heavily, overbearingly, dictatorially state-led, dirigiste, protectionist, and winner-picking of any country outside the communist bloc. Result: South Korea is now a prosperous industrialised country whose median standard of living easily rivals many EU member countries.

      All through this process, the official ideology of North Korea viewed South Korea as the Satanic Enemy Number One, and the two countries were technically even at war with each other. Something which remains true to this day, in fact.

      Government = success. Yeah, right. Ask a South Korean.

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    17. It was a big competitive play, for sure, but a peaceful, globalising, market-based one. That raised societal welfare via trade. Government spending is a low'ish 30% of GDP.

      It could have been so much better if that figure was lower. SK vs NK remains an outstanding example of socialist failure vs capitalist success, despite this.

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    18. S W-L
      I decided not to pursue an academic career over 25 years ago despite having a bleeding heart, partly because of the overwhelming socialist bias of social scientists. It seems nothing has changed, or as if it's got worse. You can only push so much water uphill. Luckily, hardly any social science students give a damn about what they are being taught, merely passing through to get the grades and hopefully a ticket to a job.

      Back to social science: Markets create wealth, are about success. Trade isn't a zero sum game. To dismiss this as a given and to say mainstream economics is mostly about market failure is a really sad state of affairs for economics. Dismal, in fact.

      Fortunately, the real world of markets and exchange outside mainstream economics goes on creating wealth despite this, fighting off the various attempts to hobble it as best it can.

      I know some of your wilder supporters here think more taxation would be a good thing, but for those paying 42% marginal tax rates on income, or aspiring to, more socialist experiments seem like dangerously expensive pipe dreams. And why they successful run scared of fiscal profligacy, no matter how much they love the "free" NHS or "free" state education.

      And they just don't trust Keynesian mainstream economics enough to think that even more deficit spending than cyclically is inevitable is worth the risk of even more taxes in the future. At least I don't.

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    19. "And they just don't trust Keynesian mainstream economics enough to think that even more deficit spending than cyclically is inevitable is worth the risk of even more taxes in the future. At least I don't."

      A few people owe an apology. We do need rational forward looking agents in Keynesian models.

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    20. "I know some of your wilder supporters here think more taxation would be a good thing, but for those paying 42% marginal tax rates on income, or aspiring to, more socialist experiments seem like dangerously expensive pipe dreams."

      It's a trope of the rich that they are the "victims" of taxation. They are also the beneficiaries of "welfare benefits" in the form of tax relief on pensions and ISAs even before we start talking about other methods of tax evasion. And the people paying the highest marginal tax rates are the poor. Such self-unwareness is entirely typical.

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    21. James: Again, I believe you know what the term 'market failure' really means. And it doesn't mean or imply that 'markets= failure', or that SWL is asserting markets always fail. Similarly for 'Governent = Success'. So again, hat exactly is it that's driving you to deliberately misrepresent people's views and ideas?
      Your points again are completely unfounded and not born out by any eveidence or real world experiences. Eg. The highest marginal tax rates on income of the last century in the post ww2 period in both the US and UK are of course associated with the most successful economic era we have known for these societies, as measured by the key economic indicators of GDP growth, unemployment rates and inflation, not to mention average living standards. Eg2. There are plenty of countries with much higher marginal tax rates than the UK, who over the past 30 years or more have economically outperformed us, enjoying higher average incomes and general living standards than us.
      You might also want to google the relatively recently coined term "Corpoate welfare"...and appreciate that the taxpayer in the UK directly and indirectly subsidises many of largest private companies and banks to the conservatively estimated amount of £85bn per annum. Gastro George above makes other points to further illustrate the complete incorrectness of your evidence free world-view.
      Before commenting, and to avoid appearing as an idealogue, do you not think it wise to actually check whether the evidence bears out what you believe?
      If it doesn't, then do the obvious. Stop making a fool of yourself by spreading falsehoods which are so easily disprovable, and just change your views...it really isn't difficult.

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    22. Gastro George.
      Only on a full paid up Socialist Worker would say that someone in the UK paying a 42% marginal tax rate was rich. Rich, indeed.

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    23. "to what extent are central banks designed to be a barrier to money financing by the state, and is that role still valid or outdated. "

      Well, obviously, it's the only reason the central bank is separate from the state, and it's clearly still a major role.

      The big question is why you would ever want a barrier to money financing by the state. I've never seen a convincing case for it, even though it seems to have been an article of faith among many "mainstream" economists.

      Empirically, this barrier seems to create recessions, increase inequality,but do absolutely nothing to prevent hyperinflation. The social dynamics mean that the central bank refuses to help the state with money financing during demand-side busts (when it should), but is perfectly willing to print money during demand-side booms and supply-constrained periods (when it shouldn't).

      There is a very strong case made by a HETERODOX group, the "modern monetary theorists", that you do NOT EVER want a barrier to money financing by the state. In short, money financing by the state is a GOOD thing, now and always. That's the only point being made by the MMTers, really.

      Which is why you should listen to heterodox economists. Some of them have some good points. Obviously, there are a lot of heterodox schools, and some of them are fools, but some of them seem to just be correct.

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    24. @JiL - An interesting comment. Have you seen the surveys of people's opinions of their relative income? Those at the lower end of the high tax bracket think of themselves as being paid average wages, when in fact they're in the top 15%. My comment was admittedly a bit throwaway, but was intended as a partial antidote to the complacency of those 15% (which includes me BTW).

      But then it doesn't look like you read all of my comment. A high proportion of those paying 42+% marginal tax rates will be those just above the basic tax allowance - as they lose means-tested benefits for all wage increases that they get.

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    25. One thing to think about re: central banks as barriers. I might be mistaken, but wasn't this model of the ideal CB part of a wave of "technocratic" politics that washed over the globe, I believe in the 1980s? I'd really have to dig to find work on this--I remember this as part of bigger studies or technocracy (usually related to Latin America). That is, keep the technical issues to the technocrats and away from politicians, and the idea that economics is apolitical and technical became louder in the 1980s. This is all Weber and Critical Theory. Miguel Centeno wrote on technocracy in Latin America in the 1990s, although he didn't touch central banks so much.

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    26. Gastro George.
      At least we can agree just how much we need some strong RGDP growth.

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  5. Many people probably prefer a more Popperian approach to (macro)economics, not the kind of Lakatosian variety of research programmes. A Popperian approach would basically start with the basic general equilibrium model and then add layer upon layer until reality is reflected perfectly. Progress in this sense would be a generally accepted microfounded macroeconomic model that combines ALL innovations made so far, from asymmetrical information, rent-seeking, financial frictions and so on, to irrationality (exuberance or panic), monetary constraints, trade theory and so on... the whole national economy in an intertemporal, global framework. This would obviously be extremely complex. I know that central banks do something like that, though not as extreme, but they also rely on parameters instead of making these parameters themselves dependent on something else.
    As an aside, I think economics will always have the problem that once this general model is accepted and known, this knowledge will alter behavior again, because then private actors can foresee central bank decisions and exploit them, which the central banks then also have to consider, etc, etc...

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    1. "Many people probably prefer a more Popperian approach to (macro)economics, not the kind of Lakatosian variety of research programmes. A Popperian approach would basically start with the basic general equilibrium model and then add layer upon layer until reality is reflected perfectly. Progress in this sense would be a generally accepted microfounded macroeconomic model that combines ALL innovations made so far, from asymmetrical information, rent-seeking, financial frictions and so on, to irrationality (exuberance or panic), monetary constraints, trade theory and so on... the whole national economy in an intertemporal, global framework."

      A particularly insightful comment, Alexander.

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  6. "However pretending mainstream economics is something that it is not just devalues these criticism"

    I'd agree--in particular, that "mainstream" economics (whatever this might be--I don't think you economists even know) is the first and last word on the subject, or even comes close to encapsulating what an "economy" involves. The insularity, narrow- or closed-mindedness, and arrogance of the economics profession is itself dangerous. There is a whole world of economic sociology, political economy, economic anthropology, and other areas of endeavor--and yet economists like Krugman or Wren-Lewis or others have these "eureka!" moments who you discover that maybe politics matters (and then, like Noah Smith, proceed to look like 12-year-olds when turning to political analyses).

    I appreciate what SWL has been trying here, and I follow this blog regularly and have learned a lot. I share the annoyance and frustration SWL talks about here. But it's annoying and frustrating as well to see the discourse so circumscribed. I wonder if SWL would better understand "macromedia" (an old idea outside economics, albeit not using this word) and address it if his own "theoretical" horizons were expanded.

    Random rant over.

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    1. Maybe - so help broaden them with some references I can follow up. I actually worry a lot when talking about issues outside my own area of expertise that I am ignoring lots of existing analysis, and do what I can to search for it, but I'm very happy when someone who knows these other areas well can point me in the right direction.

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    2. I always liked the blog by this anonymous fellow, "Unlearning economics." I read his posts and references, and it dovetailed perfectly with much economic sociology. The late Richard Swedberg put out a good book on economic sociology as well. Neil Fligstein's Architecture of Markets (Princeton, 2001) and The Transformation of Corporate Control (Harvard, 1990) approach economic organization and practice from an embryonic field theory perspective (the original model for which, with hypotheses, was proposed by Paul DiMaggio and Walter Powell in American Sociological Review way back in 1983). William Roy (Socializing Capital) and Frank Dobbin (Forging Industrial Policy) also make good cases for applying power and culture to economic practice. Note that you won't find the kinds of abstract models you do in macro or micro economics--partly because there is still lots of "paradigmatic" work left to do, partly because there is this logic of contingency (space & time) in the theoretical foundations (so that the usual macroeconomic models, which really abstract away from concrete space and time, would be foreign). Maybe that's the way to go. Or maybe not. I'd add my own radical ideas, but I'll stick with being anonymous for the time being. (I suspect you'd appreciate the Fligstein work and DiMaggio and Powell, but maybe I'm wrong).

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    3. And I do appreciate your admitted caution--it's a welcome relief to the arrogance of the likes of Sachs, or Noah Smith, or even Krugman at times.

      One economist who seems to be closer to these other social sciences is Roger Farmer. He seems to have this appreciation for agency and structure, albeit in a watered-down way. His claim that there can be multiple equilibria also speaks to the appreciation in other social sciences for context.

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    4. "There is a whole world of economic sociology, political economy, economic anthropology, and other areas of endeavor--and yet economists like Krugman or Wren-Lewis or others have these "eureka!" moments who you discover that maybe politics matters"

      I agree with this particularly re Krugman. I studied Political Science specialising in international relations and although I agree with Krugman re the Iraq War, I find his reasoning very naive. I guess that is how economists look at us when we talk about economics.

      I often feel though that the issues are very connected. A lot of economic problems in the third world are due to political problems and vice versa. You really need to have a certain command of knowledge across the spectrum.

      What I find unhealthy about economics is this idea that you have to unite everything with a rational choice framework. In political science we have alternatives. (Yes we do use rational choice, for example in explaining the stability of the bi-polar power arrangement of the Cold War and use game theory etc.) But it is not the only way we look at this. We understand both the strengths and the weaknesses of this and other approaches. It gives us something to judge and critique one approach vv another. I do not think economists can even imagine dealing with an approach that does not involve rational choice, optimisation conditions and mathematical equations.

      To deal with future problems we need more openness and humility on all sides and an understanding that the truth is best found by not closing off important avenues to finding it.

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    5. It's telling that one classical non-economist who doesn't come up often, and even then in an oversimplified form, is Max Weber. (Not enough sociologists or political scientists read Weber closely, I'll admit.) For Weber, economic practice was a form of politics and culture. Weber was, if I recall, peripheral to the "war of the methods" over a century ago, but he witnessed it and, at least regarding economics, was on the losing side.

      Back to the OP, though, and responding to Enrique above (whose response exemplifies the problem, I think--seriously, not to be snarky)--there should be room for an "intellectual" and policy alliance between heterodox economists, X-Keynesian (fill in the blank for X) economists, and those in political science and economic sociology. The problem is that (macro)economists seem to presume that, at least regarding economics policy, theirs is the only game in town because of an arbitrary focus and fixation on math. (Use of math in and of itself is fine, but there is a "mathematical fetisism," to cop a phrase from Marx). So it's hard for those of us who take intellectual honesty and empirical rigor seriously to "unite" because there are status wars between the disciplines that involve theoretical and methodological squabbles rather than real debates (usually). Read Richard Swedberg's interviews with economists and sociologists Princeton, 1990)--it's amazing how well the sociologists knew economics, but how badly the economists knew sociology especially Weber)--and this includes interviews with economists who won or would win the Nobel!

      I guess what I'm taking too long to say is that there should be room for more complementary and helpful discussion that might help us confront the kind of right-wing misrepresentation we see in Washington or New York or London--but the balkanization of the social sciences (which seems defended or almost celebrated) gets in the way. Divide and conquer.

      By the way, SWL thinks it's hard to talk Keynesianism in the macromedia--try talking about "structure." In the USA you're ignored or accused of being a socialist (even if you are critical of socialism for structural reasons)!

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    6. in what sense? as it happens I am all for learning from other disciplines, although I can understand economists who find their time completely exhausted by keeping up with their own. And I am certainly not a math fetishist, and worry that the benefits that come from maths sometimes come at too high a price.

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    7. @Enrique: I was referring to defending taking the market for granted and the comment that we cannot do all things at one time. Well, a good framework should facilitate that--the natural sciences come much closer to this (not a theory but a framework) than we do. But that point of what I wanted to say ended up getting lost in other stuff. Sorry. No offense intended (I leave intended offenses for the likes of John Cochrane and Greg Mankiw, if I could ever stomach visiting their blogs). Seems we are more in agreement than disagreement.

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    8. oh none taken. And if defending taking the market for granted in many applications exemplifies the problem, then I indeed exemplify it, because I think that's a sensible thing to do. Similarly, I think economics is just so complicated that you just can't get anywhere without deliberately ignoring lots of stuff. I mean you might hope for the profession as a whole to think about everything, but no one model will come close.

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    9. These are all good references, *particularly* "Unlearning Economics", which is a very good reference to the most useful economics work which has been developed, mostly outside the "mainstream".

      I'd also read Bill Black -- because the overwhelming role of fraud and criminal dynamics has been nearly ignored by mainstream economists for a very long time. (Not since "bad money drives out good" has it been a serious topic of study in the mainstream, as far as I can tell.) And it's critically important right now.

      Economic sociology is the direction which economics needs to go in, because economics is, after all, a specialized form of sociology, just as biology is a specialized form of physics. Just do it.

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    10. Agreed. Let me throw this out. Economics has an unhealthy "physics envy": micro still looks like Newtonian mechanics (especially laws of motion), macro looks like a crude form of statistical mechanics, although in its better forms approaches something like special relativity (in form, not necessarily in predictive power). But the presumptions are these atomized "things" bouncing into each other or being launched from a cannon. Social relations (economic, political, whatever) are more complicated and seem to involve relations themselves, as well as the actors with their differing tastes, dispositions, etc. So rather than physics (with all the math), maybe the better metaphor or model is something like chemistry. There is math (e.g. kinetics), but doing organic chemistry requires attention to 1) the individual atoms (oxygen, carbon, etc. behave differently), 2) the relations (chemical bonds--are they ionic or not, what is the structure of bonds--the stereochemistry), and 3) fields (magnetic or electrostatic, heat or radiation which shape reactions). Much of that is done graphically (drawing out molecules & reactions), but the math is pretty simple (unless you want to do the quantum mechanics for each bond--but that would be the equivalent of bringing in cognitive psych, which economics hasn't done--behavioral economics is a far cry from good cognitive psych). And which social sciences are closest to this way of thinking? Econ soc & anthro. Hmm.

      So if we want to talk about "heterodox" and whatever "damage" it might do, we really should step back and try to understand what "economics" should or can be. This is a good moment to do this for all the social sciences. We all screwed up big time. Sociologists and anthropologists have a lot of good stuff to say, but strangely they have been silent. (I can guess why, but will shut up soon.) Economists need to step back now and ask just what they are talking about, and whether the language and categories are not past their sell-by date.

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    11. Oh yes, James Galbraith has also called for more attention to "crime" in economics. He has framed the whole Great Recession as, in part, the result of economic malfeasance. Markets warped not just by opportunism but by pretty conscious and deadly opportunism. (Which only institutional economics really accounts for--and where is NIE in this mainstream-heterodox picture?)

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  7. I agree with Wren-Lewis and Krugman on this. The dishonest rightwing and neoliberal economists are the ones driving people away from the mainstream and into the confused heterodox.

    Granted I have a lot of sympathy towards the heterdox, but when anonymous trolls post rude comments I lose that sympathy. They should link to bloggers they like. Farmer is good.

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  8. Try Tyler Cowen at
    http://marginalrevolution.com/
    Lots of institutional economics there.
    He even writes mainstream economics textbooks.

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    1. You recommend Tyler Cowen??? Irony surely! But it does explain a lot
      Mr. “so-called liquidity trap.”
      Despite "we’ve been at the zero lower bound for six years; we’ve seen a 400 percent rise in the monetary base without a takeoff in inflation; we’ve seen record peacetime deficits go along with record low long-term interest rates. Liquidity trap economics aren’t a speculative hypothesis at this point, they’re the world we’ve been living in for years. How can that go unnoticed?"
      http://krugman.blogs.nytimes.com/2014/11/28/in-front-of-your-macroeconomic-nose/
      And...
      http://mainlymacro.blogspot.in/2014/11/understanding-anti-keynesians.html
      http://krugman.blogs.nytimes.com/2013/02/10/still-says-law-after-all-these-years/
      http://krugman.blogs.nytimes.com/2012/02/04/the-great-anti-keynesian-flip-out/

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    2. Simon, funny thing is, you and I are on the same side. Trying to improve human welfare through more optimal instutional arrangements. I wouldn't be here otherwise.

      I recommended Tyler Cowen to S W-Ll because he has written a lot, and linked to a lot, of interesting institutional economics. And appears to have an open mind.

      Just remember, all the bigest societal failures have been from governments going too big as a % of GDP, however well intentioned, never from having too much markets.

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    3. Oh. A lot of impressive PK posts. But did you see the news yesterday. 5.6% US unemployment, down from the 10% peak in 2009. No liquidity trap there. Just a very slow recovery. So, back to the argument about how it could have been quicker. Better monetary policy (NGDP Forecast Targeting) or fiscal stimulus.

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    4. James in London: Your last two comments (9 Jan 22.17 and 10 Jan 00.20) just aren't correct. In the second one, you ignore the stimulatory effects of more Government spending - it was flat for most of the last few years, see this graph:
      https://research.stlouisfed.org/fred2/graph/?graph_id=215139

      You can see the slope of the GDP curve, the blue one, is not much different before and after the Great Recession, so why say the recovery is weak? You appear to be just following the GOP anti-Obama line. But the red slope, covering total US Government spending, is flat from 2010 onwards. How much greater would the recovery have been if this stimulus had not been so constrained?

      As for your first comment, you seem to be following the Rogoff/GOP line about debt to GDP limitations - which of course has now ben discredited, although as it is so simple for the right to understand they continue spouting it as gospel. You add something of your own, about Countries never having a problem with too much markets. It seems you conveniently ignore the fact that it was too much markets and not enough Government that caused the Great Recession!

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    5. I expect the drop in unemployment had something to do with the near 6% of GDP the US Treasury fiscally injected into that economy in 2008/9 via TARP and similar. The FED operated monetary policy, QE and TALF and trillion dollar "bailouts" with Maiden Lane and the federal takeover of Fannie Mae and Freddie Mac etc.

      Remember the headline back in June: "$29.1tn in market investments, held by 400 public sector institutions in 162 countries, which "could potentially contribute to overheated asset prices."

      Anyway guys, the three equation new Keynesian model is so last century. The 2008 - 20?? GFC has trashed it. Have a read of the Bank of Canada Review for 2007/8. The world economy imploded shortly after this "NK Celebration" was published. The new Keynesian DSGE models didn't prevent inflation doubling on the year while the Bank was dropping interest rates. Or preventing it going to minus one percent when it hit ZLB.

      The C$63 billion of Treasury fiscal stimulus in 2009 did a world of good mind you.

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    6. James: With respect, your points regarding the biggest societal failures, and also the US having not been in a liquidity trap are both completely unfounded and untrue, as the evidence/data and actual real world events demonstrate.
      Fiscal stimulus - as anon touches upon above for the US, and for the very simple reason that in a liquidity trap situation at the ZLB monetary policy is ineffective.
      The PK links were there as he is of course far more able and qualified that I am to demonstrate these points, and provides lots of information/evidence to explain why. If you disagree with them, rather than pointing me to yesterdays news, why don't you engage in what PK actually says - focussing on the evidence and data - and explain how he is wrong.

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    7. fifthdecade et al - thanks for the chart. Unfortunately I observe a rapid rise in G failing to halt the recession. And only when G flattens off does the recovery begin. I am not saying there is a link, however. I am not the GOP/Rogoff and nor are Market Monetarists.

      Market Monetarists argue it was only IT-obssessed central banks that caused the GFC. Slowing NGDP in late 2007 and especially in 2008 was ignored, creating nominal havoc, and a classic sticky wages meets falling AD shock leading to mass unemployment. Just awful.

      Not all banks everywhere overgeared, yet the GFC affected them all, a classic symptom of a macro/monetary cause. S W-L must know this, too.

      It was only when QE began to start that the recovery could kick in during mid-late 2009. The earlier fiscal stuff wasn't doing the trick. It wasn't ideal monetary policy, NGDP Forecast Targeting is that, but it has worked OK, just too slowly, as we all observe and are all dissatisfied with.

      MM also has the monetary offset theory (and constant reality) making for fiscal expansion failure. Perhaps sad, but true. frustratingly so for Keynesians and NK alike.

      We also have the doom and gloom predictions of Keynesians like PK that at the ZLB plus austerity the economy could not recover. But it has, more or less. A classic falsification if ever there was. Now saying it could have been better with fiscal too is just not good enough, devious, in fact. There is, and never was a liquidity trap. It would have been better if clear NGDP Futures Targeting had been introduced, rather than chilling spectre of rate rises the moment a glimmer of inflation appears.

      See here for more:
      http://econlog.econlib.org/archives/2015/01/simon_wren-lewi.html

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  9. "So why does Sachs keep choosing to side with those advocating austerity" (from your previous blog).

    I did study from Sach's Global Macro-economics textbook and I am vaguely familiar with the MSG model which is a rational expectations general equilibrium multi-country model and is a model that was highly respected during the era of large scale econometric models and I know personally the simulations of which were even drawn on for real policy analysis.


    I am no expert, but I am trying to the understand the philosophy (rather than the mathematics) behind this. And I think it is important the public understand this if it is going to make informed decisions at elections. This is not about attacking mainstream economics or Sachs, the latter who has tirelessly worked to fight economic and social problems in Africa and environmental abuse, often without any commensurate gratitude and has had to directly confront very powerful vested interests. And I have no heterodox economics agenda, I know less about heterodox economics than mainstream economics.

    Do you think his position has anything to do with theory that is built on the representative agent, the life cycle smoothing of consumption theory and Ricardian Equivalence? He says in the post that you refer to that we need "a progressive agenda without chronic deficits", but he does not say what the problem actually is. Maybe it is not about rational expectations but incentives. As a fellow mainstream economist, perhaps you know why he is worried about these deficits in a period of weak demand.

    You say he does not understand the ZLB. But do you really think that his concerns about fiscal expansion with current high deficits would be eradicated by the ineffectiveness of an expansionary monetary policy (assuming this has to be done by targetting the short term interest rate) at the ZLB. (Send me a link if it cannot be expressed very simply).

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  10. When you are trying hard to convince policy makers and journalists that what those on the right are arguing for is not implied by mainstream thought, people from the left pop up to undermine what you say.

    And why do they do that.

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  11. This is a long comment thread, and I have only read about half of it. I had a thought on Sachs and New Keynesian macro. The question is what is the Keynesian fiscal policy variable -- government purchases (G) or the structural deficit. In new Keynesian models the variable is G minus balanced growth G (that is in the models as simulated it is G minus steady state G). This matters a lot, because the change in G is highly correlated with the change in GDP. Now old Keynesians talked about the structural deficit as Sachs did. This was odd in 1937, since G-cT != G-T.

    People who don't understand NK models (which set shockingly includes prominent economists) question the use of G in, say, Krugman's scatter graph. It is worth noting that this is the absolutely natural choice for a new Keynesian. In the standard NK models ( I should write "model" as I am thinking of Smets-Wouters) temporary tax cuts do not affect aggregate demand.

    I'm even willing to admit that the data on the recent correlation of fiscal policy ang GDP growth are even kinder to NK than to paleo Keynesian models (there are typed it) .

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  12. This debate between Sachs and Goodfriend might shed some light on where Sachs is coming from.

    https://www.youtube.com/watch?v=gEjzrS2kKfs

    Sachs sees the recession caused by loose financial deregulation and too much liquidity in the US economy that created asset price/housing bubbles during the Great Moderation problems caused by mistaken Fed policy which misunderstood events in the world economy. (Some interesting similarity here with current German concerns.)

    He also says we need a new macro-economics.

    Sachs is now a different figure to the 1990s. (That's clear from his post where he quotes Keynes's own wariness of the value in quantitatively estimating multipliers - something of course Sachs once did all the time.) He seems to be saying that large Fed financed bond purchases act to create the types of distortions he is talking about (housing bubbles etc.) In In his article he believes the right way of tackling the twin problem of deficit and deflation is targetted expenditure increases and tax increases (especially I would imagine on the rich - as well as polluters).

    When he writes against "crude AD management", it is now stating to make sense.

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    1. Sorry that should be loose financial regulation

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    2. So you're saying that Sachs is making the point that it matters WHO gets the money when the government prints & spends money? That distribution is very important?

      Yeah. He's absolutely right about that. It's pretty obvious when you look at relative propensity to spend -- if you send the money to the rich, you get no economic boost, but if you send it to the poor you get a big boost.

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    3. Yes, and notice he was saying that some time ago before a lot of people starting thinking of this (eg in "House of Debt") last year.

      He is definitely on to something. These are real ideas.

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  13. "Then why do many mainstream economists aggregate utility across individuals to construct social welfare functions? I think this is a good example of those on the right trying to suggest economics says something (utility cannot be compared across individuals) which does not represent what mainstream economists actually do. "

    Simon, I don't think that claim is completely right. Of course mainstream economists aggregate; that however does not say that they do it in a consistent way.

    I, at least, am absolutely sympathetic to redistribution and I think that "equalizing marginal utility" sounds a lot like good intuition; but it still seems to me that this is not a consistent method. "why do many mainstream economists aggregate utility across individuals to construct social welfare functions"? Because it is the only way that we have to answer the questions we want to answer; but that does not mean that we have a convincing method. Economists often assume populations consisting of quasilinear-utility individuals or identical individuals so that they can aggregate consistently - but what if we want to say something about non-identical people with non-quasilinear utility functions... Internal and external consistency are not always good friends.

    However, if you could point me to literature discussing this, I'd be grateful.

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    1. But I thought your original argument was that diminishing marginal utility was not important in what mainstream economics did. And what alternative more convincing method do you have in mind?

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    2. I can only speak for myself; I have no more convincing method, but that's exactly my problem. It's a case where intuition and available methods do not seem to fit. I have now found something by Ken Binmore discussing the problems and proposing a solution, but I have not yet really understood it.

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  14. The problem is that heterodox in the real world is now orthodox - no one believes in orthodox economics any more. Whilst the row goes on about the necessity and impact of austerity there is a sense that orthodox models are unable to cope with the reality of fearful markets and that heterodox "economists" are just frightened renters. Someone needs to change the game?

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  15. "In my view heterodox economics is far more dangerous in giving young students that lean to the left a distorted view of the mainstream which can have lasting damage. "

    The starting point of mainstream economics is limited resources and unlimited wants. That is we are all greedy. That is how it defines the economic problem. The basis of modern macro-economics is rational expectations models, something else many people do not feel comfortable with. It is the philosophical foundations that many people don't like. My guess it is particularly uncomfortable having such foundations for people whose strengths are in the humanities and philosophical side, people who naturally like to question. They just do not like starting off their way of thinking this way.

    But these may have an interest in economic problems and most likely could be very creative and make a very important contribution.

    Spending years learning something which they think starts off very suspiciously entails a huge opportunity cost and they may not consider it the best way of getting to the truth.

    What do you suggest they do?

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    1. Your argument might make some sense if all of macro fell apart once you stopped assuming rational expectations. It does not. If you do not learn something because you are suspicious of a (small) part of it before learning what role it plays, well in that case someone critical might never learn anything.

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    2. At the risk of flogging a dead horse and further drawing out an already lengthy (but interesting) discussion, I want to take issue with this statement of yours. Let me tell a story to do so.

      Once upon a time, and for quite a long time, the Ptolemaic earth-centered model was perfectly fine for what humans needed to do. That model could explain the motion of heavenly bodies, and it could explain/predict even the seemingly odd retrograde motion of Mars—although the fit wasn’t perfect.

      Now, we know today that the Ptolemaic model was incorrect, even if it mostly worked. So, given your comment above, what would you tell a young Johannes Kepler?

      Further, what would you tell Kepler when we used a sun-centered model with the planets in perfectly circular orbits around the sun (because he could then base planetary motion on a nested model of the five perfect solids, thus proving the mind and creation of a perfect God at work)? That model had a better fit with evidence than the Ptolemaic model—except the retrograde motion of Mars was off by, if I recall correctly, two seconds (not minutes or degrees) of arc. Pretty small error—but Kepler took it seriously and refined his model—planetary orbits were not circular but oval, and the five perfect solids were thrown out (a big step on his part).

      What advice would you give Kepler in either case?

      Now, I understand that a real rethinking of economics is costly. You have sunk costs in what you are doing—human capital (knowledge), social capital (reputation), etc.—and you are trying to influence policy making to avoid the stupidity that politicians always fall for. Rethinking economics is hard work, and has its risks. But there is not just heterodox literature, but also models and ideas outside mainstream economics (Weber, Bourdieu, etc) that might require thinking outside the box in terms of theory, methods, how we evaluate models, etc. And I think that is what some “heterodox” scholars really are saying.

      Anyway, a last thought.

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    3. Rather closer to home, lets think about the two major revolutions in macro that have occurred in the last century. Both Keynes and the New Classical economists had a deep understanding of what they were trying to overthrow. They did not try and argue that everything that had gone before was worthless, but instead focused on what they thought the critical problems were, and came up with clear alternative ways of doing things. In particular - and this is what this post is about - they did not misrepresent what they were trying to change.

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    4. I am not sure about that Simon. The New-Classicals went for Keynesians with a vengeance. You could say that Friedman tried to keep the basic Keynesian framework - he said so, "the framework is right, but not the conclusion" in his article he wrote called "Friedman on Keynes". The New-Classicists were a different matter. In many ways they tried to restore pre-Keynesian monetarism (see Sargent 1981), but in an even more extreme form. It would be good to review what happened, the battles were not pretty. The Keynesians were also grossly misrepresented. Angus Maddison and Robert Gordon are good on this.

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  16. I am a private sector macroeconomist who "learned" his economics a while ago (circa the seventies) and I think that there are a lot of people somewhat like me who may well have missed out on some of the more recent controversies...Furthermore in the present stage of my career, I happen to work about 9000 km south of the UK, where libraries and book stores are yet to be discovered technical innovations.

    I have been trying to follow these debates, but it is somewhat hard when you not quite sure of having accessed the fundamental papers on the Internet (forget Journals, they are expensive and anyway, they don't take credit cards from where I live).

    Please allow me to make this suggestion and erhaps you have already done this or know of someone who has done this well, but it seems to me that you could provide a great service to the non-academic part of the profession: put together a bibliography of essential papers that is easily accessible from the internet and set it up on your blog. I am sure a lot of people like me would be ever so grateful. And on a sarcastic note, I know of a great deal of City economists - been there, done that - who would greatly benefit, but likely won't.

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  17. Simon, what is your view on Modern Monetary Theory (MMT)?

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  18. Why don't you own your failure instead of trying to squirm out of it?

    Where did over optimistic projections that were wrong, that growth will resume despite austerity came from if not mainstream? If policy makers are not listening to mainstream, who are they listening to?

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    1. Because it was not my own failure, as everything I have written makes crystal clear. I suggest you do some research before making such a ridiculous statement. Policy makers abandoned mainstream macroeconomics in 2010, as a result of pressure from the right and panic about the Eurozone. That is obvious to anyone who has an open mind.

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    2. So the IMF, World Bank, ECB, European Comission, and national governments were all using heterodox economics?

      Oh my. Does this heterodox school have a name it would be nice to know.

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    3. To my knowledge they were using new keynesian and new classical models, from where this error originated. But feel free to correct.

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    4. Good grief - who said they were using heterodox models? Did you read what I just wrote? You should start debating with market monetarists - you have a lot in common.

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    5. If they were not using heterodox, surely they were using orthodox?

      Are you saying they were using orthodox models that were not mainstream? How is that even possible?

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    6. On the one hand, you and Krugman are saying that we new keynesians have known effects of fiscal policy for decades. On the other hand, models that produced disastrous predictions about (non-) effects of austerity were orthodox, mainstream new keynesian. What I am missing here?

      Setting aside the blame game, there is a huge problem here. In the UK for example, conservatives set themselfs a goal "we will balance budged by end of our term", based on these over optimistic forecasts about growth in times of austerity. When the economy fails to deliver, they just move the goalpost to the end of next governments term. And so fort. So the need for austerity never goes away and of course austerity only means spending cuts, not raising taxes.

      Wrong predictions about economic growth give raise to very toxic political dynamics. There is nothing wrong is people, collectively, want smaller public sector, and exercise their power democratically. But this is far away from democratic choice.

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    7. What you are missing is that the forecasts had nothing to do with how fiscal policy is treated in these models. But you also presume that the forecasts, if they had been right, would have justified the policy. Because forecasts often go wrong, you do not take risks with the recovery by undertaking austerity at the ZLB. That is straight macro textbook logic.

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    8. Models missed how growth was dependent on fiscal support from government, which makes them very bad models.

      " Osborne [...] blamed "all sorts of economic storms" for the failure to clear the UK's budget deficit as promised. "

      Promise, that was based on these failed predictions. In the real world these predictions are used very much as a basis for policy.

      " Chief Secretary to the Treasury Danny Alexander defended the government's record after Labour accusations its budget promises were "in tatters".

      The Lib Dem cabinet minister said the coalition had been right not to stick to its targets after economic problems in the eurozone had affected the UK.

      "The impact of the financial crisis on our own domestic economy also was greater than we expected," he said. "

      Ditto. What ailed the economy was governments austerity not these silly excuses.

      This is all product of rubbish economics that produces terrible outcomes. Admitting problem is the first step in the way to solve it.

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    9. I do not think you are listening to what I'm saying.

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  19. "The right won the economics debate; left and right are just haggling over details. "

    If Nick Rowe is right about winning the academic debate in economics, thankfully, he has a lot of work to do in convincing the ideas of right-wing economic theory to many policy makers, historians, political scientists and many others. Even taking perhaps the most left of policies, prices and incomes policies, NR would very surprised to learn that in many places prices and incomes policies are not daft, and in fact have been used very successfully in many places. This does not mean they work well everywhere at any time. but understanding this would require historical and other such literacy, and a totally different way of thinking than what we have had since 1978, and perhaps since 1945.

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  20. Of course ample of stupid Post Keynesians are just distorting mainstream macro and it is pointless to engage with these morons in any way. They are the left-wing equivalent of anti-Keynesian demand denying New Classicals, i.e. a waste of time.

    But let's not forget that mainstream macro has ignored debt before the crisis and it were Post Keynesians like Minsky and Koo who did not. Great economists like e.g. Krugman acknowledged this blind spot and incorporated this insight into a model.

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