Habit and Myth

by the Sandwichman

Why do you think what you think and do what you do? Habit. How do you explain why you think what you think and do what you do? Myth.

What do you want?

The Economist On Modern Economic Theory Melting Down

The most recent issue of The Economist has three articles about The Crisis of Modern Economics, with a book on the cover whose title is "Modern Economic Theory" appearing to melt down, with the most interesting one being the one on macroeconomics. All three articles are linked to in a post by Menzie Chinn on Econbrowser, where he also links to Austrian, Mario Rizzo, criticizing mathematical modeling. While recognizing some of the arguments in The Economist to be valid, Chinn definitely defends mathematical modeling, and seems to be not too critical of the dominant DSGE models. Mark Thoma at Economist's View also linked to all three articles, along with a link to Mark Gertler's mini-course that attempts to try to show how the DSGE models might be fixed to do better (an effort that I think fails).

The main arguments in the article on macroeconomics (the main other one is on financial economics) involve failures to include behavioral economics, failures to do heterogeneous agent modeling, and a general failure to model bubbles well, with Minsky being mentioned, although also dismissed as not mathematical (despite work by Steve Keen and me and others). While these arguments are correct, there is all too much defense of the DSGE models for "benchmark" purposes, although my observation is that the people working on these models, which totally dominate central bank modeling, take them all too seriously and think that models assuming rational expectations by homogeneous agents in general equilibrium can be solved with minor tweaking (and think their inclusion of sticky prices and wages is some great breakthrough to ingenuity, a point Thoma pokes at, and that many Post Keynesians have argued is neither Keynesian nor even useful, with flexprice models often less stable than fixprice ones). There is also the general ignoring of deeper problems in microeconomics in these articles, such as those pointed out in Steve Keen's _Debunking Economics_, even if I disagree with some of what he has to say in that book.

Forestry 'ethics' in Australia

Earlier this year the huge ethical problem inherent in the long-term practice of converting Australia's native forests to monoculture tree plantations was solved in one fell swoop by a director of a plantation company:

“…..Effectively most of the Central Victorian forests, it's basically a plantation. It's called 'native', but it regenerated from a 1939 fire. It all got burnt on the same day, it all regenerated on the same day - apart from having human hands touch it, that's a plantation, but unfortunately it's seen psychologically as native. But that material now is high quality. And you could plant that stuff, but you won't get quality in 10 or 15 years, or 20 or 25. …So, it's really not a native versus plantation: it's a 30 to 50 year, versus a 10 to 15 year issue.” [1]

Setting aside the fact that the 1939 fires occurred 70 years ago, rather than a mere 50, plantation management entails considerably more than a passive wait for native species to regenerate after an inferno.


In Tasmania and large areas of mainland Australia the process goes something like this: First the native forests, including ancient stands of World Heritage value, are bulldozed to the ground. A tiny minority of the logs are used for furniture making, boat building and suchlike. Ninety percent of the logs that are harvested, however, are used for the conversion to woochip to make paper pulp for the commercial benefit of large transnational corporations [2]. The rest of the considerable biomass, as can be seen in the above image [3], is piled up and burnt using napalm dropped from helicopters. In this process hundreds of years of forest mulch is also incinerated and the top soil turns into baked brick. Local residents often choke on the thick plumes of smoke that emit from these gigantic industrial fires.

Monoculture bluegum trees are planted to replace the biodiverse forest. The industrial fire prevents the regeneration of unwanted (non-commercial) rainforest species. In turn, repeated industrial applications of 1080 poison kill off wildlife that may pose a threat to these small newly-planted monoculture saplings used to replace native flora.

Over the following 20 year life span of the industrial plantation there may be repeated aerial sprayings of cypermethrin and/or other toxic insecticides; and this occurs despite the placement of these industrial plantations in major water catchments and within and around rural communities across the state. Cursory and unreliable testing is done in major arterial streams where chemicals will be the most diluted. It is no coincidence then, that that the Australian state with by far the most intensive 'forestry' regime has the highest human cancer rate in the nation. Toxicological studies in Tasmanian devils, the platypus and other native mammals, unsurprisingly, reveals the presence of POPs including organo-chlorines, PCBs, furans and dioxins. [4]

The words of Ula Majewski can only hint at the tragedy of what is happening in (what now are only the small remnants left of) Australia's native forests :

"There is nothing quite like the silence of a freshly cut clearfell or a freshly cut aggregated retention coupe, just as there is nothing quite like the terrible roar of a chainsaw or an excavator splitting open the dawn air. In these blasted landscapes, the voice falls silent; narrative is systematically rendered nonexistent. To stand within this silence, in the choked up confusion of mud and splintered stumps, to come across the jagged remains of a tree under which you sat a few weeks before, is to truly understand the terrible parameters of ignorance and disrespect that are compelled by something as fundamental and as simple as human greed. "[5]

[1] Australia's recession-proof woodchips
Peter Mares interviewing Dennis Neilson (Director of the New Zealand based forest industry consultancy, DANA Limited. A company that owns eucalyptus plantations).
ABC National Interest program. 24th July 2009
http://www.abc.net.au/rn/nationalinterest/stories/2009/2552111.htm

[2] Corporations such as Norske Skog whose major customers are the Rupert Murdoch media empire and Fairfax Media. These two companies virtually monopolise the Australian newspaper market. Also woodchipper companies such as Gunns Ltd and Forest Enterprises and the companies that invest in them (Elders, AMP, ANZ, Macquarie Group, Perpetual Investments and others).

[3] Biomass piles from a typical native forest coupe clearfell in North West Tasmania. This image was taken by the author, Brenda Rosser, in February 1996. The 100 year old regenerating forest was 'harvested' by the Tasmanian state government enterprise 'Forestry Tasmania'. Despite written assurances that the area would be regenerated back to native forest the trees were replaced by a monoculture of Eucalypt Nitens. Rainforest species in the creeks were chopped down and other breaches of the Forest Practices Code occurred with no penalties imposed by the State Forest Practices Authority.

[4] See Dr David Obendorf's comments at:
http://tasmaniantimes.com/index.php?/weblog/comments/timeline-of-the-toxicology-study-in-tasmanian-devils/

[5] The Cracking of Our Hearts. Speech by Ula Majewski., left in the Florentine. Speech: Parliament Lawns, Hobart. 13th January 2009.
http://tasmaniantimes.com/index.php?/weblog/article/the-cracking-of-our-hearts/

Fiscal Hypocrisy Goes Way Back

Steve Benen is right:

Yesterday, Senate Minority Leader Mitch McConnell addressed the costs of health care reform. "If you're going to do something as comprehensive as the president wants to do," the Kentucky Republican said, "you ought to pay for it." ... When Bush/Cheney slashed taxes by well over $1 trillion, Republicans said there was no reason to worry about paying for it. When Bush/Cheney started the war in Afghanistan, Republicans said there was no reason to worry about paying for it. When Bush/Cheney started the war in Iraq, Republicans said there was no reason to worry about paying for it. When Bush/Cheney added Medicare Part D, Republicans said there was no reason to worry about paying for it. It's not that their efforts at paying for it came up short, it's that they didn't even try. The notion of fiscal responsibility was simply deemed irrelevant -- an inconvenient detail for unnamed people in the future to worry about. And now, these exact same policymakers are, with a straight face, complaining bitterly about the fiscal habits of Democrats who are -- in case anyone's forgotten -- actually trying to pay for much-needed health care reform.

Steve adds that there are some centrist Democrats guilty of the same hypocrisy. Let me just add that Republican fiscal hypocrisy dates back to the 1981 tax cut paid for of course by increases in defense spending under President Reagan.

An Idiosyncratic Road to Crisis Theory

An Idiosyncratic Road to Crisis Theory

As an undergraduate, introductory microeconomics didn't make any sense. After a few weeks, I realized that it was easy to get a good grade until by working backwards. Since the goal was to show that everything worked out perfectly, all you have to do on an exam is to start with the answer that the market creates the best outcome, then work backward to figure out what would make it occur. Economics soon became my easiest class. Although I do not follow that procedure anymore, I am convinced that much of the economics profession still does.

Eventually, some seemingly obvious questions began to trouble me. Economics, which purports to explain the nature of a capitalist system motivated by profit maximization, lacks a theory of capital as well as any coherent explanation of the determination profits. One of reasons is simple: economics generally deals with a static conception of the world, yet fixed capital, which becomes increasingly important with the maturation of capitalism, calls out for a dynamic analysis, even with a static conception of the world.

Read the rest here

http://michaelperelman.wordpress.com/2009/07/20/an-idiosyncratic-road-to-crisis-theory/road/

Down Under's Dr. Doom Dukes It Out With Dr. Bounceback Down Under

Well, that is an exaggeration, but they were both in the same room at points and are friendly. I have just returned from Computing in Economics and Finance, 15th conference of the Society for Computational Economics, held at the University of Technology in Sydney, Australia this past week. While dominated by wonkish quants who worship DSGE models in central bank basements ("putting some learning in them will make everything all right"), there were also some heterodox types, most prominently Australia's Dr. Doom, aka, Steve Keen, a Post Keynesian who has been math modeling Minsky since before it was fashionable and is now all over Aussie media having loudly called the crash early. He also runs a lively blog, Debtwatch. Brenda Rosser and I saw him perform, which he does well, with his array of slides of misery and mounting debt, and so on.

Dr. Bounceback is Jim Morley of Washington University in St. Louis, whose talk was not as well attended as Keen's, but interesting nevertheless. He has recently been touted on some blogs (econbrowser at least) for being out on a limb as the most optimistic forecaster around, arguing that the depth of the fall will in the pattern of inventory adjustment models give us a strong bounceback, and while he was a bit more cautious in his talk, bringing in model averaging and recognizing that the current situation has other factors messing things up, he is still probably the strongest voice for a "V" pattern, as opposed to a "W" or a "U" or an "L," as these things get labeled in the world of alphabet business cycles. One can access a description of the bounceback model in a paper by Morley and Jeremy Piger, "Practical Computation of the 'Model-Free' Business Cycle"(pdf). I note that while some may think he is very conventional, he is not that big a fan of the DSGE models, and is friendly with his Post Keynesian colleague at Washington University, Steven Fazzari.

A facade to hide Australia's foreign-owned resources

Today, in a newspaper distributed in Australia and known as the 'Daily Telegraph' Mr Greg Sheridan has an article entitled 'Stern response vital to future' [1]. In it Sheridan refers to an interesting saga now playing out between an angry Chinese Government and Rio Tinto, which is a giant, mainly British-owned multinational natural-resource company that operates on 6 continents. It is the 4th largest publicly-listed mining company in the world.

Two weeks ago Mr Stern Hu, an executive of Rio Tinto who is also an Australian citizen, was detained by the Chinese Government and accused of "bribing officials from companies he was doing business with and engaging in illegal espionage."


The context for Mr Hu's detainment was that Rio Tinto had recently rejected a $25 billion bid for a 20% stake in Rio by the Chinese Government-owned Chinalco. The Chinese Government made it clear that it was "furious" about this rejection. China also missed out on its bid for a 40% cut in iron ore prices when customers from Japan and South Korea undermined China's position by accepting prices would fall by a lesser 33%.

What concerns me about the nature of the reporting on this issue in Australia's mainstream media is that the Australian reader is being misled about the true nature of these, and related, disputes. The conflict, it is pretended, is between China and Australia. But it's not. Australlian ownership levels in Rio Tinto are minimal at around 16%. By contrast 42% of Rio Tinto shareholders are in the UK and 18% of its equity is owned by Americans.

Although it's true that Mr Stern is an Australian citizen, his detainment alone does not justify the enormous amount of media coverage that his arrest is getting. Nor does it seem appropriate that our Prime Minister over-emphasise the economic stake that China has with its relationship with the Australian government; as he appears to do.

Alarmingly, Australia's mining resources (in general) are likely to be predominantly foreign-owned. [2], [3] If this nation now fits the contemporary description for Canada: a "twenty-first century version of a tenant farmer", it's about time Australian citizens were told the truth by the major GLOBAL media companies.

[1] 'Stern response vital to future by Greg Sheridan. The Sunday Telegraph. Page 100. 19th July 2009

[2] Foreign-owned major resource projects By Stephen Mayne. May 19, 2009
http://www.maynereport.com/articles/2007/07/17-2040-8377.html

[3] Foreign government investments in Australia By Stephen Mayne. May 18, 2009
http://www.maynereport.com/articles/2008/02/15-2200-9287.html

Less is More

by the Sandwichman

They say jobless. We say work less!

Only So Much Boilerplate to Go Round

by the Sandwichman

The Economist again pimps its lump:

A commonly held view is that British youngsters have been displaced by the influx of youthful migrants from eastern Europe since 2004. But this is the "lump-of-labour" fallacy—that a job for a Polish cleaner means one fewer for a native worker...

A more likely explanation, though still disputed, is that the minimum wage was pushed up too much a few years ago.

No. This is the lump of labour fallacy. And this is how The Economist has reused and reused and reused the same propaganda boilerplate nineteen (19) times since 1993!

More than a year ago, I offered $10,000 to anyone who could refute my debunking of this perennial "lump-of-labour fallacy" canard and get their refutation published in a leading economics journal. And I repeated my offer and repeated it.

No takers. No nibbles, even. Why? Because if you actually look into The Economist boilerplate about "this is the lump of labour fallacy, yada, yada..." you'll quickly learn it is bogus. It is baseless name-calling and not a bona fide "economic fallacy".

Krugman Notes the Role of Automatic Stabilizers – in Part

Paul Krugman makes an interesting argument in Deficits Saved the World:

What we’ve had is a sharp increase in the desired private surplus at any given level of GDP, due to a combination of higher personal saving and reduced investment demand. This is shown as an upward shift in the private-surplus curve. In the 1930s the public sector was very small. As a result, GDP basically had to shrink enough to keep the private-sector surplus equal to zero; hence the fall in GDP labeled “Great Depression”. This time around, the fall in GDP didn’t have to be as large, because falling GDP led to rising deficits, which absorbed some of the rise in the private surplus. Hence the smaller fall in GDP labeled “Great Recession.” What Hatzius is saying is that the initial shock — the surge in desired private surplus — was if anything larger this time than it was in the 1930s. This says that absent the absorbing role of budget deficits, we would have had a full Great Depression experience. What we’re actually having is awful, but not that awful — and it’s all because of the rise in deficits. Deficits, in other words, saved the world.

If we consult table 1.1.6 of BEA’s NIPA tables (real gross domestic product and its components in 2000$), we see very little change in either real GDP or consumption but an almost $450 billion decline in investment from 2007QI to 2009QI. Government purchases rose by approximately $90 billion with the rest of the offset coming from an improvement in net exports. However, real exports fell by over $35 billion so one of the saving graces was the fall in imports. A positive marginal propensity to import tends to reduce the Keynesian multiplier and hence works as another form of automatic stabilizer.

Sarah Palin’s Supply-side Silliness on Cap & Trade

Whenever a supply-sider lectures us on economics, it is always fun to see if said supply-sider even knows the basics of economics. Case in point in an op-ed opposing cap & trade from Sarah Palin:

There is no shortage of threats to our economy. America's unemployment rate recently hit its highest mark in more than 25 years and is expected to continue climbing. Worries are widespread that even when the economy finally rebounds, the recovery won't bring jobs. Our nation's debt is unsustainable, and the federal government's reach into the private sector is unprecedented ... There is no denying that as the world becomes more industrialized, we need to reform our energy policy and become less dependent on foreign energy sources. But the answer doesn't lie in making energy scarcer and more expensive! ... Job losses are so certain under this new cap-and-tax plan that it includes a provision accommodating newly unemployed workers from the resulting dried-up energy sector, to the tune of $4.2 billion over eight years. So much for creating jobs … The ironic beauty in this plan? Soon, even the most ardent liberal will understand supply-side economics. The Americans hit hardest will be those already struggling to make ends meet. As the president eloquently puts it, their electricity bills will "necessarily skyrocket." So much for not raising taxes on anyone making less than $250,000 a year.

I guess we should give her credit for actually knowing we are in a recession. But cap & trade is more about our long-term future and surely new jobs can be created in other sectors – assuming the current Republican love of Herbert Hoover economics does not get in the way of rational macroeconomic policy. And I would hope the former governor of Alaska might recognize that a well designed cap & trade policy could actually reduce the deficit she worries about. Conservative economist Greg Mankiw even thinks the extra tax revenues might allow us to lower other forms of taxation – perhaps on those “Americans hit hardest”.

But my main problem with this op-ed is that it contends that cap & trade represents a restriction on the supply of energy, which confuses an alleged shift of the supply curve with what is really going on – a tax wedge between the demand curve (private marginal benefit of using energy) and the supply curve (private marginal cost). Credit goes to Brad DeLong for clarifying how Palin may have missed the main reason why economists including Greg Mankiw endorse policies akin to cap & trade:

So I called Jennifer Lee:

ME: Good morning. My name is Brad DeLong. I got your email about the cap-and-trade op-ed this morning and I was wondering if I could ask you a few question. An op-ed about cap-and-trade energy policy that doesn't even whisper about global warming? Why is publishing this something to be proud of rather than embarrassed about?

Others have noticed the same problem as documented by Steve Benen.

Update: Palin was for cap & trade before she was against it.

Is California Printing Money?

Via Mark Thoma and Marshall Auerback comes a news story that has been read by Mark and Marshall as the state deciding to print its own money. But is an IOU really money when:

Banks like Bank of America and Wells Fargo stopped accepting IOUs yesterday.

If the two major banks in the state are not accepting these IOUs, they aren't exactly liquid which is a key element in the usual definition of "money".

Jobless Recovery v. Working Less

by the Sandwichman

Brad DeLong worries and worries about the "jobless recovery"

The "jobless recovery" is an oxymoron. It also stands the lump-of-labor fallacy on its head. Instead of a "fixed amount of work to be done" there is a growing amount of work to be done by a fixed number of workers. Well, the remedy is obvious -- or would be obvious but for the precision-engineered blinkers worn by almost all economists these days: "So long as there is one man who seeks employment and cannot find it, the hours of work are too long." Who said that? Why the great Keynesian himself, John Maynard!

Wait! No! That was Samuel Gompers. What Keynes said was:

"The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result as well by consuming more or working less. Personally I regard the investment policy as first aid... Less work is the ultimate solution."

So, the first Obama stimulus was first aid. Let's assume the patient is stabilized. The economy is no longer "falling off a cliff". WHAT WOULD KEYNES DO?

Jobless or work less?

No Evidence that Business Week Economics Editor Knows What He is Talking About

by the Sandwichman

Peter Coy fantasizes that he is imparting eternal wisdom when he boilerplates:

"The idea that older workers displace younger ones assumes that there’s a fixed amount of work to be done. That’s known as the lump-of-labor fallacy—and it’s at play in the anti-immigration camp as well. By and large, economies don’t work that way. Workers earn incomes and spend the money and the recipients of the money hire more people and off we go. Growth."

Indeed there is not a fixed amount of work to be done! In fact, between December 2007 and June 2009 six and a half MILLION jobs disappeared. Thus, there is not a fixed amount of work but a diminishing amount. By and large, economies don't work... the way economists pretend they do. Workers' incomes stagnate and debt soars and the recipients of the money repackage subprime mortgages as collateralized debt obligations and off we go. Collapse. ("But who could have known???")

As for that alleged lump-of-labor fallacy...

Contracting Out, Or Boeing Bites Itself on the Butt

Boeing is having a great deal of difficulty in constructing its new airplane. These problems remind me of the work of Ronald Coase.

In 1991, Coase won the misnamed Nobel Prize for economics, largely on the basis of two articles. In one of these, Coase explored the nature of the firm, "distinguishing mark" of which is the "the suppression of the price mechanism."

Coase, Ronald. 1937. "The Nature of the Firm." Economica, 4: 386-405, p. 389.

To some, at first glance, such words might suggest a radical Marxist ideology -- "suppressing the price system". In fact, Coase saw something that earlier economists had overlooked. Business transactions between firms are based on prices, but, within a business orders and procedures generally determine how things are done, not prices.

At the same time, a business can theoretically contract out virtually everything it does. A major corporation could consist of a telephone, an Internet connection, and a bank account. It could rent its office and make contracts with employees on a daily basis. It could pay other companies to produce and market its goods.

No major company has ever gone that far because of the difficulty of specifying everything it needed in contracts. Yet, in the new age of neoliberal worship of markets some corporations have actually made great strides toward creating a totally market-driven business. A few corporations have even taken to using prices within the firm in an effort to make each division accountable.


Subcontracting can have different kinds of motives. Some firms may subcontract because another firm is more efficient in performing a task. Of course, subcontracting with sweatshops in low-wage countries has become all too common. Others may do so in order to avoid responsibility, such as an otherwise "reputable" corporation that subcontracts out janitorial work to a company that pays minimum (or even subminimum) wages. In this way, the company can still present itself as an upstanding "citizen" -- never having a clue about the fate of its janitors. Other unionized firms may openly subcontract just to avoid paying union wages.

Now back to Boeing. For years, Boeing has increasingly subcontracted out work. In part, the objective was to provide jobs in countries that purchased its planes, but avoiding unionized labor was a major motive for much of the subcontracting.

Now, the subcontracting is coming back to bite Boeing. The specifications for airplane parts leave little tolerance for error, yet the quality of some of the work was substandard or late. So now Boeing is forced to purchase some of the subcontractors instead of their products.

Sanders, Peter. 2009. "Boeing Sets Deal to Buy a Dreamliner Plant: Company to Pay Vought Aircraft $580 Million, Forgive Cash Advances for Work on 787." Wall Street Journal (8 July).

Boeing Co. agreed to acquire manufacturing operations from one of its key suppliers [Controlled by the Carlyle Group] on the delayed 787 Dreamliner aircraft at a cost of $1 billion. The purchase of a plant in North Charleston, S.C., from Vought Aircraft Industries would mark the second time Boeing has taken over a key part of the Dreamliner's supply chain.

Now back to Coase. His idea was that firms chose to avoid the price system, at least in part, because of the difficulty of framing requirements in terms of a formal contract. Perhaps, the management of Boeing might consider reading Coase.

One other part of Coase' analysis was the idea transactions costs -- the time and expense of working out deals or specifying the requirements of purchased products or services. Contracts are terribly difficult to write in a way that they spell out all contingencies in advance. Economists refer to this as the principal-agent problem.

One other problem with contracting out: sometimes such arrangements require more than a contract. Parties may shut down or build new factories depending upon which side of the contract they sign. Should economic conditions change, readjustment can be costly. Workers must relocate or remain unemployed [which explains why there is an association between home ownership and unemployment]. Companies may be left with the challenge of restarting production or with finding alternative uses for empty factories.

For example, when oil prices spiked, some companies found that increasing transportation costs wiped out the expected savings from contracting out production in far-off lands. For this reason, some the business press is suggesting that Mexican maquiladoras are now becoming more attractive than Chinese sweatshops.