Building a Science of Economics For The Real World
Jan 22nd, 2013 by Conor McCabe
You’ve got to hand it to the US House of Representatives. Whenever there’s a problem with the world, it holds a hearing. The report below is from 2010 and carries the title, “Building a Science of Economics for the Real world.’
The picture quote is from Robert Solow, by his own admission ‘a quite traditional mainstream economist.’ Solow is concerned primarily with the dominance of the Dynamic Stochastic General Equilibrium (DSGE) model within modern macroeconomic analysis.
Solow’s statement is pp.12-15 of the report, but this is worth quoting in that Solow states his mainstream credentials (his belief that the economy a collection of roughly rational players), then goes on to criticize DSGE for its rationality in extremis.
Most economists are willing to believe that most individual “agents” - consumers, investors, borrowers, lenders, workers, employers - make their decisions so as to do the best that they can for themselves, given their possibilities and their information. clearly they do not always behave in this rational way, and systematic deviations are well worth studying. But this is not a bad approximation in many cases. The DSGE school populates its simplified economy - remember that all economics is about simplified economies just as biology is about simplified cells - with exactly one single combination worker-owner-consumer-everything-else who plans ahead carefully and lives forever. One important consequence of this “representative agent” is that there are no conflicts of interest, no incompatible expectations, no deceptions.
This all-purpose-decision-maker essentially runs the economy according to its own preferences. Not directly, of course: the economy has to operate through generally well-behaved markets and prices. Under pressure from skeptics and from the need to deal with actual data, DSGE modellers have worked hard to allow for various market frictions and imperfections like rigid prices and wages, asymmetries of information, time lags, and so on. This is all good. But the basic story always treats the whole economy as if it were like a person, trying consciously and rationally to do the best it can on behalf of the representative agent, given its circumstances. This can not be an adequate description of a national economy, which is pretty conspicuously not pursuing a consistent goal. A thoughtful person, faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on.
The full report is available here.
The idea of the economy as the sum of rational choices can be seen here in these comments by the Irish economist, Jim Power, on Tonight With Vincent Browne last year. The context is single parents in Ireland and, well, both Vincent Browne and Lousise Bayliss of SPARK take him to task.
Neither Louise nor Vincent say it directly of course, but what we are watching here is a clash between the assumptions of human behaviour as expressed in modern economics and the realities of human relationships as experienced by people in their everyday lives. And Professor Robert Solow in his evidence to the House Committee on “Building a Science of Economics for The Real World” is saying pretty much the same thing.
Finally, here’s an extract from Steve Keen’s Debunking Economics (2011). It gives a short introduction into the rise of neoclassical economics and the fallacies it contains. The piece from Keen is a way of highlighting that there are people working within economics who have a grounded view of who societies work - that it is not all one-sided; it is not all Jim Power and rational-choice theory.
It’s a broad church but the main term is heterodox economics and I would say that it is within heterodox economics that progressives and activists should reside.
Sunday Times has a piece on Joe Costello criticising Google and others at a dinner on the 9th January which was part of the EU Presidency. He is reported as saying that the tax loopholes used by MNCs need to be closed and is quoted as affirming that “if we do not act there will be people who will force us to act”
The Dept of Foreign Affairs said the comments were made in a personal capacity and the dinner ‘was off the record’.
Also this Wednesday, 4pm at the Finance Committee there are two motions (i) re. Agreement to Improve Tax Compliance and Provide for Reporting and Exchange of Information concerning Tax Matters with the United States of America;
(ii) re. Exchange of Information relating to Taxes with Montserrat
Sure to be the usual sycophancy but might be a nugget or two in it.
Copy of ILR came the post this morning too. Looks very useful. Fair play for getting it out & best of luck with it.
Plenty of alternative economic thought in Real World Economic Review (formally Post-autistic economic review). Well worth a read.
@Oireachtas Retort
Perhaps corporations which hold claims on wealth need to be looked at slightly differently ………
Why do they hold so much surplus claims as if they were a bank or something ?
http://bilbo.economicoutlook.net/blog/?p=20337
Lack of demand ?
“The notion that the “lost taxes” are in some way preventing the government from spending is just an application of mainstream economics. In terms of Modern Monetary Theory (MMT) such terminology is grossly misleading.
The tax revenue lost just represents “numbers on a bit of paper” and the only issue that is important is the amount of purchasing power that is embodied in the tax cuts (or the reversal of them) and how it is distributed.”
Levying higher taxes certainly lowers the purchasing power of those who are paying the taxes and progressives argue that the burden of this lost purchasing power should be spread across income recipients.
“Saying that the rich should pay might make progressives feel better but it doesn’t face up to the real problem – a need for fundamental re-education of the public about the role of the budget deficit and the status of currency-issuing governments. That is where the progressive effort should be focused.”
PS
In the euro area the above sov government dynamics do not apply….
Billy talks about a free floating currency sov currency system.
I am of a more conservative bent then above but I believe Billy is correct in a world without final settlement…………(he would argue differently of course given the currencies are free floating and all but we do know CBs manipulate their value using complex derivative means)
Anyway - Imagine you hold 99 % of all the claims on wealth in this world……….how can you spend it if there is no economy to spend it in ?
This is the great paradox for sov wealth holders.
The world is becoming too unstable to spend your tokens.
Hold on to your extreme ratio of wealth and your wealth declines
Dilute your claims on wealth and your wealth declines………
It is kind of funny in a sick sort of way.
Its a question of how far these guys will push it.
Also
“The problem is that the growing gap between the real wages and productivity also violated the traditional relationship between real wages and consumption. So, if the output per unit of labour input (labour productivity) is rising strongly yet the capacity to purchase (the real wage) is lagging badly behind – how does economic growth which relies on growth in spending sustain itself?
The two questions are clearly related. Marx identified the “realisation problem”, which he considered to be intrinsic to capitalism. In the past, maintaining a constant wage share helped offset this problem.
Dork - it my belief that the Euro was designed to destroy all labour value , given its intrinsic monetary structure.
I.e. euro governments cannot maintain this labour share even if they wanted to.
It therefore must MUST push up the costs of capital ($ price of oil to unheard of & sustained levels)
Bill - “It is not clear to me that the focus on tax equity (whatever that means) is sufficient to promote the political changes necessary to make the fundamental steps that are required.”
We can see how non state actors have taken executive power within the ECB…………
This is the reality of the market state.
There is no real division of power as in a nation state system.
The speaker for the market state system which has assumed effective local executive power in this jurisdiction (its not a real country) states there will be very nasty but unspecified consequences …….
But we cannot know the threats in open view in a supposed democracy and we don’t know the profits for the ECB.
The question of where these extractive profits go is never asked.
Kevin Humphreys asks the “Gov”…………………..starts at 1H .00m
http://www.oireachtas.ie/viewdoc.asp?DocID=22674&&CatID=127
(view on external player)
The Gov expects to pay “our” debts with no money in the system.
Banks don’t lend money………….. they lend credit , even CBs
Money is a national thingy.
The euro is not a money token - its a (external) capital token.
This is not understood
Peoples surplus value is being exported into global / wage arbitrage banks ………..
He later talks about the non sov nature of the government (1h .21 m)
The banks create the money (really credit) in the eurosystem which means they have total money power ….obviously under such a system they will seek to eat all of the surplus for their extractive global games.
He talks of the economy as a series of debt contracts (ironically with no real money to pay the debts in this free banking nightmare)
The Gov (1h .20 m) “Thereby sucking more resources out of the government sector when the government has to fill the hole (taxing bank money only) - this is the problem of closing that circuit”
Banks seek to extract and destroy nation state systems as they did not have total money power under such a system.
Our remaining capital accrued during the credit inflation period is being exported to Asia & the Euro core.
Again I will say it again - the Euro & the European experiment is a expression of pure monetary evil.
Especially after 1979 Ireland became part of this Euro Soviet.
Europe is at the very core of the neo - liberal nightmare since the very start - going as far back as the 1960s
All of the other CBs in the Anglo world have worked toward creating this dastardly experiment.
People need to be prepared to accept the consequences of their decisions? Does Mr. Power extend this logic to bondholders who lent to insolvent Irish banks? Of course not.
This isn’t about ration choice theory or economics or hetrodox/orthodox opinions. This is about acadeo-theological justification for banker’s policies. Switching to hetrodox economic theories simply changes the tune being played on the same pipe.
Economics should not be looked on as an academic discipline anymore. It is a form of public relations.
This is what Bollox looks like……………..
http://www.youtube.com/watch?v=pVGwa4MCmaw
Pure Soviet / Nazi propaganda
This is what real leadership looks like…………
www.youtube.com/watch?v=BotyxdQyQaA