Links and Stuff

This (semi-)post will meander.

The website mindful money followed up on its recent post about ‘New Economics’ sites, in which I was happy to be mentioned, with interviews with some of the bloggers, including Steve Keen and me. Here is the interview ‘home page,’ and here is my interview. A brief excerpt, sure to be hated by economists:

In economics, the elephant in the room is, and always has been, assumptions…many economic models are invalid before we even begin, simply because the assumptions don’t resemble the real world at all.

Vaguely related, I recently claimed on twitter that Bob Solow was the most quotable economist of all time. My above point about assumptions reminds me of another of his – on why he doesn’t engage neoclassical economists:

Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the Battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon Bonaparte.

To this end, Miles Kimball – a guy who is so nice and open minded I feel like I am kicking a puppy by daring to disagree with him – has a post on economic models that I would surely be excoriated for (‘straw man’) if I were to post it as a parody:

The closest we can come to treating consumption, leisure and the public good in this model as ordinary goods is if we imagine a social planner…in other words, the social planner I am talking about is not a fallible human, but the Invisible Hand.

I’m sure Gavin Kennedy would take issue with the use of the Invisible Hand metaphor, but seriously? There is an obvious chicken and egg problem if we are to invoke the ‘free market’ as a mechanism before trade takes place. I mean, I also object to the idea that there is some sort of magical omnipotent force making everything perfect in a market economy.

In other news, OWS have a video in which Raghuram Rajan repeats various crap and John Cassidy is unable to escape the governments versus markets mentality. Nonetheless, I am glad to see it. Anyway, I could ramble on for a while but I’ll stop here.

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  1. #1 by paul on August 22, 2012 - 7:28 pm

    “I also object to the idea that there is some sort of magical omnipotent force making everything perfect in a market economy”

    …And you should, as all natural systems are subject to the omnipotent forces of decay and the systems will wind down unless some external input is applied. This is true in physics and thermodynamics and is equally true wrt economic activity.

    • #2 by Unlearningecon on August 23, 2012 - 4:37 pm

      Interesting and succinct point. What is your background, may I ask? I’m guessing a (real) science?

  2. #3 by Greg Hill on August 22, 2012 - 7:37 pm

    Congrats! and thanks for the links.

  3. #4 by john77 on August 22, 2012 - 8:08 pm

    That assumes that you are living in 2012 not 1818. If I visited St Helena in 1818, I should listen with interest to a lecture on ARTILLERY tactics in the battle of Austerlitz.

    • #5 by Unlearningecon on August 23, 2012 - 4:35 pm

      Yes I would probably let him talk if he knew his stuff.

  4. #6 by ivansml on August 22, 2012 - 10:28 pm

    At the risk of being pedantic, prefixes matter – the Solow quote refered not to neoclassical, but to new-classical macroeconomists (Lucas, Sargent, Prescott, rational expectations and all that). Plenty of Solow’s work can surely be considered neoclassical. But yeah, it’s a funny quote :)

    • #7 by Unlearningecon on August 23, 2012 - 4:38 pm

      Yeah fair point. Solow contributed bucketloads to the neoclassical literature then proceeded to abandon it. I think he is more disenamoured with every passing year.

  5. #8 by Blue Aurora on August 23, 2012 - 2:28 am

    Congratulations on getting interviewed, Unlearningecon. Keep working at it. Also, could you please respond to my e-mail?

    • #9 by Unlearningecon on August 23, 2012 - 4:39 pm

      Which one? Sorry I’ve been quite busy.

      • #10 by Blue Aurora on August 24, 2012 - 2:20 am

        The most recent one that I sent to you…

      • #11 by Unlearningecon on August 24, 2012 - 4:25 pm

        Yeah will do, I have a couple in my inbox from you that I haven’t fully responded to. I’ll try and do it all at once tomorrow.

  6. #12 by Mick Brown on August 23, 2012 - 9:58 am

    The idea that some invisible magic force is at work to bring us all prosperity as long as we leave it alone is hilarious; but it might have seemed like that a couple of hundred years ago when riches were pouring into the country from empire and abroad and around the corner there was always waiting another labour-saving innovation that would also create employment.
    The labour that was saved was that of horses and employment was created in building and operating the innovations.
    The work horses have gone now and the more recent innovations involve getting rid of human labour and I can’t see that changing. Even if it is made easier to start businesses, where are the businesses to start that will employ people?
    The invisible hand nonsense grew more popular again in the last 30 years when foolish people led by the nose by spivs and charlatans thought that their income from the obvious bubble of a property boom would go on growing for ever. Even up until recently anyone expressing doubt about this would be shouted down.

    • #13 by Unlearningecon on August 23, 2012 - 4:45 pm

      It amuses me when right wingers such as those at the ASI suggest that rich companies got rich simply because they ‘let trade flourish,’ rather than actively oppressing and extracting from countries in Africa and Asia.

  7. #14 by Mark A. Sadowski on August 25, 2012 - 2:31 am

    “Only if you believe NGDP is the horse and RGDP the cart. However, from the evidence they themselves prevent, it seems it’s the opposite:”

    http://leftoutside.files.wordpress.com/2012/05/uk-ngdpbp-vs-rgdp.png?w=560&h=420

    In the context of the AD-AS Model:

    http://en.wikipedia.org/wiki/AD-AS_model

    policymakers have the ability to move the AD curve through fiscal or monetary policy. The AS curve is much more difficult for them to have much effect on.

    Most of the time policymakers use monetary policy, and in the UK’s case they are practicing Inflation Targeting. Thus policymakers will keep the AD curve fixed unless something causes the AS curve to shift and change the inflation rate.

    If the AS curve shifts left in one period inflation rises and real growth falls. Policy makers will respond the following period by shifting the AD curve left to keep the inflation rate constant and real growth will fall further.

    If the AS curve shifts right then the opposite applies. In each case RGDP will appear to move before NGDP although it is actually NGDP that the policymakers have control of.

    This is the result of the policymakers choice to target the inflation rate and not the rate of NGDP growth. Notice also that Inflation Targeting leads to even greater RGDP instability than if the policymakers chose to not respond at all.

    This is one reason why NGDP targeting is superior to Inflation Targeting.

    • #15 by Unlearningecon on August 25, 2012 - 10:49 am

      I was not suggesting that policymakers do not control NGDP (although I also believe that, but let’s assume it’s the case); I was suggesting the even if they were to boost NGDP/AD in times of recession, what would follow would not be an RGDP boost but only an inflation boost and possibly an asset bubble. This would simply be stagflation.

      I have written about this here and here, also a good post from another blog here.

  8. #16 by Mark A. Sadowski on August 25, 2012 - 6:42 pm

    If raising the rate of NGDP growth only raises inflation and not the rate of RGDP growth that implies that we are on the elastic portion of the AS curve. If that is the case there is no output gap and we are already at maximum employment.

    • #17 by Unlearningecon on August 25, 2012 - 8:31 pm

      No I am suggesting that once traditional monetary mechanisms are exhausted all the CB can do is buy assets, which will obviously inflate their prices. Have you seen the BoE’s recent report on how QE disproportionately favoured asset holders (otherwise known as the rich)?

  9. #18 by Mark A. Sadowski on August 25, 2012 - 8:58 pm

    The only way that the rate of inflation can increase without the rate of RGDP growth increasing is if the economy is on the elastic portion of the AS curve. If the economy is on the elastic portion of the AS curve then there is no output gap and employment is at its maximum level.

    However, according to the BOE report.

    Page 1:
    “Without the Bank’s asset purchases, most people in the United Kingdom would have been worse off. Economic growth would have been lower. Unemployment would have been higher. Many more companies would have gone out of business. This would have had a significant detrimental impact on savers and pensioners along with every other group in our society.”

    Page 5:
    “According to the reported estimates of the peak impact, the £200 billion of QE between March 2009 and January 2010 is likely to have raised the level of real GDP by 1½ to 2% relative to what might otherwise have happened, and increased annual CPI inflation by ¾ to 1½ percentage points. Assuming that the additional £125 billion of purchases made between October 2011 and May 2012 had the same proportionate impact, this would translate into an impact from the £325 billion of completed purchases to date of roughly £500-£800 per person in aggregate.”

    So, it would appear the UK is not on the elastic portion of the AS curve.

    • #19 by Unlearningecon on August 25, 2012 - 9:55 pm

      At this point you should know I broadly reject the AD/AS framework.

      The only way that the rate of inflation can increase without the rate of RGDP growth increasing is if the economy is on the elastic portion of the AS curve. If the economy is on the elastic portion of the AS curve then there is no output gap and employment is at its maximum level.

      This is overly simplistic and aggregative. It really depends on what the money is spent on – clearly, if it’s on asset prices it can just inflate them even if there is excess productive capacity elsewhere in the economy. The BoE report confirms as much – also I never claimed QE had no positive effects. But there are better ways that AD can be increased and channeled in to productive activity, hence having more of an effect on RGDP.

  10. #20 by Mark A. Sadowski on August 26, 2012 - 5:09 pm

    “At this point you should know I broadly reject the AD/AS framework.”

    The point of referring to the model was to show you that there is a rational and very mainstream explanation for why NGDP appears to follow RGDP, and under what circumstances this would be true. I do not intend to sell you on the framework.

    “But there are better ways that AD can be increased and channeled in to productive activity, hence having more of an effect on RGDP.”

    The BOE clearly assumes that the effect of QE on RGDP is more or less proportional to its amount. Hence if more RGDP is desired one merely needs to increase the amount of QE. So, by what criteria are these ways “better”.

    • #21 by Unlearningecon on August 27, 2012 - 2:04 pm

      Ah OK. Well what I meant was that fiscal stimulus can be directly channeled towards road, education what have you, whereas under a mainstream framework ‘making banks lend’ does not tell us who they will lend to and how productive it will be. So if you have the choice between inflating with NGDP targeting, and doing this with fiscal stimulus, obviously the latter is better.

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