Young People Tired of Old Economic Models

Andrew Revkin‘s post reminds me of my time at Notre Dame. He quotes Michael Sandmel, who is graduating this year from NYU:

We had around 140 attendees from universities around the country.  Many of us study in mainstream neoclassical economics departments where interdisciplinary ecological-economics, and the questioning of G.D.P. growth as a primary (or, depending on who you ask, desirable) objective, is still very much fringe thinking.  I don’t attempt to speak for all of my peers, but I know that many of us share an enormous frustration with the way in which our supposedly leading institutions teach us about the economy in a way that is myopic, ahistorical, and devoid of nearly any critical conversation about sustainability or human well being.

This is particularly troubling as we regularly see our schools accredit future leaders in business, finance, and government, sending them into a world of 21st century problems with a 20th century toolkit.

Well said!

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What are economists for, anyway?

Rob Johnson at the Institute for New Economic Thinking asks a deep and important question: does the economist serve powerful interests or society?

The answer seems clear-cut. Economists today primarily serve the needs of powerful interests at the expense of society in general.

But why?

To answer this, Johnson peals back the surface of overt corruption to explain how the problem goes far beyond that. It was not that economists were all on the take leading up to the global financial crisis, Johnson says, but that those whose visions aligned with powerful financial interests “were used as marketing vehicles, and they were not adequately skeptical as scientists of what the flaws in their vision might be.”

“The world is always uncertain,” Johnson continues, “so when people become anxious, they want the expert to tell them what is going to happen.” The problem is that these experts don’t shoulder much of the risk of being wrong – or of selling confidence when humility is called for – and it is society that ultimately pays the full price of their deception.

Yet many economists don’t even see the problem. They don’t know – or don’t want to know – that they are selling snake oil and that the abstract precision of their finely tuned mathematical models doesn’t hold up to the many contingencies of the real world.

The solution Johnson proposes resonates with me: change the way economics is taught. Rather than use principles of economics to indoctrinate, use it so study the philosophy of economic science. Help students realize that an interesting and useful economics deals with politics and institutions and power and the good society. Ethics cannot be completely absent from the toolkit of the economist. Otherwise, they end up serving the interests of the powerful at the expense of society.

Then we can get to the real issue that the profession must confront:

Economists. What – and who – are they good for?

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Jobs Reports- Good News for Whom?

Revisions and all, we are 300,000 jobs richer than we were a month ago. There are plenty of blog reactions you can read to this report, all of which tease out the different cyclical and structural aspects, short and long-term implications, much better than I could. Check out Mark Thoma’s links for a smattering.

My own reaction, yesterday morning, was cynical as ever- “great news for Barack Obama!” As I read my Twitter feed over breakfast, I particularly enjoyed Neil Irwin’s tweet: “that sound you hear is champagne corks in the West Wing.” Indeed, Obama’s Intrade odds jumped 1.5% to 57%, the highest level since August, when the Europe news was getting worse. OK, let’s leave that cynical reaction aside.

I had a reality check this morning, courtesy of the inner city of Baltimore, while driving to a church men’s breakfast in the DC area. I was riding with two fellow congregants from Luther Place Memorial Church– one an old-timer who is something of a social justice junkie, the second a community activist in Baltimore, who works to transform vacant lots to community spaces. The old-timer began to ask for our reactions to the jobs report. Before I could say my piece about it helping Obama but not being good enough for a real recovery, the activist jumped in and said, “I don’t pay attention to that stuff. Where I work, the unemployment rate is 50 to 70 percent. These reports just aren’t relevant to them.”

We immediately moved to discussing Mitt Romney’s remarks, and agreed about how out of touch he seems by saying he’s not concerned about the very poor. Ed the activist knows that way more than 5% of Americans are very poor, and no, the safety net is not catching them.

We didn’t get into the politics of it much deeper than that. But it’s clear to me that there’s a simple fact people like Mitt Romney will never comprehend, and that most of us progressives too easily forget (especially when we get “good” economic news). Our economy has been leaving many behind for some time now. The great recession has made things worse, and there is no such thing as an economic recovery in places like inner city Baltimore.

This whole conversation was underscored well by a reflection from Richard Rohr, read toward the end of this breakfast (and it was quite serendipitous- our reader opened to the book to a random page). It was titled “Who are the poor?” and it read,

“The Gospel sounds very different to a man with a full stomach than it does to a man with an empty stomach…that’s why Jesus said the Gospel had to first be preached to the poor.”

When we hear the jobs report, with our full stomachs, we have all manner of reactions that will inherently be divorced from the reality that the poor experience. Yes, the January jobs report matters. Cynically, it helps Obama on the margins, which is good, because he is way better than the other guy. But, jobs reports like these are not good enough. 

This is true in the limited sense that we are far from full employment, which we rightly hear from Mark Thoma, Dean Baker, et al. However, this jobs report is more importantly not good enough when read by those with empty stomachs. Unfortunately, with our current economic structure, no jobs report will be Gospel or good news to them.

The first Friday of every month this year, we will hear a (hopefully) six-digit number. Pundits and economists will weigh in, good and bad. Let’s just all keep in mind that a jobs report sounds very different to a man with a full stomach than it does to a man with an empty stomach. We should all work for an economy in which jobs reports can be truly good news for the swelling ranks of the poor.

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Economist: Blog Heterodoxy on the Rise

It’s been a little while since I last posted…theoretically, a good New Year’s resolution would be to start posting more, but I’ll have to see if time allows. I was immediately drawn, though, to this story from the latest issue of the Economist: “Heterodox Economics: Marginal Revolutionaries.” The author focuses in particular on two schools of thought- market monetarism and neo-chartalism, and on two of their champions- Scott Sumner and Warren Mosler, respectively, who inparticular have gained mainstream currency.

The article goes somewhat in-depth into the ideas of each school, but I think what is most relevant is the process by which these bloggers have risen to prominence, and what it means:

On February 25th, [Sumner] earned a link from Tyler Cowen, a professor at George Mason University whose “Marginal Revolution” blog is widely respected. And one month after he started Mr Krugman devoted a short post to rebuffing him.

To be noticed by Mr Krugman is a big thing for a blogger; all the current heterodoxies court such attention, with neo-chartalists churning up his comment threads and Austrians challenging him to set-piece debates. The more Mr Krugman wrestles with them, the more attention they garner—a correlation that has made him wary. “I’ll link to any work I find illuminating, whoever it’s from,” he writes. “I’ll link to work I think is deeply wrong only if it comes from someone who already has a following.” Otherwise, “why give him a platform?”

Mr Sumner’s blog not only revealed his market monetarism to the world at large (“I cannot go anywhere in the world of economics…without hearing his name,” says Mr Cowen). It also drew together like-minded economists, many of them at small schools some distance from the centre of the economic universe, who did not realise there were other people thinking the same way they did. They had no institutional home, no critical mass. The blogs provided one. Lars Christensen, an economist at a Danish bank who came up with the name “market monetarism”, says it is the first economic school of thought to be born in the blogosphere, with post, counter-post and comment threads replacing the intramural exchanges of more established venues.

Indeed, much of the sociology of the discipline has been driven by a gatekeeper model, in which the only way to be heard is to fit into the mainstream enough to get published. Blogging creates a different set of incentives, because people who read blogs seem to value heterodox more in and of itself, and little value is placed on conformity. It is not a perfect meritocracy- the best and brightest ideas might still be ignored if they are too radical. However, one hopes that the existence of economics blogs is chipping away at the intellectual narrowness of the discipline.

Over time, ideas from yet more radical schools of thought, like neo-Marxism or post-Keynesianism, may be deemed worthy of heavy consideration and rebuttal from the likes of Krugman or Mankiw. However, for that to happen, everyone needs to be speaking the same language. I imagine that Mosler and Sumner have had a somewhat easier time because their ideas more easily fit onto the map of economic discourse, particularly because their ideas fit well into a financial discourse. Start talking about alienation or surplus value, though, and it may be a different story.

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The entire political discourse is already too small

Many criticize the Occupy Movement as having muddled goals and nebulous ideas, and that it therefore will be unable to change anything. But this viewpoint misses the entire point.

The Occupy Movement recognizes a fundamental problem: that it is generous to call our political system a democracy, when so few have so much more influence in Washington than the rest of us. This leads to policies and systems coming out of Washington that do not work for everyone, but rather for those who helped craft them. Remedying this situation is an enormous task, and it is not a goal of the Occupy Movement to come up with a single silver-bullet solution. Rather, the Occupiers realize that the first step to ameliorating the situation is to talk about it. The entire political discourse is already too small. The Occupy Movement is simply creating a space in which these issues can become part of the public discourse. It is a space which can accomodate, for the first time in decades, perspectives that are larger than the Republican/Democrat polarization. Those who are unimpressed, unsettled, or unsympathetic to such an approach lack either thoughtfulness or creativity.

The cable news channels, for one, seem unwilling to comprehend this approach to action. Unable to reduce the Occupy Movement to a bumpersticker-size slogan, cable news networks prefer to dismiss the Occupiers as confused and restless. It really is a shame when dwelling in thoughtfulness, complexity, and creativity receives so little credit.

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For those who think Veblen is “just a sociologist”

Conspicuous consumption plays an important role, even in our flailing economy. See the NYTimes, “Even Marked Up, Luxury Goods Fly Off Shelves”:

Nordstrom has a waiting list for a Chanel sequined tweed coat with a $9,010 price. Neiman Marcus has sold out in almost every size of Christian Louboutin “Bianca” platform pumps, at $775 a pair. Mercedes-Benz said it sold more cars last month in the United States than it had in any July in five years.

Even with the economy in a funk and many Americans pulling back on spending, the rich are again buying designer clothing, luxury cars and about anything that catches their fancy. Luxury goods stores, which fared much worse than other retailers in the recession, are more than recovering — they are zooming. Many high-end businesses are even able to mark up, rather than discount, items to attract customers who equate quality with price.

In the Theory of the Leisure Class, Veblen wrote that a major force driving economic activity was competition in the pursuit of higher status: to drive the nicest car, wear the most expensive clothing, go on the most exotic vacations, so that others would see your status. Veblen wrote that this conspicuous consumption led to irrationality in purchases and wasteful spending. This article is a great reminder of how economists could progress by looking backwards once in a while.

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Churches Seeking to Become Economic Alternatives

The New York Times has an excellent article about a new effort by churches in my current residence, Washington DC, to organize themselves and buy energy as a group, simultaneously saving money and using those savings to promote green energy. The effort is a collaboration of a community organizing group, Washington Interfaith Network, and the DC Project, which promotes green alternatives (disclosure- I am heavily involved with both organizations, and a member of a Luther Place church, which is part of WIN and the energy collaboration). Here’s what they are doing, in brief:

11 churches and a nonprofit youth group got together to solicit reduced-rate bids for electricity — most of it from renewable energy sources — from local suppliers. In the first year of its contract, which ends in May, the group expects combined savings of nearly $100,000.

As the good word has spread, and it gears up to negotiate a second contract, the original group has swelled to 40 members. The bigger alliance plans to exercise even more leverage in the next round of negotiations by requiring bidders to extend the same discounted rate to individual parishioners and members.

And more revenue is on the way: the group is planning to take a cut of those residential savings as a kind of eco-tithe…

The churches in Washington forged their alliance with help from the Washington Interfaith Network, which does community organizing for member congregations and is now receiving a 10 percent cut of the overall electricity savings. The other group that helped bring the churches together, the DC Project, is a nonprofit that promotes weatherization and green energy jobs.

Felipe Witchger, the lead organizer with the DC Project, said that the next contract will require participants, which now also include synagogues and affiliates like unions and advocacy groups, to either buy renewable energy or commit to energy-efficiency upgrades. For the upgrades, he said, workers from neighborhoods with high unemployment and poverty rates would be hired.

Needless to say, I think this is a great initiative, and may lead to even greater things.

I’ve written a lot about Catholic Social Tradition on this blog (well, not lately), and we have also written a lot about alternative ways of envisioning the economy. Generally, CST is a reaction to the broad economy, and promulgates ways for individuals to live in relation to the economy and to seek to change the economy. However, because CST is more philosophical in nature, it doesn’t go the extra mile of thinking about how individual churches can simultaneously be in the economy and change the economy.

Community organizing, on the other hand, has been practiced through churches for decades. It is a direct response to seeing the world as it is, and the world as it should be, and seeking to bring the two closer together. Churches in cities across the country, and increasingly the world, join forces to shape the political conversation around real economic issues. Often, community organizing is about marshaling a small (but still significant) amount of money from within, and a lot of people from within, to move a few people outside (politicians) to deliver a lot of money on the outside (like affordable housing projects, neighborhood revitalization, etc.).

Notice that neither CST nor community organizing speaks directly to the churches themselves being or becoming part of an alternative economy. And yet, churches are employers, social service providers, and consumers- often large ones at that. Realizing that they are economic units, and have autonomy over how they act as such (especially in tandem), can potentially be transformative. What started as an 11 church group-buying initiative is blossoming into a 40 church green energy effort. Who knows what may come next- an alternative energy co-op that creates green jobs? A joint-church solar generation effort? When churches realize that social justice can occur within and in collaboration with neighbors, we can begin to see an alternative economy, closer to the world as it should be, aspiring to the gauntlet that popes and prophets alike have set forth.

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Why Economics Must Loose the Shackles of Science

Much post-crisis navel-gazing in economics has concluded something like, “economists treated economics as a science, even though it isn’t,” or, “it’s more like biology than physics.” The implicit assumption is that the hard sciences are science wrought certain and unassailable. In his book The Blind Spot, William Byers belies that notion by speaking to the uncertainties that scientists often miss in their own field. I think this book is important for students and scholars of economics to read, though, because many of the points Byers makes can be said even more truly of economics than mathematics and the physical sciences.

Byers begins by addressing these disciplines within his scope head-on, drawing on the history and philosophy of science to show that whatever the subject, many “results carry a family resemblance. There are limits to what we can know.” He then puts forth a dialectic of science as certainty versus science as wonder, arguing that “coherence results from acts of creativity…[and] transcends classical objectivity and subjectivity.” I wonder where economics fits into this dialectic- what is an economics of wonder? Economics, for all of its faults, is often practiced by genuinely creative people who want to model the world to answer interesting questions. Likely, though, the limits come as economists seek what Byers asperses- certainty; economists may too often fall short because they limit themselves to questions that can be answered with the data or methods at hand.

Much of the body of the book is filled with engaging vignettes of the history of science, as well as philosophical digressions that frame key issues in similar dialectics. I won’t belabor it, because I think this book is not easily treated in a simple blog review, but I think the key takeaways for science are just as easily said for economics. For example, Byers discusses how the jump from mathematical equations to real world applications of those equations is often fraught with peril. I was intrigued by an article by Wolfgang Dreschler in the same vain that spoke directly to economics: “mathematics might be easily yet erroneously taken as the real kind of connection between objects.” Indeed, the relationship between model, variable, and real world is one often glossed over in economics, and apparently in hard sciences as well.

Byers’ conclusion has a lot to say for economics too: “human judgment must be reclaimed from those theories, ideologies, and mechanical systems than can be so intimidating…the world is uncertain and the problems are difficult…[but] the world of the uncertain is the world of creative possibilites.” Economics, especially as it is practiced in the mainstream, does not have a sufficiently robust philosophy of itself to justify any comparison to the hard sciences. However, the main takeaway we can gather from Byers’ work is that “science” isn’t a goal for a given discipline; rather, the goal is to exhaust all methodologies as appropriate, embracing uncertainty, and attempting to answer questions that matter, no matter how seemingly intractable.

For too long, economics has approached the questions that seem observable, hoping to offer a ceteris paribus answer in all cases. Reading Byers’ account of science’s own struggles should be informative and sobering against this approach. Quite simply, uncertainty will not allow it approach to work; we will get some answers, but they won’t be answers that compel the real world to act just so. Economics needs to put away its delusions of scientific grandeur, and instead aim to be useful and creative, not authoritative or universal.

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How I Would Reinvent Capitalism

The Nation had 16 activists respond to the question, “If you had the ability to reinvent American capitalism, where would you start? What would you change to make it less destructive and domineering, more focused on what people really need for fulfilling lives?” Three of them resonated with me in particular: Chris Macklin on employee ownership, Dirk Philipsen on how we measure prosperity, and Eugene McCarraher on our “moral imagination.”

I’m not going to block-quote them, however- instead, I’ve put in my own reader submission (limited to 400 words), which the magazine is soliciting from its readers. You’ll see that it attempts to weave together concepts from all three of these columns:

Capitalism’s defining quality is evident in its name- capital, not labor, nature, or morals, is put above all else. This preeminence of capital has ramifications for how we produce, consume, earn, save, and tally it all up; I argue that it causes problems in each of these facets of our economic life. Often, people confuse capitalism with markets (free ones in particular). Instead, I think capitalism has a few distinctive consequences: 1) surplus is distributed by those who own, not those who work and make; 2) more consumption is always better; and 3) anything “outside” the economy, like the environment, may as well not exist.

Capital is relevant to these features because it means that the production process can be owned, and thus the fruits of it can be immediately taken from the hands that produce it. As a corollary, this means that to profit, those who own capital must sell as much as possible, some of which is indeed bought back by those who make the goods. And finally, capital seeks its return without any regard to destruction that it doesn’t have to pay for, like ozone depletion or disappearing wetlands.

As long as capital remains preeminent, we cannot remake capitalism. Instead, we need to gradually remake economic structures to chip away at capital’s power. Giving workers stock ownership is one small step, but giving workers complete control over their enterprise is a more radical fruitful step. It would mean that production and consumption would be more tightly linked, as the amount one consumes would be more in line with what one produces. Lavish consumption would not disappear entirely, but would be made scarce. Remeasuring economic value to include environmental externalities is another small step, but forcing these externalities into pricing through democratically-decided taxes is a larger and more fruitful step (and I guarantee, a worker-run Chamber would fight it a lot less).

These steps must be supported by increased class consciousness through education.  The value of worker ownership and environmental stewardship are obvious to their beneficiaries; demonstrating that capital’s dominance stands in the way of these benefits is critical. A class-conscious society will support economic structures that value labor and value nature, not just profits. Changing capitalism does not mean removing markets or destroying property, but rather reshaping production and consumption markets so economic value is not distorted by power divides between capital and other.

How would you remake capitalism?

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“The Riddle of Money, Finally Solved”

Below is a guest post from Philip George, whose website is philipji.com. The post is a shortened version of a longer article you can find on his website here. Some related posts are here and here.

For nearly a century the progress of macroeconomics has been stalled by a single error, the error of regarding money as cash balances and the demand for money as the demand for cash balances. It is an error that is common to the Keynesians, the monetarists and the Austrians. And it has been taught to every economics undergraduate for generations so that it is etched into the collective consciousness of all economists.

To view it in practice look at how Milton Friedman used it. For Friedman money is an asset, one of many alternative assets, such as stocks, bonds, durable consumer goods, or even human capital. To determine the demand for money one has to compare it with the demand for those alternative assets. If Paul wishes to hold more stocks and bonds it follows that his demand for money and therefore his cash balances will come down.

So where is the error? Consider that Paul decides to hold fewer bonds than he did, preferring instead to hold more money. In Friedman’s analysis his demand for money has gone up. But the only way that Paul can reduce his holding of bonds is to sell some to Peter. So Peter’s holding of bonds goes up and his demand for money goes down. Although Peter and Paul can change their individual stocks of bonds and money, their combined stock of bonds or combined stock of money cannot change. By trading in financial assets the stock of money in the economy cannot be changed one whit.

In Friedman’s model of the economy money exists only in the form of currency. There are no banks and the only way in which money can be increased or decreased is through the agency of the central bank. To see how such a model results in errors for Austrians, see http://www.philipji.com/stupidity-of-economists.html, and for how it lands Keynesians in errors see http://www.philipji.com/paul-krugman-and-the-liquidity-trap.html.

So what is money? To answer that question, we begin with the money multiplier. In its simplest form, this is how it works. The central bank buys $100 worth of, say, government bonds, from a bond dealer. The dealer deposits the $100 in a commercial bank. Assuming that the reserve ratio is 20%, the bank has to retain $20 as a reserve; so it lends out $80. Assuming this is deposited in another bank, the second bank now has to retain 20% of this $80 as a reserve i.e. $16 and can lend out $64, which in turn is deposited in a third bank. By adding up the entire chain of new deposits it can be shown that the $100 created by the central bank’s initial purchase of a bond for $100 will result in the creation of $500 of new money.

We show the process in a simple diagram as below, where M is the reserve, m is the multiplier, and mM is the money created.

The money multiplier

So far, Keynesians, monetarists and Austrians will all be in agreement with us. Curiously none of them seems ever to have asked: What happens when this newly created money mM is spent? We now ask the question by drawing the figure below.

The money multiplier integrated with the economy

And having asked the question we are immediately confronted by a problem. At A the central bank injects M dollars into the system. The banking system, through a series of loans and deposits, converts it into mM dollars at B. When this money returns to A, it is then converted by means of the multiplier to a value of m²M at B. In the next cycle this becomes m³M at B, and on on in an ever-increasing spiral. Equilibrium, it would seem, is impossible.

There is only one way out. For equilibrium to be maintained the money created while moving from A to B must be destroyed in the movement from B to A. We answer one objection immediately. Why isn’t the entire mM dollars created at B spent? That is to say, why is M dollars retained unspent at A while moving from B to A? The answer is quite simple: in the money multiplication process described at the start of this section, when 500 dollars of new money is created, 100 dollars has to be retained by all the banks together as reserve.

The answer to the second question may be a little more difficult to appreciate. How is the amount of money mM at B destroyed so that it becomes M at A? The answer is that the destruction happens through the mechanism of saving. Each person who receives money spends some of it while saving a little and withdrawing it from the system. The total of this saving must be exactly equal to the net money created mM-M for equilibrium to be maintained. But people do not hide their savings under their mattresses. Because they are assured that the central bank will not allow the disorderly failure of banks they place their savings in the bank. We draw the result as in Fig 3 below.

Savings and money creation in the economy

Simple though it is, this is the model of the economy that has eluded economists so far. In it a) Money is created when banks lend money and is destroyed when loans are liquidated and b) Money is endogenous i.e. it can be created and destroyed without the intervention of the central bank.

Many conclusions can be derived from this model. For instance,

a)     If the injection of money  into the system by the central bank is multiplied by a process of bank lending, it can be sustained only if the system produces an equivalent amount of saving and this saving is loaned out again.

b)    It is possible for the system to remain in equilibrium when the economy is operating at levels far below full employment.

c)     It is possible to estimate the amount of money (an aggregate I call Corrected Money Supply) by estimating the amount of savings in demand deposits and by subtracting this amount from M1. See http://www.philipji.com/riddle-of-money/ For the period from 2001 to 2011 we get a graph accurately tracks the economy.

 

Corrected Money Supply 2001 to 2011

 

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