There are essentially two reasons to study economics. The virtuous reason is that one is fascinated by a complicated world and sees economics as a good method towards understanding this complexity. My favorite incarnation of this sort of economic thinking was Thorstein Veblen. A close second was Galbraith. Not only did he devote his incredible genius towards understanding how the world works, he could be incredibly funny doing it (see above). Of course, trying to make sense of incredibly complex subjects is the hobby of geniuses—and geniuses are not all that common. The rest of the economics profession is made up of folks who have no higher ambition than to be hired by the Wolves of Wall Street, or at least invited to all their good parties. They're the folks who argue that hookers and blow have higher marginal utility than a comprehensive understanding of the world anyway.
It has already been a year since the dynamic duo of Rogoff and Reinhart were exposed as frauds. To absolutely no one's surprise, they have suffered nothing for their academic sins. They were lying in the service of the empire, after all. But imagine the nightmare if one of those two frauds was your teacher. Of course, it wouldn't actually be a nightmare if your goal was to become a fraud yourself. But if you goal was a better understanding of how the economy really works, listening to one of those clowns prattle on would be enough to bring on tears of frustration.
Amazingly enough, there is a budding revolt among economics students who are hoping to get more out of life than getting invited to the good parties. Youthful idealism is still one of the great impulses of humanity. They don't want to be part of a shameless profession. I wish them well.
Reinhart and Rogoff: One Year Later
The Great Spreadsheet Blunderby DEAN BAKER MAY 08, 2014
It has been a bit more than a year since the Excel Spreadsheet error that shook the world. For those who may have missed it, in April of 2013, Thomas Herndon, a University of Massachusetts graduate student in economics, found an error in the calculations of Harvard Professors Carmen Reinhart and Ken Rogoff on the relationship between government debt and economic growth.
Reinhart and Rogoff had done analysis showing that countries experienced sharply slower growth once their debt to GDP ratio exceeded 90 percent. With the United States and many European countries reaching debt to GDP ratios in this 90 percent range, Reinhart-Rogoff’s work was seen as a warning alarm. It was taken as providing evidence that they would have to reduce spending and/or raise taxes to get or stay below the 90 percent cutoff.
Political leaders and central bankers around the world were happy to trumpet the Reinhart-Rogoff findings. The story was that cutting deficits may slow growth in the short-term, and seriously hurt those directly affected by the cuts such as laid off government workers, but it was essential medicine for sustaining a healthy economy.
The spreadsheet error uncovered by Herndon, and analyzed in a paper co-authored with two University of Massachusetts professors, Michael Ash and Robert Pollin, showed that the Reinhart and Rogoff story was not true. Working off the spreadsheet that Reinhart and Rogoff had created, they showed there was no 90 percent cliff. Reinhart and Rogoff’s cliff depended both on the spreadsheet error and also a peculiar way of aggregating growth rates across countries.
If the numbers were entered correctly and added up across countries with more typical methods, growth did not fall off steeply for debt levels above 90 percent. The data still showed a negative relationship with higher debt levels associated with lower growth rates, but the sharpest reduction in growth rates occurred with debt levels of less than 30 percent. That was a very different story than what Reinhart and Rogoff were telling publicly and presumably also in private meetings with central bankers, finance ministers, and members of Congress.
Perhaps even more importantly, a number of analyses looked at the direction of causation between growth and debt. While Reinhart and Rogoff never directly tested for causation, they certainly implied that the causation went from high debt to low growth rates.
Following the discovery of the spreadsheet error several papers analyzed the Reinhart-Rogoff data and found that the causation went almost entirely from slow growth to high debt. In other words the story was not that countries ran up big debts and then their economies stopped growing. The story was that countries that had serious growth problems tended to run larger deficits to boost growth. Also, if an economy is growing rapidly, its debt to GDP ratio would decline (other things equal) as its GDP rose. When a country’s GDP is not rising much, it’s much harder to bring down the debt to GDP ratio.
With the academic basis for deficit reduction undermined by this new research, it might have been reasonable to expect there would be a renewed push for measures to stimulate the economy and reduce the high unemployment rates that plague most wealthy countries. However nothing like this happened. The push for deficit reduction in the United States and Europe went on just as it had before.
The one exception was Japan, where the government of Shinzo Abe embarked on an aggressive stimulus program. Abe took this path in spite of the fact that Japan has by far the highest debt to GDP ratio of any wealthy country. And Abe’s policies appear to have worked to date, as growth jumped and employment surged.
But Abe embarked on this path even before the spreadsheet error had come to light. The economics profession can’t claim that this new evidence was responsible for the change of policies in Japan.
There isn’t much that the economics profession can claim in this debate that makes it look very good. While there is now a large and growing body of evidence that larger budget deficits would boost growth and employment in the current economic environment, those in the political establishment in both Europe and the United States seem impervious to evidence at this point. They got all the evidence they needed when they had the Reinhart-Rogoff study they could cite. Now that it turns out that Reinhart and Rogoff were mistaken, they see no reason to re-examine their policies.
It is also instructive that Reinhart and Rogoff don’t seem to have suffered much in their professional standing. While both of them have produced a large body of research over their careers, so that their reputations did not rely on the 90 percent debt-to-GDP cliff, this was a rather egregious error. They justified their mistake by pointing out that it only appeared in a working paper that they had rushed to finish. A revised version of the paper included the correct numbers.
However they surely knew that the dramatic 90 percent cliff story from the original working paper was being used in policy debates around the world. Knowing that they had been rushed when they wrote that version of the paper, surely they had time in the subsequent 3 years until the error was discovered to go back and examine their work, or more likely have a research assistant re-examine their work. Obviously they never chose to do so. If either of them has suffered any professional consequence from this failure, it is difficult to see what it is.
Economics is a profession that fixates on the idea of getting incentives right. When two prominent economists can make a major error on work that had a huge impact on economic policy across the world, and face no real consequences, it says a great deal about the incentives in the economic profession. more
Economics Students Begin to Revolt
Challenging the Ruling Economic Orthodoxyby PETE DOLACK MAY 11, 2014
Economics students of the world have nothing to lose but their ideological chains. A revolt appears to be brewing — an international coalition of economics students has issued a public call for the teaching of a variety of schools of thought so that the field might actually find solutions to the world’s problems.
This is a radical departure. Orthodox economics, dominated thoroughly by Chicago School ideology, exists to justify extreme inequality and class dominance, which is why its adherents, who occupy critical financial posts around the world, continue to implement ruinous policies. At universities, the teaching of economics is similarly dominated by the Chicago School.
Not all students are content with this state of affairs. The international coalition International Student Initiative for Pluralism in Economics has issued a manifestotaking direct aim at the extraordinarily narrow curriculum. What makes this especially noteworthy is that this coalition comprises 42 student associations in 19 countries — and has a web site in seven languages. The manifesto says:
“This lack of intellectual diversity does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century — from financial stability, to food security and climate change. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods. … [P]luralism carries the promise to bring economics back into the service of society.”The very need to drag economics “into the real world” speaks for itself. The ideological narrowness of the field leaves students unprepared, the manifesto says:
“Where other disciplines embrace diversity and teach competing theories even when they are mutually incompatible, economics is often presented as a unified body of knowledge. … This is unheard of in other fields. … An inclusive and comprehensive economics education should promote balanced exposure to a variety of theoretical perspectives, from the commonly taught neoclassically-based approaches to the largely excluded classical, post-Keynesian, Institutional, ecological, feminist, Marxist and Austrian traditions — among others. Most economics students graduate without ever encountering such diverse perspectives in the classroom.”Nor should economics wall itself off from other disciplines, as if the economy is independent of the rest of human activity:
“[E]conomics education should include interdisciplinary approaches and allow students to engage with other social sciences and the humanities. Economics is a social science; complex economic phenomena can seldom be understood if presented in a vacuum, removed from their sociological, political, and historical contexts. To properly discuss economic policy, students should understand the broader social impacts and moral implications of economic decisions.”That such things need to be said, once again, speaks for itself.
How can a science call itself “sacred”?
Orthodox economists — or “neoclassical” as they are called in the field — like to present themselves as hard-headed realists who dispassionately crunch numbers. Yet consider that one of the most important Chicago School economists, Frank Knight, wrote in a leading academic economic journal that professors should “inculcate” in their students that these theories are not debatable hypotheses, but rather are “sacred feature[s] of the system.”
Under this “sacred” system, economic activity is treated as a simple exchange of freely acting, mutually benefiting, equal firms and households in a market that automatically, through an “invisible hand,” self-adjusts and self-regulates to equilibrium. Households and firms are considered only as market agents, never as part of a social system, and because the system is assumed to consistently revert to equilibrium, there is no conflict. Production is alleged to be independent of all social factors, the employees who do the work of production are in their jobs due to personal choice, and wages are based only on individual achievement independent of race, gender and other differences.
Underlying these assumptions is a concept known as “perfect competition,” a model that assumes that all prices automatically calibrate to optimum levels, and that there are so many buyers and sellers that none possesses sufficient power to affect the market. The economist Robert Kuttner, in a 1985 Atlantic Monthly article, summarized the unreality of this concept:
“Perfect competition requires ‘perfect information.’ Consumers must know enough to compare products astutely; workers must be aware of alternative jobs; and capitalists of competing investment opportunities. … Moreover, perfect competition requires ‘perfect mobility of factors.’ Workers must be free to get the highest available wage, and capitalists to shift their capital to get the highest available return; otherwise identical factors of production would command different prices, and the result would be deviation from the model.”The real world bears no resemblance to that artificial ideological construct. Rather than question their dogma, adherents instead insist government regulations get in the way, sullying what would otherwise be a pristine market. This is where “magic” comes in, as in the “magic of the market” that is routinely invoked. Because orthodox economists often treat Adam Smith’s works as sacred books, it is not inappropriate to note that Smith himself wrote that “Providence” guarantees that everyone, including the poor, has enough to eat:
“When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition.”A couple of centuries of refutation
Although Smith’s writings tend to be cherry-picked by his epigones — inconveniently, Smith acknowledged that capitalists have advantages over employees and believed that labor should be fairly compensated — he drew conclusions that long ago showed themselves unsustainable. Smith believed that capital accumulation inevitably leads to increases in employment and wages, that commercial exchange leads automatically to moral behavior, and that a free market without restrictions would restrain big merchants and manufacturers while benefiting employees and consumers.
Smith wrote in the 18th century at the dawn of the Industrial Revolution before his ideas could be put to the test; today’s orthodox economists who repeat them in the face of massive evidence to the contrary are motivated by something other than scientific rigor. Keep this mind the next time Karl Marx is dismissed as irrelevant because he wrote in the 19th century. At least Marx based his works on rigorous analysis of the actual workings of capitalism.
One of the “sacred” features of capitalism verboten to question is its alleged high levels of efficiency. Were we to examine this question from, for example, an Institutionalist perspective, we might find that is not so. Institutional economics is a school that believes economic and social behaviors are cultural phenomenon, conditioned by cultural parameters, and incorporates a focus on the deployment and concentration of power, in particular the role of institutions in shaping economic behavior.
This is one of the neglected traditions the International Student Initiative for Pluralism in Economics manifesto said should be added to economics curriculums. A leading Institutionalist economist, Marc Tool, argues that competitive market economies are inefficient because they provide no way for wants and preferences to be appraised, leaving it instead to media advertising to create demand artificially, and that markets fail to address the problems of gross income inequality. As a result, many people have their choices in life constrained
“to the point where intellect, creativity, compassion, and commitment are stunted or destroyed for those denied. We then live in a layered or tiered community suffering from elitism and privation alike. This would appear to be inefficiency of really monumental proportions.”More idle capacity, more unemployment
Unemployment is high at the same time that plants sit idle. Total U.S. industrial capacity utilization as of January 2014 is only 78 percent, and although that is higher than the figure was in the years following the onset of the global economic downturn, there has been a persistent decline in capacity usage since the 1960s. European industrial capacity is 79 percent. Despite this unused capacity, unemployment remains high in both regions.
Another way of looking at this inefficiency is that shrinking numbers of people, in all parts of the world, who have steady employment that pays a living wage. John Bellamy Foster and Robert W. McChesney in their 2013 book The Endless Crisis calculate that the “global reserve army” — workers who are underemployed, unemployed or “vulnerably employed” (including informal workers) — totals 2.4 billion. In contrast, the world’s wage workers total 1.4 billion.
The mystery surrounding orthodox economists continuing to insist on policies that have brought such ruinous results vanishes when we realize that they are promulgating ideology for the benefit of industrialists and financiers and not science on behalf of humanity. Lately is has become fashionable to advocate for a return to the Keynesian policies of the mid-20th century — even these, safely within capitalist bounds, are marginalized within the economics profession.
Keynesianism is the belief that capitalism is unstable and requires government intervention in the economy when private enterprise is unable or unwilling to spend enough to lift it out of a slump. Alas, we are not living in the mid-20th century. Keynesianism depended on an industrial base and the availability of new markets into which capitalism could expand. A repeat of history isn’t possible because the industrial base of the advanced capitalist countries has been hollowed out, transferred to low-wage developing countries, and there is almost no place remaining to which to expand.
Moreover, capitalists who are saved by Keynesian spending programs amass enough power to later impose their preferred neoliberal policies, as they began to do by the late 1970s. The “Keynesian consensus” was a temporary phenomenon tolerated by capitalists because their profits were rising despite the higher wages they were paying. If the world is undergoing a structural crisis of capitalism, then policies intended to stabilize capitalism can’t provide a long-term solution.
Study of the widest reasonable range of economic ideas is not simply a matter of healthy debate but necessary to finding a path to a better, more humane world.
Bringing alternative economic ideas back into the mainstream, especially those critical of capitalism, is part of a larger social struggle. The one percent’s preferred ideas that dominate did not fall out of the sky. As Karl Marx once wrote: “The ideas of the ruling class are in every epoch the ruling ideas, i.e. the class which is the ruling material force of society, is at the same time its ruling intellectual force.”
“Ruling” ideas create priesthoods, which are best left outside of economics departments and central banks. more