I watched the comedienne Wanda Sykes' remarks at the White House Correspondent's Dinner on You Tube. Commenting on Cheney, she said, in paraphrase, 'Cheney talks about all the valuable information the torture produced. It's just as if I were to rob a bank and then tell the judge, yes I did rob the bank, but look at all the bills I payed with the money.'
This is exactly right. The reason we don't torture is not or shouldn't be that it doesn't yield reliable information, or that it protects our own captive soldiers in the future, whether or not these things are in fact true. Cheney's claim that the former is false, even if it were so, is irrelevant. The logic of our moral reasoning is not a consequentialist logic. Obama has spelled out this non-consequentialist logic explicitly. The reason not to torture, he has said, is that it corrupts our character.
Monday, May 11, 2009
Sunday, May 10, 2009
Economics Was OK, It Was Only the Economists who Failed (Disputed)
There has been a lot of discussion of this recent article by Barry Eichengreen in The National Interest. In a nutshell, Eichengreen’s argument is we should not blame economic theory for the failure to anticipate and avoid the financial crisis. Theory had the tools—agency theory, asymmetric information, behavioral economics—to do the job. The problem was that some academic economists were seduced by extramural income opportunities to ignore these subfields, while the others followed along to avoid the costs of nonconformism. Fortunately, he concludes, economics is becoming more empirical, so embarrassing episodes like this will be less common in the future.
Some parts of this are unarguable. There were important theoretical developments during the past 20 years that can be drawn on to understand what went wrong. To a considerable extent, the economics profession has been suborned; it has bent itself, heliotropically, to the sources of its enrichment. Nevertheless, I would take issue with Eichengreen on two main points.
First, economic theory, taken as a whole, is culpable. The core problem is that each theoretical departure, whether it is a knotty agency problem or a behavioral kink, is inserted into an otherwise pristine general equilibrium framework. The only way you can get an article published in a mainstream economics journal (and therefore reproduce the conditions of your existence as an academic economist) is to present your departure piecemeal, showing that it exerts its effects even in an otherwise pristine universe. According to the standards that rule the profession, a GE model with one twist is theory’s version of the controlled experiment. This is why the picture Eichengreen paints for us, in which multiple unorthodox insights come together and interact synergistically, is never seen in a peer-reviewed economics journal. As a result, even though every organ of 1960's-era orthodoxy is mortally wounded, the entire body strides vigorously forward. That is a prime reason why, despite the labors of so many clever and right-thinking economic theorists, we are in this mess.
Second, the shift toward empiricism is not an unalloyed gain. Yes, much of this work is refreshingly open-minded, allowing the data to lead. An honest tally of the published literature, however, particularly in the top journals, will show that a majority of quantitative articles are concerned to calibrate existing theoretical models. Unless a model is so out of step or inflexible that it cannot be calibrated at all, it passes the empiricist’s “test”. Economics, as I have argued before here and elsewhere, has no culture of what in real sciences is known as a critical test, a confrontation with data that can be survived only if the hypothesis in question is highly likely to be correct. In other words, empirical work in economics, whatever sophisticated estimators it employs and stringent p-values it seeks, has little to do with the minimization of Type I error, properly understood. For this reason, bad theory (like the mind-numbing onslaught of DSGE models in macro) prosper even in the midst of the “empirical turn”. With enough tweaking, I can calibrate an equilibrium model of the US economy as of 2006, and again as of 2009. It won’t be exactly the same model, but it will use a standard set of baseline assumptions, so who cares?
The bottom line is that economics in both its theoretical and empirical modes is implicated in the current debacle. Making the funding of economists more transparent would help, and attention should be given to the institutional structures that favor conformism within the profession, but economics itself needs to be reformed.
Some parts of this are unarguable. There were important theoretical developments during the past 20 years that can be drawn on to understand what went wrong. To a considerable extent, the economics profession has been suborned; it has bent itself, heliotropically, to the sources of its enrichment. Nevertheless, I would take issue with Eichengreen on two main points.
First, economic theory, taken as a whole, is culpable. The core problem is that each theoretical departure, whether it is a knotty agency problem or a behavioral kink, is inserted into an otherwise pristine general equilibrium framework. The only way you can get an article published in a mainstream economics journal (and therefore reproduce the conditions of your existence as an academic economist) is to present your departure piecemeal, showing that it exerts its effects even in an otherwise pristine universe. According to the standards that rule the profession, a GE model with one twist is theory’s version of the controlled experiment. This is why the picture Eichengreen paints for us, in which multiple unorthodox insights come together and interact synergistically, is never seen in a peer-reviewed economics journal. As a result, even though every organ of 1960's-era orthodoxy is mortally wounded, the entire body strides vigorously forward. That is a prime reason why, despite the labors of so many clever and right-thinking economic theorists, we are in this mess.
Second, the shift toward empiricism is not an unalloyed gain. Yes, much of this work is refreshingly open-minded, allowing the data to lead. An honest tally of the published literature, however, particularly in the top journals, will show that a majority of quantitative articles are concerned to calibrate existing theoretical models. Unless a model is so out of step or inflexible that it cannot be calibrated at all, it passes the empiricist’s “test”. Economics, as I have argued before here and elsewhere, has no culture of what in real sciences is known as a critical test, a confrontation with data that can be survived only if the hypothesis in question is highly likely to be correct. In other words, empirical work in economics, whatever sophisticated estimators it employs and stringent p-values it seeks, has little to do with the minimization of Type I error, properly understood. For this reason, bad theory (like the mind-numbing onslaught of DSGE models in macro) prosper even in the midst of the “empirical turn”. With enough tweaking, I can calibrate an equilibrium model of the US economy as of 2006, and again as of 2009. It won’t be exactly the same model, but it will use a standard set of baseline assumptions, so who cares?
The bottom line is that economics in both its theoretical and empirical modes is implicated in the current debacle. Making the funding of economists more transparent would help, and attention should be given to the institutional structures that favor conformism within the profession, but economics itself needs to be reformed.
Prediction
by the Sandwichman
May BLS Non-farm payroll employment decline: -775,000 to -835,000 jobs lost.
One of the things I noticed mucking around with the BLS birth/death model is that the Business Employment Dynamics data upon which the model is based doesn't quite seasonally adjust. That is to say the 'seasonally-adjusted' series of business openings and closings still displays a noticeable seasonal fluctuation. Thus when the imputed birth/death adjustment is added back into raw employment data and then seasonally-adjusted, the birth/death adjustment might be partly undoing the seasonal adjustment of the employment totals.
Another thing I noticed is that seasonally unadjusted January to June employment numbers consistently display a steady slope, with the seasonally-adjusted employment figures intersecting that line at April. So far this year, the January to April segment of that line has been flat, with a minor dip down in February and March followed by a small bounce in April. That small bounce might reflect the 62,000 census workers plus the residual unadjusted seasonal variation from the birth/death model.
Assuming that the flat-line slope of the unadjusted employment figure follows the usual pattern and applying a rough seasonal adjustment formula to the result produces a trend projection loss of between 775,000 and 835,000 jobs in May, depending on whether one discounts the one-time-only 2010 census jobs. The reported number could be less because of upward revision of the April job loss figure.
May BLS Non-farm payroll employment decline: -775,000 to -835,000 jobs lost.
One of the things I noticed mucking around with the BLS birth/death model is that the Business Employment Dynamics data upon which the model is based doesn't quite seasonally adjust. That is to say the 'seasonally-adjusted' series of business openings and closings still displays a noticeable seasonal fluctuation. Thus when the imputed birth/death adjustment is added back into raw employment data and then seasonally-adjusted, the birth/death adjustment might be partly undoing the seasonal adjustment of the employment totals.
Another thing I noticed is that seasonally unadjusted January to June employment numbers consistently display a steady slope, with the seasonally-adjusted employment figures intersecting that line at April. So far this year, the January to April segment of that line has been flat, with a minor dip down in February and March followed by a small bounce in April. That small bounce might reflect the 62,000 census workers plus the residual unadjusted seasonal variation from the birth/death model.
Assuming that the flat-line slope of the unadjusted employment figure follows the usual pattern and applying a rough seasonal adjustment formula to the result produces a trend projection loss of between 775,000 and 835,000 jobs in May, depending on whether one discounts the one-time-only 2010 census jobs. The reported number could be less because of upward revision of the April job loss figure.
Mexico: Not a Model State (Yet)
In today’s New York Times, Larry Rohter writes this in the middle of an article about how Mexico is a much better place than it used to be:
Just before President Obama visited here on April 16, in contrast, the Mexican Senate approved a request by the government of President Felipe Calderón to allow the Mexican Navy to participate, for the first time, in annual exercises with the United States and other nearby countries. During Mr. Obama’s trip, Mr. Calderón even briefly addressed Mr. Obama in English in public at the Mexican White House; that was something that Mexican presidents always avoided in my day, for reasons of sovereignty, self-image and the very complicated history of American-Mexican relations.
None of this suggests that Mexico has become a model state.
Political Aspects of Full Employment II, 1.
by Michal Kalecki
The above is a very crude and incomplete statement of the economic doctrine of full employment. But it is, I think, sufficient to acquaint the reader with the essence of the doctrine and so enable him to follow the subsequent discussion of the political problems involved in the achievement of full employment.
In should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called 'economic experts' closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.
There are, however, even more direct indications that a first-class political issue is at stake here. in the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany. This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler. The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter's profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article.
The reasons for the opposition of the 'industrial leaders' to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment. We shall examine each of these three categories of objections to the government expansion policy in detail.
next
The above is a very crude and incomplete statement of the economic doctrine of full employment. But it is, I think, sufficient to acquaint the reader with the essence of the doctrine and so enable him to follow the subsequent discussion of the political problems involved in the achievement of full employment.
In should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called 'economic experts' closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.
There are, however, even more direct indications that a first-class political issue is at stake here. in the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany. This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler. The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter's profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article.
The reasons for the opposition of the 'industrial leaders' to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment. We shall examine each of these three categories of objections to the government expansion policy in detail.
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Saturday, May 9, 2009
Scientific Integrity for Economists
The federal Office of Science and Technology Policy is taking comments on its draft principles of scientific integrity. Here's what I wrote:
UPDATE: The rules for biomedical researchers may be tightening. Why can't we do this for economists?
I am writing to offer a comment on scientific integrity. As we know, it is important that those whose work is used to provide a scientific basis for policy decisions reveal the sources of their funding so as to avoid conflicts of interest or undisclosed potential bias. This stipulation has made gradual progress in the medical sciences in particular -- something for which we should all be grateful. Unfortunately, in my own field of economics no one makes or enforces such a rule. Economic analysis often plays a central role in decision-making, and economists are often funded by interested parties, but disclosure is nonexistent. It is unlikely that the economics profession will take the lead in remedying this situation, so we have to look to our clients. If OSTP would take a clear stand on this matter it would improve the credibility of analysis entering the regulatory process and would also have a salutary effect on the profession itself.
UPDATE: The rules for biomedical researchers may be tightening. Why can't we do this for economists?
Statisical Aspects of Fool Employment
by the Sandwichman
Dean Baker points out that among the discrepancies in the "better than expected" April employment number from BLS is the fact that the "birth/death" adjustment for April 2009 is 50,000 jobs higher than it was for April 2008 -- an unlikely eventuality.
The explanation for this is mind boggling. For the most part, the BLS simply assumes that the more firms go out of business, the more new firms start up...
More egregious than the questionable BLS imputation is the tendency in media commentary to interpret the result as some kind of turning point. 539,000 job losses is huge, but it's an improvement over the 699,000 jobs lost in March or the 681,000 in February... right? No. It's a further deterioration of the job market at a decelerating rate.
But wait, minus the birth/death imputation the trend is: February 815,000, March 813,000, April 765,000 . And, net of the extraordinary, one-time-only hiring of 62,000 people for the 2010 census, the April figure would be 827,000. It's also worth mentioning that these losses are from a progressively shrinking base, so a given number of job losses represents a larger percentage loss.
[Correction: the birth/death model imputation is not seasonally adjusted, so, strictly speaking, it's not cricket to subtract it from the monthly unemployment numbers, which are seasonally adjusted. But since my point is mainly that the 539,000 figure is no cause for celebration, these numbers will do as 'ballpark estimates'. The BDM is, after all, itself a sort of ballpark estimate of an unknown number.]
Discounting for statistical anomalies, the trend appears to be one of accelerating job losses. The best that can be said for the April situation is that the acceleration of job loss is within the margin of error. Whoop-de-doo!
Dean Baker points out that among the discrepancies in the "better than expected" April employment number from BLS is the fact that the "birth/death" adjustment for April 2009 is 50,000 jobs higher than it was for April 2008 -- an unlikely eventuality.
The explanation for this is mind boggling. For the most part, the BLS simply assumes that the more firms go out of business, the more new firms start up...
To account for this net birth/death portion of total employment, BLS uses an estimation procedure with two components: the first component excludes employment losses from business deaths from sample-based estimation in order to offset the missing employment gains from business births. This is incorporated into the sample-based estimate procedure by simply not reflecting sample units going out of business, but imputing to them the same trend as the other firms in the sample. This step accounts for most of the net birth/death employment.So, for example, if 227,000 jobs were lost at firms that went out of business in April but other firms shed only about .5% of their employees that month, then the BLS pretends (roughly) that new firms created 226,000 new jobs (with some minor adjustment to take into account the historical trend over the last five years). This actually might make some kind of sense in normal times, because the BLS survey systematically misses employment at firms that are starting-up. But there's a recession on. And a credit crunch.
More egregious than the questionable BLS imputation is the tendency in media commentary to interpret the result as some kind of turning point. 539,000 job losses is huge, but it's an improvement over the 699,000 jobs lost in March or the 681,000 in February... right? No. It's a further deterioration of the job market at a decelerating rate.
But wait, minus the birth/death imputation the trend is: February 815,000, March 813,000, April 765,000 . And, net of the extraordinary, one-time-only hiring of 62,000 people for the 2010 census, the April figure would be 827,000. It's also worth mentioning that these losses are from a progressively shrinking base, so a given number of job losses represents a larger percentage loss.
[Correction: the birth/death model imputation is not seasonally adjusted, so, strictly speaking, it's not cricket to subtract it from the monthly unemployment numbers, which are seasonally adjusted. But since my point is mainly that the 539,000 figure is no cause for celebration, these numbers will do as 'ballpark estimates'. The BDM is, after all, itself a sort of ballpark estimate of an unknown number.]
Discounting for statistical anomalies, the trend appears to be one of accelerating job losses. The best that can be said for the April situation is that the acceleration of job loss is within the margin of error. Whoop-de-doo!
Political Aspects of Full Employment I, 3.
by Michal Kalecki
It may be objected that government expenditure financed by borrowing will cause inflation. To this it may be replied that the effective demand created by the government acts like any other increase in demand. If labour, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services. (In the state of over-employment of resources such as we witness at present in the war economy, an inflationary rise in prices has been avoided only to the extent to which effective demand for consumer goods has been curtailed by rationing and direct taxation.) It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.[*]
[*]Another problem of a more technical nature is that of the national debt. If full employment is maintained by government spending financed by borrowing, the national debt will continuously increase. This need not, however, involve any disturbances in output and employment, if interest on the debt is financed by an annual capital tax. The current income, after payment of capital tax, of some capitalists will be lower and of some higher than if the national debt had not increased, but their aggregate income will remain unaltered and their aggregate consumption will not be likely to change significantly. Further, the inducement to invest in fixed capital is not affected by a capital tax because it is paid on any type of wealth. Whether an amount is held in cash or government securities or invested in building a factory, the same capital tax is paid on it and thus the comparative advantage is unchanged. And if investment is financed by loans it is clearly not affected by a capital tax because if does not mean an increase in wealth of the investing entrepreneur. Thus neither capitalist consumption nor investment is affected by the rise in the national debt if interest on it is financed by an annual capital tax.
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It may be objected that government expenditure financed by borrowing will cause inflation. To this it may be replied that the effective demand created by the government acts like any other increase in demand. If labour, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services. (In the state of over-employment of resources such as we witness at present in the war economy, an inflationary rise in prices has been avoided only to the extent to which effective demand for consumer goods has been curtailed by rationing and direct taxation.) It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.[*]
[*]Another problem of a more technical nature is that of the national debt. If full employment is maintained by government spending financed by borrowing, the national debt will continuously increase. This need not, however, involve any disturbances in output and employment, if interest on the debt is financed by an annual capital tax. The current income, after payment of capital tax, of some capitalists will be lower and of some higher than if the national debt had not increased, but their aggregate income will remain unaltered and their aggregate consumption will not be likely to change significantly. Further, the inducement to invest in fixed capital is not affected by a capital tax because it is paid on any type of wealth. Whether an amount is held in cash or government securities or invested in building a factory, the same capital tax is paid on it and thus the comparative advantage is unchanged. And if investment is financed by loans it is clearly not affected by a capital tax because if does not mean an increase in wealth of the investing entrepreneur. Thus neither capitalist consumption nor investment is affected by the rise in the national debt if interest on it is financed by an annual capital tax.
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Friday, May 8, 2009
The UK and Australia block urgently-needed forestry reform
Australia and the UK blocked reforms in the global forest industry this week. At the third design meeting of the World Bank Forest Investment Program (FIP) that took place in Washington in the last few days the UK took the lead in blocking consensus for safeguard criterion on the “integrity of natural forests”. The UK supported the conversion of native forests to plantations as well as the destructive process of clearfelling. The UK insisted upon the definition of ‘forest’ as one that includes industrial tree monocultures. If the UK successfully gets its way on the latter point “the replacement of the Amazon (rainforest) by oil palm plantations, as currently being planned by the Brazilian government, would not be regarded ' deforestation" under these definitions."
“The Australian government, which was not represented at the meeting itself, made a quite scandalous move by passing the message that they could not accept any text recognizing the right to free prior and informed consent of Indigenous peoples regarding FIP funded activities. This is particularly remarkable as the Australian government just adopted the UN Declaration on the Rights of Indigenous peoples, which clearly recognizes this right. And to our surprise, almost all other countries were willing to accept this principle.” [1]
[1] From the plantationsaustralia yahoogroup
terra nullius and plantations
Posted by: "james jones" jj_371@hotmail.com amisanthony
Date: Wed May 6, 2009 10:43 pm ((PDT))
“The Australian government, which was not represented at the meeting itself, made a quite scandalous move by passing the message that they could not accept any text recognizing the right to free prior and informed consent of Indigenous peoples regarding FIP funded activities. This is particularly remarkable as the Australian government just adopted the UN Declaration on the Rights of Indigenous peoples, which clearly recognizes this right. And to our surprise, almost all other countries were willing to accept this principle.” [1]
[1] From the plantationsaustralia yahoogroup
terra nullius and plantations
Posted by: "james jones" jj_371@hotmail.com amisanthony
Date: Wed May 6, 2009 10:43 pm ((PDT))
Link to Perimeter Institute Lectures on Economic Crisis
PERIMETER INSTITUTE RECORDED SEMINAR ARCHIVE is where one can find most of the lectures that were given May 1-3 at the conference on "The Economic Crisis and its Implications for the Science of Economics" at the Perimeter Institute for Theoretical Physics. The following ones can be accessed there.
Eric Weinstein, "A science less dismal: welcome to the Economic Manhattan Project"
Nouriel Roubini, "Interpreting the failure to predict financial crises and recession"
Nassim Taleb, untitled
Panel with Weinstein, Roubini, Taleb, and Richard Freeman
Emanuel Derman, "Scientists, scienster, anti-scientists and economists"
Andrew Lo, "The adaptive market hypothesis and financial crisis"
Richard Alexander, untitled
Panel with Derman, Lo, Alexander, Bill Janeway, Zoe-Vonna Palmrose
Doyne Farmer, untitled
Leigh Tesfatsion, "Introduction to agent based models"
Pia Malaney, untitled (Eric Weinstein also, this one on gauge theory)
Barkley Rosser, "A transdisciplinary perspective" (says it is on micro and macro, but not)
Alexander Outkin, Mike Brown, Jim Herriot, "A look at some models"
Samuel Vasquez, Kelly Rose (others listed, but not speaking), "Group work"
Eric Weinstein, "A science less dismal: welcome to the Economic Manhattan Project"
Nouriel Roubini, "Interpreting the failure to predict financial crises and recession"
Nassim Taleb, untitled
Panel with Weinstein, Roubini, Taleb, and Richard Freeman
Emanuel Derman, "Scientists, scienster, anti-scientists and economists"
Andrew Lo, "The adaptive market hypothesis and financial crisis"
Richard Alexander, untitled
Panel with Derman, Lo, Alexander, Bill Janeway, Zoe-Vonna Palmrose
Doyne Farmer, untitled
Leigh Tesfatsion, "Introduction to agent based models"
Pia Malaney, untitled (Eric Weinstein also, this one on gauge theory)
Barkley Rosser, "A transdisciplinary perspective" (says it is on micro and macro, but not)
Alexander Outkin, Mike Brown, Jim Herriot, "A look at some models"
Samuel Vasquez, Kelly Rose (others listed, but not speaking), "Group work"
Political Aspects of Full Employment I, 2.
by Michal Kalecki
It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption. To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally these securities will reach persons or firms which retain them as interest-yielding assets. In any period of time the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government. Thus what the economy lends to the government are goods and services whose production is 'financed' by government securities. In reality the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.
What happens, however, if the public is unwilling to absorb all the increase in government securities? It will offer them finally to banks to get cash (notes or deposits) in exchange. If the banks accept these offers, the rate of interest will be maintained. If not, the prices of securities will fall, which means a rise in the rate of interest, and this will encourage the public to hold more securities in relation to deposits. It follows that the rate of interest depends on banking policy, in particular on that of the central bank. If this policy aims at maintaining the rate of interest at a certain level, that may be easily achieved, however large the amount of government borrowing. Such was and is the position in the present war. In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940.
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It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption. To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally these securities will reach persons or firms which retain them as interest-yielding assets. In any period of time the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government. Thus what the economy lends to the government are goods and services whose production is 'financed' by government securities. In reality the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.
What happens, however, if the public is unwilling to absorb all the increase in government securities? It will offer them finally to banks to get cash (notes or deposits) in exchange. If the banks accept these offers, the rate of interest will be maintained. If not, the prices of securities will fall, which means a rise in the rate of interest, and this will encourage the public to hold more securities in relation to deposits. It follows that the rate of interest depends on banking policy, in particular on that of the central bank. If this policy aims at maintaining the rate of interest at a certain level, that may be easily achieved, however large the amount of government borrowing. Such was and is the position in the present war. In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940.
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Thursday, May 7, 2009
Those Wacky Europeans!
by the Sandwichman
EU recommends shorter working hours to prevent layoffs
Don't they know it's a lump-of-labor fallacy to think that you can fight unemployment by cutting hours? Why, it says right here in this introductory textbook...
EU recommends shorter working hours to prevent layoffs
Don't they know it's a lump-of-labor fallacy to think that you can fight unemployment by cutting hours? Why, it says right here in this introductory textbook...
Actions by Member States and social partners must aim at maintaining as many people as possible in jobs. To this end, a temporary adjustment of working hours can be an effective policy option for firms of all sizes, with the support of public funding including the European Social Fund (ESF); it can be an opportunity for re-training to facilitate internal job transfers or transitions to other companies and/or sectors in line with flexicurity.
Do We Need an "Economic Manhattan Project"?
Following a suggestion by mathematician Eric Weinstein of the Natron Group for an Economic Manhattan Project," back in December, Mike Brown, Stuart Kauffman, Zoe-Vonna Palmrose, and Lee Smolin posted "Can Science Help Solve the Economic Crisis?" weighing in favorably on Weinstein's proposal at on the edge. They criticized various assumptions of neoclassical theory and called for complexity science, agent-based models, evolutionary modles, and gauge invariance models to be used for non-equilibrium dynamics modeling, as well as analysis of policy alternatives. Criticism by Nassim Taleb, Michael Shermer, Emanual Derman, Paul Romer, and others can be found under "The Reality Club" at that link. Ronald Bailey of reason weighed in with further critiques, calling the whole thing "inane", with others commenting there as well.
On March 2, Tyler Cowen posted on "Lee Smolin on General Equilibrium Theory". This dealt with some of the related issues and dragged in me making some critical remarks, with replies by both Eric Weinstein and Lee Smolin, who is a quantum gravity theorist at the Perimeter Institute of Theoretical Physics in Waterloo, Ontario. As a result of that, I was invited to participate (and did) in a conference held May 1-4 at the Perimeter Institute on "The Economic Crisis and its Implications for the Science of Economics." The participants included some of the original critics, such as Taleb and Derman, along with a variety of people from physics, math, computer science, evolutionary biology, accounting, finance, and economics, with some of the better known others including Nouriel Roubini, Andrew Lo, Doyne Farmer, Leigh Tesfatsion, Richard Alexander, and Richard Freeman. To the best of my knowledge, no overall summary of what happened there has been posted anywhere, but it was very intense with many ideas and tough arguments going back and forth (the institute has blackboards for walls in much of it, which get a lot of use). So, attempting to go below the fold, I shall try to summarize some of it.
The conference was in two parts, a much larger public conference on May Day (for which Freeman wore a red shirt), and a much smaller workshop the next three days, with some of those speaking on the first day not participating in that ("Dr. Doom" Roubini and "Black Swan" Taleb had to go scare some finance ministers in Singapore, and Lo and Derman also departed). Also, I left after only a bit of the last day, when those still standing were trying to summarize and put forward a way to go forward (something will come out of this, but I am not sure that "Manhattan Project" will describe it). I note that the workshop included some lectures (including one by me on May 3), along with some breakout group sesssions.
Anyway, rather than a blow by blow of who said what when, let me note some major issues and positions. So, one big thing that there was a lot of agreement on was the likely superiority of agent-based modeling in some form or other for modeling non-equilibrium economic systems. A leader there for this was Leigh Tesfatsion, who maintains the main website for collecting agent-based models in economics. She called for this being done in macroeconomics to at least supplement the current DSGE models that dominate the basements of the central banks. Doyne Farmer also seconded this strongly, and is apparently building one with Robert Axtell. A curious aspect of this debate was that I learned later from Leigh that someone in attendance for part of the time was the computable general equilibrium modeler, John Whalley. However, for whatever reason, he chose not to make any comments at all on anything, and did not wear a name tag either.
A related issue, which may well be a major focus of more immediate efforts coming out of this conference, was what to do about the fact that most agent-based models are written in different languages and that it is not easy to link up between them. This is related to broader issues that had some of the computer scientists there worked up, as well as the estimable Leigh Tesfatsion, about interfacing between different computer languages in general. Also brought up in this discussion was the problem of data availabilty, with some saying that crucial data really is publicly available, but unknown by most, while others disputed this. There may be some push in these areas coming out of this.
I would note that there were several presentations of specific agent-based models in the workshop. One that was rather nice was by Alexander Outkin from before the decimalization of the stock exchanges showing that this would not necessarily stabilize things as forecast.
There were a lot of discussions of econophysics, with Doyne Farmer of the Santa Fe Institute providing a good summary of the state of play in that controversial arena. More cogent to this conference is the argument advocated by Lee Smolin, drawing on more specific work by Eric Weinstein and Pia Malaney, along with some post-docs at the Perimeter Institute, about applying gauge invariance theory to economics. Gauge invariance is an idea that floats around in some of the efforts to obtain a general unified theory of cosmology, particularly putting together general relativity with quantum mechanics, with the Perimeter Institute being a center of those who question string theory for achieving this, and Smolin a leader of this group.
Anyway, this was the matter that I had criticized, initially quite strongly, over on marginal revolution. I still hold to some of my criticisms, but also feel that I have not seen or fully understood all that there is to this argument. So, part of it seems to be a rediscovery of the wheel, in this case, the theoretical superiority of Divisia indexes for measuring values over time when relative prices and quantities are changing, with the claim being made further that this can also apply to a world of changing preferences, with the ability to chart cardinal utility over time, assuming that it is meaningful to talk about that. My problem with the former is that most economists know this, but that it is applying Divisia indexes in practice that is the problem as they assume continuous time, whereas empirical reality for actual indexes comes to us in discrete chunks not always all that close to each other. I am unsure about the utility argument.
An application was also made to financial markets by Simon Vasquez. He and Simone Severini also presented what was supposed to be a model of non-equilibrium dynamics. I would not say that this achieved something that Weinstein says can be done, which is to use gauge theory methods for measuring the curvature of fiber bundles to measure the degree of out-of-equilibriumness of a system. I think this latter would be really useful, and maybe it can be done, but I did not see this being fully achieved yet from what was presented there.
A rather looser end that I did not see the end of, as the summary from the relevant out-session was not presented before I left, was the application of biological or evolutionary ideas to all this. One disappointment was that co-organizer Stuart Kauffman did not attend, who is a biologist associated with the Santa Fe Institute, and whose work has been applied at times in economics. One presentation in the main workshop was by Kelly John Rose of PI on interpreting input-output matrices from an ecological perspective due to Robert Ulanowicz, that of ecological ascendancy, with looking at economic sectors as ecological trophic levels. He also said that gauge invariance was relevant to this, although that was not shown clearly. However, more generally, the ecological or biological arguments tended to be more on the side of this workshop.
There was more discussion of them in the main presentations the first day. So, Andrew Lo spoke of the adaptive market and how investors change their views over time in a market so as to lead to instabilities, arguably a fancier updating with neuroeconomics arguments of Minsky and Shiller. Also, the noted evolutionary biologist, Richard Alexander, spoke about various issues in the evoution of human beings and relations between kinship and sexual selection. However, he added little to the main workshop discussions, and in my private conversations with him he expressed reservations about people inappropriately using the "language of evolution" outside of more strictly biological evolution. So, while he is fine with discussing how moral systems evolved with humans over long periods of time, he was not particularly happy with people talking about firms or technologies or market forms evolving.
I am going to close this by saying that it was one of the most stimulating conferences I have been to, real clashes of serious ideas while people were willing to speak with mutual respect. I am perhaps sorry that Whalley did not speak up to defend more orthodox approaches, but, well, I do not blame him for keeping his head down. I do hope that it does lead to some further developments, and I think the critics who think this is all going to lead to proposals for central planning or whatever are barking up the wrong tree (see the discussions by Bailey and others).
On March 2, Tyler Cowen posted on "Lee Smolin on General Equilibrium Theory". This dealt with some of the related issues and dragged in me making some critical remarks, with replies by both Eric Weinstein and Lee Smolin, who is a quantum gravity theorist at the Perimeter Institute of Theoretical Physics in Waterloo, Ontario. As a result of that, I was invited to participate (and did) in a conference held May 1-4 at the Perimeter Institute on "The Economic Crisis and its Implications for the Science of Economics." The participants included some of the original critics, such as Taleb and Derman, along with a variety of people from physics, math, computer science, evolutionary biology, accounting, finance, and economics, with some of the better known others including Nouriel Roubini, Andrew Lo, Doyne Farmer, Leigh Tesfatsion, Richard Alexander, and Richard Freeman. To the best of my knowledge, no overall summary of what happened there has been posted anywhere, but it was very intense with many ideas and tough arguments going back and forth (the institute has blackboards for walls in much of it, which get a lot of use). So, attempting to go below the fold, I shall try to summarize some of it.
The conference was in two parts, a much larger public conference on May Day (for which Freeman wore a red shirt), and a much smaller workshop the next three days, with some of those speaking on the first day not participating in that ("Dr. Doom" Roubini and "Black Swan" Taleb had to go scare some finance ministers in Singapore, and Lo and Derman also departed). Also, I left after only a bit of the last day, when those still standing were trying to summarize and put forward a way to go forward (something will come out of this, but I am not sure that "Manhattan Project" will describe it). I note that the workshop included some lectures (including one by me on May 3), along with some breakout group sesssions.
Anyway, rather than a blow by blow of who said what when, let me note some major issues and positions. So, one big thing that there was a lot of agreement on was the likely superiority of agent-based modeling in some form or other for modeling non-equilibrium economic systems. A leader there for this was Leigh Tesfatsion, who maintains the main website for collecting agent-based models in economics. She called for this being done in macroeconomics to at least supplement the current DSGE models that dominate the basements of the central banks. Doyne Farmer also seconded this strongly, and is apparently building one with Robert Axtell. A curious aspect of this debate was that I learned later from Leigh that someone in attendance for part of the time was the computable general equilibrium modeler, John Whalley. However, for whatever reason, he chose not to make any comments at all on anything, and did not wear a name tag either.
A related issue, which may well be a major focus of more immediate efforts coming out of this conference, was what to do about the fact that most agent-based models are written in different languages and that it is not easy to link up between them. This is related to broader issues that had some of the computer scientists there worked up, as well as the estimable Leigh Tesfatsion, about interfacing between different computer languages in general. Also brought up in this discussion was the problem of data availabilty, with some saying that crucial data really is publicly available, but unknown by most, while others disputed this. There may be some push in these areas coming out of this.
I would note that there were several presentations of specific agent-based models in the workshop. One that was rather nice was by Alexander Outkin from before the decimalization of the stock exchanges showing that this would not necessarily stabilize things as forecast.
There were a lot of discussions of econophysics, with Doyne Farmer of the Santa Fe Institute providing a good summary of the state of play in that controversial arena. More cogent to this conference is the argument advocated by Lee Smolin, drawing on more specific work by Eric Weinstein and Pia Malaney, along with some post-docs at the Perimeter Institute, about applying gauge invariance theory to economics. Gauge invariance is an idea that floats around in some of the efforts to obtain a general unified theory of cosmology, particularly putting together general relativity with quantum mechanics, with the Perimeter Institute being a center of those who question string theory for achieving this, and Smolin a leader of this group.
Anyway, this was the matter that I had criticized, initially quite strongly, over on marginal revolution. I still hold to some of my criticisms, but also feel that I have not seen or fully understood all that there is to this argument. So, part of it seems to be a rediscovery of the wheel, in this case, the theoretical superiority of Divisia indexes for measuring values over time when relative prices and quantities are changing, with the claim being made further that this can also apply to a world of changing preferences, with the ability to chart cardinal utility over time, assuming that it is meaningful to talk about that. My problem with the former is that most economists know this, but that it is applying Divisia indexes in practice that is the problem as they assume continuous time, whereas empirical reality for actual indexes comes to us in discrete chunks not always all that close to each other. I am unsure about the utility argument.
An application was also made to financial markets by Simon Vasquez. He and Simone Severini also presented what was supposed to be a model of non-equilibrium dynamics. I would not say that this achieved something that Weinstein says can be done, which is to use gauge theory methods for measuring the curvature of fiber bundles to measure the degree of out-of-equilibriumness of a system. I think this latter would be really useful, and maybe it can be done, but I did not see this being fully achieved yet from what was presented there.
A rather looser end that I did not see the end of, as the summary from the relevant out-session was not presented before I left, was the application of biological or evolutionary ideas to all this. One disappointment was that co-organizer Stuart Kauffman did not attend, who is a biologist associated with the Santa Fe Institute, and whose work has been applied at times in economics. One presentation in the main workshop was by Kelly John Rose of PI on interpreting input-output matrices from an ecological perspective due to Robert Ulanowicz, that of ecological ascendancy, with looking at economic sectors as ecological trophic levels. He also said that gauge invariance was relevant to this, although that was not shown clearly. However, more generally, the ecological or biological arguments tended to be more on the side of this workshop.
There was more discussion of them in the main presentations the first day. So, Andrew Lo spoke of the adaptive market and how investors change their views over time in a market so as to lead to instabilities, arguably a fancier updating with neuroeconomics arguments of Minsky and Shiller. Also, the noted evolutionary biologist, Richard Alexander, spoke about various issues in the evoution of human beings and relations between kinship and sexual selection. However, he added little to the main workshop discussions, and in my private conversations with him he expressed reservations about people inappropriately using the "language of evolution" outside of more strictly biological evolution. So, while he is fine with discussing how moral systems evolved with humans over long periods of time, he was not particularly happy with people talking about firms or technologies or market forms evolving.
I am going to close this by saying that it was one of the most stimulating conferences I have been to, real clashes of serious ideas while people were willing to speak with mutual respect. I am perhaps sorry that Whalley did not speak up to defend more orthodox approaches, but, well, I do not blame him for keeping his head down. I do hope that it does lead to some further developments, and I think the critics who think this is all going to lead to proposals for central planning or whatever are barking up the wrong tree (see the discussions by Bailey and others).
Political Aspects of Full Employment I, 1.
by Michal Kalecki
A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.
If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.
next
A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.
If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.
next
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