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Javier E

Opinion | What Do We Actually Know About the Economy? (Wonkish) - The New York Times - 0 views

  • Among economists more generally, a lot of the criticism seems to amount to the view that macroeconomics is bunk, and that we should stick to microeconomics, which is the real, solid stuff. As I’ll explain in a moment, that’s all wrong
  • in an important sense the past decade has been a huge validation for textbook macroeconomics; meanwhile, the exaltation of micro as the only “real” economics both gives microeconomics too much credit and is largely responsible for the ways macroeconomic theory has gone wrong.
  • Finally, many outsiders and some insiders have concluded from the crisis that economic theory in general is bunk, that we should take guidance from people immersed in the real world – say, business leaders — and/or concentrate on empirical results and skip the models
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  • And while empirical evidence is important and we need more of it, the data almost never speak for themselves – a point amply illustrated by recent monetary events.
  • chwinger, as I remember the story, was never seen to use a Feynman diagram. But he had a locked room in his house, and the rumor was that that room was where he kept the Feynman diagrams he used in secret.
  • What’s the equivalent of Feynman diagrams? Something like IS-LM, which is the simplest model you can write down of how interest rates and output are jointly determined, and is how most practicing macroeconomists actually think about short-run economic fluctuations. It’s also how they talk about macroeconomics to each other. But it’s not what they put in their papers, because the journals demand that your model have “microfoundations.”
  • The Bernanke Fed massively expanded the monetary base, by a factor of almost five. There were dire warnings that this would cause inflation and “debase the dollar.” But prices went nowhere, and not much happened to broader monetary aggregates (a result that, weirdly, some economists seemed to find deeply puzzling even though it was exactly what should have been expected.)
  • What about fiscal policy? Traditional macro said that at the zero lower bound there would be no crowding out – that deficits wouldn’t drive up interest rates, and that fiscal multipliers would be larger than under normal conditions. The first of these predictions was obviously borne out, as rates stayed low even when deficits were very large. The second prediction is a bit harder to test, for reasons I’ll get into when I talk about the limits of empiricism. But the evidence does indeed suggest large positive multipliers.
  • The overall story, then, is one of overwhelming predictive success. Basic, old-fashioned macroeconomics didn’t fail in the crisis – it worked extremely well
  • In fact, it’s hard to think of any other example of economic models working this well – making predictions that most non-economists (and some economists) refused to believe, indeed found implausible, but which came true. Where, for example, can you find any comparable successes in microeconomics?
  • Meanwhile, the demand that macro become ever more rigorous in the narrow, misguided sense that it look like micro led to useful approaches being locked up in Schwinger’s back room, and in all too many cases forgotten. When the crisis struck, it was amazing how many successful academics turned out not to know things every economist would have known in 1970, and indeed resurrected 1930-vintage fallacies in the belief that they were profound insights.
  • mainly I think it reflected the general unwillingness of human beings (a category that includes many though not necessarily all economists) to believe that so many people can be so wrong about something so big.
  • . To normal human beings the study of international trade and that of international macroeconomics might sound like pretty much the same thing. In reality, however, the two fields used very different models, had very different intellectual cultures, and tended to look down on each other. Trade people tended to consider international macro people semi-charlatans, doing ad hoc stuff devoid of rigor. International macro people considered trade people boring, obsessed with proving theorems and offering little of real-world use.
  • does microeconomics really deserve its reputation of moral and intellectual superiority? No
  • Even before the rise of behavioral economics, any halfway self-aware economist realized that utility maximization – indeed, the very concept of utility — wasn’t a fact about the world; it was more of a thought experiment, whose conclusions should always have been stated in the subjunctive.
  • Kahneman and Tversky and Thaler and so on deserved all the honors they received for helping to document the specific ways in which utility maximization falls short, but even before their work we should never have expected perfect maximization to be a good description of reality.
  • True, a model doesn’t have to be perfect to provide hugely important insights. But here’s my question: where are the examples of microeconomic theory providing strong, counterintuitive, successful predictions on the same order as the success of IS-LM macroeconomics after 2008? Maybe there are some, but I can’t come up with any.
  • The point is not that micro theory is useless and we should stop doing it. But it doesn’t deserve to be seen as superior to macro modeling.
  • And the effort to make macro more and more like micro – to ground everything in rational behavior – has to be seen now as destructive. True, that effort did lead to some strong predictions: e.g., only unanticipated money should affect real output, transitory income changes shouldn’t affect consumer spending, government spending should crowd out private demand, etc. But all of those predictions have turned out to be wrong.
  • But, you say, we didn’t see the Great Recession coming. Well, what do you mean “we,” white man? OK, what’s true is that few economists realized that there was a huge housing bubble
  • But data never speak for themselves, for a couple of reasons. One, which is familiar, is that economists don’t get to do many experiments, and natural experiments are rare
  • The other problem is that even when we do get something like natural experiments, they often took place under economic regimes that aren’t relevant to current problems.
  • Both of these problems were extremely relevant in the years following the 2008 crisis.
  • you might be tempted to conclude that the empirical evidence is that monetary expansion is inflationary, indeed roughly one-for-one.
  • But the question, as the Fed embarked on quantitative easing, was what effect this would have on an economy at the zero lower bound. And while there were many historical examples of big monetary expansion, examples at the ZLB were much rarer – in fact, basically two: the U.S. in the 1930s and Japan in the early 2000
  • These examples told a very different story: that expansion would not, in fact, be inflationary, that it would work out the way it did.
  • The point is that empirical evidence can only do certain things. It can certainly prove that your theory is wrong! And it can also make a theory much more persuasive in those cases where the theory makes surprising predictions, which the data bear out. But the data can never absolve you from the necessity of having theories.
  • Over this past decade, I’ve watched a number of economists try to argue from authority: I am a famous professor, therefore you should believe what I say. This never ends well. I’ve also seen a lot of nihilism: economists don’t know anything, and we should tear the field down and start over.
  • Obviously I differ with both views. Economists haven’t earned the right to be snooty and superior, especially if their reputation comes from the ability to do hard math: hard math has been remarkably little help lately, if ever.
  • On the other hand, economists do turn out to know quite a lot: they do have some extremely useful models, usually pretty simple ones, that have stood up well in the face of evidence and events. And they definitely shouldn’t defer to important and/or rich people on polic
  • : compare Janet Yellen’s macroeconomic track record with that of the multiple billionaires who warned that Bernanke would debase the dollar. Or take my favorite Business Week headline from 2010: “Krugman or [John] Paulson: Who You Gonna Bet On?” Um.The important thing is to be aware of what we do know, and why.Follow The New York Times Opinion section on Facebook and Twitter (@NYTopinion), and sign up for the Opinion Today newsletter.
Javier E

A Dark Age of macroeconomics (wonkish) - NYTimes.com - 0 views

  • we’re living in a Dark Age of macroeconomics. Remember, what defined the Dark Ages wasn’t the fact that they were primitive — the Bronze Age was primitive, too. What made the Dark Ages dark was the fact that so much knowledge had been lost, that so much known to the Greeks and Romans had been forgotten by the barbarian kingdoms that followed.And that’s what seems to have happened to macroeconomics in much of the economics profession. The knowledge that S=I doesn’t imply the Treasury view — the general understanding that macroeconomics is more than supply and demand plus the quantity equation — somehow got lost in much of the profession. I’m tempted to go on and say something about being overrun by barbarians in the grip of an obscurantist faith
Javier E

Reinhart, Rogoff, and How the Macroeconomic Sausage Is Made - Justin Fox - Harvard Busi... - 0 views

  • This is watching the sausage of macroeconomics being made. It's not appetizing. Seemingly small choices in how to handle the data deliver dramatically different results. And it's not hard to see why: The Reinhart-Rogoff data set, according to Herndon-Ash-Pollin's analysis, contained just 110 "country-years" of debt/GDP over 90%, and 63 of those come from just three countries: Belgium, Greece, and the UK. This is a problem inherent to macroeconomics. It's not like an experiment that one can run multiple times, or observations that can be compared across millions of individuals or even hundreds of corporations. In the words attributed to economist Paul Samuelson, "We have but one sample of history." And it's just not a very big sample.
  • So what to do about it? One response is to dig for more data, and Reinhart and Rogoff have been doing that, going back to 1800 to examine episodes of public debt overhangs. Another is to have different people crunch it in different ways, which is what Herndon-Ash-Pollin did, or assemble different data sets, as several other scholars have done.
  • But the biggest challenge may be how to present it.
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  • this is macroeconomics. It's hard to muster conclusive evidence, and almost impossible to generate much in the way of useful predictive ability. One response to this fog would be to throw up our hands and not do anything at all. Another is to acknowledge that our knowledge is limited and proceed anyway on a mix of data, theory, and intuition.
Javier E

Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Stree... - 1 views

  • Instead of self-confident and self-centered answers, the author humbly asks fundamental questions: What is economics? What is its meaning? Where does this new religion, as it is sometimes called, come from? What are its possibilities and its limitations and borders, if there are any? Why are we so dependent on permanent growing of growth and growth of growing of growth? Where did the idea of progress come from, and where is it leading us? Why are so many economic debates accompanied by obsession and fanaticism?
  • The majority of our political parties act with a narrow materialistic focus when, in their programs, they present the economy and finance first; only then, somewhere at the end, do we find culture as something pasted on or as a libation for a couple of madmen.
  • most of them—consciously or unconsciously—accept and spread the Marxist thesis of the economic base and the spiritual superstructure.
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  • He tries to break free of narrow specialization and cross the boundaries between scientific disciplines. Expeditions beyond economics’ borders and its connection to history, philosophy, psychology, and ancient myths are not only refreshing, but necessary for understanding the world of the twenty-first century.
  • Reality is spun from stories, not from material. Zdeněk Neubauer
  • Before it was emancipated as a field, economics lived happily within subsets of philosophy—ethics, for example—miles away from today’s concept of economics as a mathematical-allocative science that views “soft sciences” with a scorn born from positivistic arrogance. But our thousand-year “education” is built on a deeper, broader, and oftentimes more solid base. It is worth knowing about.
  • Outside of our history, we have nothing more.
  • The study of the history of a certain field is not, as is commonly held, a useless display of its blind alleys or a collection of the field’s trials and errors (until we got it right), but history is the fullest possible scope of study of a menu that the given field can offer.
  • History of thought helps us to get rid of the intellectual brainwashing of the age, to see through the intellectual fashion of the day, and to take a couple of steps back.
  • “The separation between the history of a science, its philosophy, and the science itself dissolves into thin air, and so does the separation between science and non-science; differences between the scientific and unscientific are vanishing.”
  • we seek to chart the development of the economic ethos. We ask questions that come before any economic thinking can begin—both philosophically and, to a degree, historically. The area here lies at the very borders of economics—and often beyond. We may refer to this as protoeconomics (to borrow a term from protosociology) or, perhaps more fittingly, metaeconomics (to borrow a term from metaphysics).
  • stories; Adam Smith believed. As he puts it in The Theory of Moral Sentiments, “the desire of being believed, or the desire of persuading, of leading and directing other people, seems to be one of the strongest of all our natural desires.”
  • “The human mind is built to think in terms of narratives … in turn, much of human motivation comes from living through a story of our lives, a story that we tell to ourselves and that creates a framework of our motivation. Life could be just ‘one damn thing after another’ if it weren’t for such stories. The same is true for confidence in a nation, a company, or an institution. Great leaders are foremost creators of stories.”
  • contrary to what our textbooks say, economics is predominantly a normative field. Economics not only describes the world but is frequently about how the world should be (it should be effective, we have an ideal of perfect competition, an ideal of high-GDP growth in low inflation, the effort to achieve high competitiveness …). To this end, we create models, modern parables,
  • I will try to show that mathematics, models, equations, and statistics are just the tip of the iceberg of economics; that the biggest part of the iceberg of economic knowledge consists of everything else; and that disputes in economics are rather a battle of stories and various metanarratives than anything else.
  • That is the reason for this book: to look for economic thought in ancient myths and, vice versa, to look for myths in today’s economics.
  • is a paradox that a field that primarily studies values wants to be value-free. One more paradox is this: A field that believes in the invisible hand of the market wants to be without mysteries.
  • Almost all of the key concepts by which economics operates, both consciously and unconsciously, have a long history, and their roots extend predominantly outside the range of economics, and often completely beyond that of science.
  • The History of Animal Spirits: Dreams Never Sleep
  • In this sense, “the study of economics is too narrow and too fragmentary to lead to valid insight, unless complemented and completed by a study of metaeconomics.”17
  • The more important elements of a culture or field of inquiry such as economics are found in fundamental assumptions that adherents of all the various systems within the epoch unconsciously presuppose. Such assumptions appear so obvious that people do not know what they are assuming, because no other way of putting things has ever occurred to them, as the philosopher Alfred Whitehead notes in Adventures of Ideas.
  • I argue that economic questions were with mankind long before Adam Smith. I argue that the search for values in economics did not start with Adam Smith but culminated with him.
  • We should go beyond economics and study what beliefs are “behind the scenes,” ideas that have often become the dominant yet unspoken assumptions in our theories. Economics is surprisingly full of tautologies that economists are predominantly unaware of. I
  • argue that economics should seek, discover, and talk about its own values, although we have been taught that economics is a value-free science. I argue that none of this is true and that there is more religion, myth, and archetype in economics than there is mathematics.
  • In a way, this is a study of the evolution of both homo economicus and, more importantly, the history of the animal spirits within him. This book tries to study the evolution of the rational as well as the emotional and irrational side of human beings.
  • I argue that his most influential contribution to economics was ethical. His other thoughts had been clearly expressed long before him, whether on specialization, or on the principle of the invisible hand of the market. I try to show that the principle of the invisible hand of the market is much more ancient and developed long before Adam Smith. Traces of it appear even in the Epic of Gilgamesh, Hebrew thought, and in Christianity, and it is expressly stated by Aristophanes and Thomas Aquinas.
  • This is not a book on the thorough history of economic thought. The author aims instead to supplement certain chapters on the history of economic thought with a broader perspective and analysis of the influences that often escape the notice of economists and the wider public.
  • Progress (Naturalness and Civilization)
  • The Economy of Good and Evil
  • from his beginnings, man has been marked as a naturally unnatural creature, who for unique reasons surrounds himself with external possessions. Insatiability, both material and spiritual, are basic human metacharacteristics, which appear as early as the oldest myths and stories.
  • the Hebrews, with linear time, and later the Christians gave us the ideal (or amplified the Hebrew ideal) we now embrace. Then the classical economists secularized progress. How did we come to today’s progression of progress, and growth for growth’s sake?
  • The Need for Greed: The History of Consumption and Labor
  • Metamathematics From where did economics get the concept of numbers as the very foundation of the world?
  • mathematics at the core of economics, or is it just the icing of the cake, the tip of the iceberg of our field’s inquiry?
  • idea that we can manage to utilize our natural egoism, and that this evil is good for something, is an ancient philosophical and mythical concept. We will also look into the development of the ethos of homo economicus, the birth of “economic man.”
  • All of economics is, in the end, economics of good and evil. It is the telling of stories by people of people to people. Even the most sophisticated mathematical model is, de facto, a story, a parable, our effort to (rationally) grasp the world around us.
  • Masters of the Truth
  • Originally, truth was a domain of poems and stories, but today we perceive truth as something much more scientific, mathematical. Where does one go (to shop) for the truth? And who “has the truth” in our epoch?
  • Our animal spirits (something of a counterpart to rationality) are influenced by the archetype of the hero and our concept of what is good.
  • The entire history of ethics has been ruled by an effort to create a formula for the ethical rules of behavior. In the final chapter we will show the tautology of Max Utility, and we will discuss the concept of Max Good.
  • The History of the Invisible Hand of the Market and Homo Economicus
  • We understand “economics” to mean a broader field than just the production, distribution, and consumption of goods and services. We consider economics to be the study of human relations that are sometimes expressible in numbers, a study that deals with tradables, but one that also deals with nontradables (friendship, freedom, efficiency, growth).
  • When we mention economics in this book, we mean the mainstream perception of it, perhaps as best represented by Paul Samuelson.
  • By the term homo economicus, we mean the primary concept of economic anthropology. It comes from the concept of a rational individual, who, led by narrowly egotistical motives, sets out to maximize his benefit.
  • the Epic of Gilgamesh bears witness to the opposite—despite the fact that the first written clay fragments (such as notes and bookkeeping) of our ancestors may have been about business and war, the first written story is mainly about great friendship and adventure.
  • there is no mention of either money or war; for example, not once does anyone in the whole epic sell or purchase something.5 No nation conquers another, and we do not encounter a mention even of the threat of violence.
  • is a story of nature and civilization, of heroism, defiance, and the battle against the gods, and evil; an epic about wisdom, immortality, and also futility.
  • Gilgamesh becomes a hero not only due to his strength, but also due to discoveries and deeds whose importance were in large part economic—direct gaining of construction materials in the case of felling the cedar forest, stopping Enkidu from devastating Uruk’s economy, and discovering new desert routes during his expeditions.
  • Even today, we often consider the domain of humanity (human relations, love, friendship, beauty, art, etc.) to be unproductive;
  • Even today we live in Gilgamesh’s vision that human relations—and therefore humanity itself—are a disturbance to work and efficiency; that people would perform better if they did not “waste” their time and energy on nonproductive things.
  • But it is in friendship where—often by-the-way, as a side product, an externality—ideas and deeds are frequently performed or created that together can altogether change the face of society.19 Friendship can go against an ingrained system in places where an individual does not have the courage to do so himself or herself.
  • As Joseph Stiglitz says, One of the great “tricks” (some say “insights”) of neoclassical economics is to treat labour like any other factor of production. Output is written as a function of inputs—steel, machines, and labour. The mathematics treats labour like any other commodity, lulling one into thinking of labour like an ordinary commodity, such as steel or plastic.
  • Even the earliest cultures were aware of the value of cooperation on the working level—today we call this collegiality, fellowship, or, if you want to use a desecrated term, comradeship. These “lesser relationships” are useful and necessary for society and for companies because work can be done much faster and more effectively if people get along with each other on a human level
  • But true friendship, which becomes one of the central themes of the Epic of Gilgamesh, comes from completely different material than teamwork. Friendship, as C. S. Lewis accurately describes it, is completely uneconomical, unbiological, unnecessary for civilization, and an unneeded relationship
  • Here we have a beautiful example of the power of friendship, one that knows how to transform (or break down) a system and change a person. Enkidu, sent to Gilgamesh as a punishment from the gods, in the end becomes his faithful friend, and together they set out against the gods. Gilgamesh would never have gathered the courage to do something like that on his own—nor would Enkidu.
  • Due to their friendship, Gilgamesh and Enkidu then intend to stand up to the gods themselves and turn a holy tree into mere (construction) material they can handle almost freely, thereby making it a part of the city-construct, part of the building material of civilization, thus “enslaving” that which originally was part of wild nature. This is a beautiful proto-example of the shifting of the borders between the sacred and profane (secular)—and to a certain extent also an early illustration of the idea that nature is there to provide cities and people with raw material and production resources.
  • started with Babylonians—rural nature becomes just a supplier of raw materials, resources (and humans the source of human resources). Nature is not the garden in which humans were created and placed, which they should care for and which they should reside in, but becomes a mere reservoir for natural (re)sources.
  • But labour is unlike any other commodity. The work environment is of no concern for steel; we do not care about steel’s well-being.16
  • Both heroes change—each from opposite poles—into humans. In this context, a psychological dimension to the story may be useful: “Enkidu (…) is Gilgamesh’s alter ego, the dark, animal side of his soul, the complement to his restless heart. When Gilgamesh found Enkidu, he changed from a hated tyrant into the protector of his city. (…)
  • To be human seems to be somewhere in between, or both of these two. We
  • this moment of rebirth from an animal to a human state, the world’s oldest preserved epic implicitly hints at something highly important. Here we see what early cultures considered the beginning of civilization. Here is depicted the difference between people and animals or, better, savages. Here the epic quietly describes birth, the awakening of a conscious, civilized human. We are witnesses to the emancipation of humanity from animals,
  • The entire history of culture is dominated by an effort to become as independent as possible from the whims of nature.39 The more developed a civilization is, the more an individual is protected from nature and natural influences and knows how to create around him a constant or controllable environment to his liking.
  • The price we pay for independence from the whims of nature is dependence on our societies and civilizations. The more sophisticated a given society is as a whole, the less its members are able to survive on their own as individuals, without society.
  • The epic captures one of the greatest leaps in the development of the division of labor. Uruk itself is one of the oldest cities of all, and in the epic it reflects a historic step forward in specialization—in the direction of a new social city arrangement. Because of the city wall, people in the city can devote themselves to things other than worrying about their own safety, and they can continue to specialize more deeply.
  • Human life in the city gains a new dimension and suddenly it seems more natural to take up issues going beyond the life span of an individual. “The city wall symbolizes as well as founds the permanence of the city as an institution which will remain forever and give its inhabitants the certainty of unlimited safety, allowing them to start investing with an outlook reaching far beyond the borders of individual life.
  • The wall around the city of Uruk is, among other things, a symbol of an internal distancing from nature, a symbol of revolts against submission to laws that do not come under the control of man and that man can at most discover and use to his benefit.
  • “The chief thing which the common-sense individual wants is not satisfactions for the wants he had, but more, and better wants.”47
  • If a consumer buys something, theoretically it should rid him of one of his needs—and the aggregate of things they need should be decreased by one item. In reality, though, the aggregate of “I want to have” expands together with the growing aggregate of “I have.”
  • can be said that Enkidu was therefore happy in his natural state, because all of his needs were satiated. On the other hand, with people, it appears that the more a person has, the more developed and richer, the greater the number of his needs (including the unsaturated ones).
  • the Old Testament, this relationship is perceived completely differently. Man (humanity) is created in nature, in a garden. Man was supposed to care for the Garden of Eden and live in harmony with nature and the animals. Soon after creation, man walks naked and is not ashamed, de facto the same as the animals. What is characteristic is that man dresses (the natural state of creation itself is not enough for him), and he (literally and figuratively) covers52 himself—in shame after the fall.53
  • Nature is where one goes to hunt, collect crops, or gather the harvest. It is perceived as the saturator of our needs and nothing more. One goes back to the city to sleep and be “human.” On the contrary, evil resides in nature. Humbaba lives in the cedar forest, which also happens to be the reason to completely eradicate it.
  • Symbolically, then, we can view the entire issue from the standpoint of the epic in the following way: Our nature is insufficient, bad, evil, and good (humane) occurs only after emancipation from nature (from naturalness), through culturing and education. Humanity is considered as being in civilization.
  • The city was frequently (at least in older Jewish writings) a symbol of sin, degeneration, and decadence—nonhumanity. The Hebrews were originally a nomadic nation, one that avoided cities. It is no accident that the first important city57 mentioned in the Bible is proud Babylon,58 which God later turns to dust.
  • is enough, for example, to read the Book of Revelation to see how the vision of paradise developed from the deep Old Testament period, when paradise was a garden. John describes his vision of heaven as a city—paradise is in New Jerusalem, a city where the dimensions of the walls(!) are described in detail, as are the golden streets and gates of pearl.
  • Hebrews later also chose a king (despite the unanimous opposition of God’s prophets) and settled in cities, where they eventually founded the Lord’s Tabernacle and built a temple for Him. The city of Jerusalem later gained an illustrious position in all of religion.
  • this time Christianity (as well as the influence of the Greeks) does not consider human naturalness to be an unambiguous good, and it does not have such an idyllic relationship to nature as the Old Testament prophets.
  • If a tendency toward good is not naturally endowed in people, it must be imputed from above through violence or at least the threat of violence.
  • If we were to look at human naturalness as a good, then collective social actions need a much weaker ruling hand. If people themselves have a natural tendency (propensity) toward good, this role does not have to be supplied by the state, ruler, or, if you wish, Leviathan.
  • How does this affect economics?
  • us return for the last time to the humanization of the wild Enkidu, which is a process we can perceive with a bit of imagination as the first seed of the principle of the market’s invisible hand, and therefore the parallels with one of the central schematics of economic thinking.
  • Sometimes it is better to “harness the devil to the plow” than to fight with him. Instead of summoning up enormous energy in the fight against evil, it is better to use its own energy to reach a goal we desire; setting up a mill on the turbulent river instead of futile efforts to remove the current. This is also how Saint Prokop approached it in one of the oldest Czech legends.
  • Enkidu caused damage and it was impossible to fight against him. But with the help of a trap, trick, this evil was transformed into something that greatly benefited civilization.
  • By culturing and “domesticating” Enkidu, humanity tamed the uncontrollable wild and chaotic evil
  • Enkidu devastated the doings (the external, outside-the-walls) of the city. But he was later harnessed and fights at the side of civilization against nature, naturalness, the natural state of things.
  • A similar motif appears a thousand years after the reversal, which is well known even to noneconomists as the central idea of economics: the invisible hand of the market.
  • A similar story (reforming something animally wild and uncultivated in civilizational achievement) is used by Thomas Aquinas in his teachings. Several centuries later, this idea is fully emancipated in the hands of Bernard Mandeville and his Fable of the Bees: or, Private Vices, Publick Benefits. The economic and political aspects of this idea are—often incorrectly—ascribed to Adam Smith.
  • Here the individual does not try anymore to maximize his goods or profits, but what is important is writing his name in human memory in the form of heroic acts or deeds.
  • immortality, one connected with letters and the cult of the word: A name and especially a written name survives the body.”77
  • After this disappointment, he comes to the edge of the sea, where the innkeeper Siduri lives. As tonic for his sorrow, she offers him the garden of bliss, a sort of hedonistic fortress of carpe diem, where a person comes to terms with his mortality and at least in the course of the end of his life maximizes earthly pleasures, or earthly utility.
  • In the second stage, after finding his friend Enkidu, Gilgamesh abandons the wall and sets out beyond the city to maximalize heroism. “In his (…) search of immortal life, Gilgamesh
  • The hero refuses hedonism in the sense of maximizing terrestrial pleasure and throws himself into things that will exceed his life. In the blink of an eye, the epic turns on its head the entire utility maximization role that mainstream economics has tirelessly tried to sew on people as a part of their nature.81
  • It is simpler to observe the main features of our civilization at a time when the picture was more readable—at a time when our civilization was just being born and was still “half-naked.” In other words, we have tried to dig down to the bedrock of our written civilization;
  • today remember Gilgamesh for his story of heroic friendship with Enkidu, not for his wall, which no longer reaches monumental heights.
  • the eleventh and final tablet, Gilgamesh again loses what he sought. Like Sisyphus, he misses his goal just before the climax
  • is there something from it that is valid today? Have we found in Gilgamesh certain archetypes that are in us to this day?
  • The very existence of questions similar to today’s economic ones can be considered as the first observation. The first written considerations of the people of that time were not so different from those today. In other words: The epic is understandable for us, and we can identify with it.
  • We have also been witnesses to the very beginnings of man’s culturing—a great drama based on a liberation and then a distancing from the natural state.
  • Let us take this as a memento in the direction of our restlessness, our inherited dissatisfaction and the volatility connected to it. Considering that they have lasted five thousand years and to this day we find ourselves in harmony with a certain feeling of futility, perhaps these characteristics are inherent in man.
  • Gilgamesh had a wall built that divided the city from wild nature and created a space for the first human culture. Nevertheless, “not even far-reaching works of civilization could satisfy human desire.”
  • Friendship shows us new, unsuspected adventures, gives us the opportunity to leave the wall and to become neither its builder nor its part—to not be another brick in the wall.
  • with the phenomenon of the creation of the city, we have seen how specialization and the accumulation of wealth was born, how holy nature was transformed into a secular supplier of resources, and also how humans’ individualistic ego was emancipated.
  • to change the system, to break down that which is standing and go on an expedition against the gods (to awaken, from naïveté to awakening) requires friendship.
  • For small acts (hunting together, work in a factory), small love is enough: Camaraderie. For great acts, however, great love is necessary, real love: Friendship. Friendship that eludes the economic understanding of quid pro quo. Friendship gives. One friend gives (fully) for the other. That is friendship for life and death,
  • The thought that humanity comes at the expense of efficiency is just as old as humanity itself—as we have shown, subjects without emotion are the ideal of many tyrants.
  • The epic later crashes this idea through the friendship of Gilgamesh and Enkidu. Friendship—the biologically least essential love, which at first sight appears to be unnecessary
  • less a civilized, city person is dependent on nature, the more he or she is dependent on the rest of society. Like Enkidu, we have exchanged nature for society; harmony with (incalculable) nature for harmony with (incalculable) man.
  • human nature good or evil? To this day these questions are key for economic policy: If we believe that man is evil in his nature, therefore that a person himself is dog eat dog (animal), then the hard hand of a ruler is called for. If we believe that people in and of themselves, in their nature, gravitate toward good, then it is possible to loosen up the reins and live in a society that is more laissez-faire.
  • For a concept of historical progress, for the undeification of heroes, rulers, and nature, mankind had to wait for the Hebrews.
  • Because nature is not undeified, it is beyond consideration to explore it, let alone intervene in it (unless a person was a two-thirds god like Gilgamesh). It
  • They practiced money lending, traded in many assets (…) and especially were engaged in the trading of shares on capital markets, worked in currency exchange and frequently figured as mediators in financial transactions (…), they functioned as bankers and participated in emissions of all possible forms.
  • As regards modern capitalism (as opposed to the ancient and medieval periods) … there are activities in it which are, in certain forms, inherently (and completely necessarily) present—both from an economic and legal standpoint.7
  • As early as the “dark” ages, the Jews commonly used economic tools that were in many ways ahead of their time and that later became key elements of the modern economy:
  • Gilgamesh’s story ends where it began. There is a consistency in this with Greek myths and fables: At the end of the story, no progress occurs, no essential historic change; the story is set in indefinite time, something of a temporal limbo.
  • Jews believe in historical progress, and that progress is in this world.
  • For a nation originally based on nomadism, where did this Jewish business ethos come from? And can the Hebrews truly be considered as the architects of the values that set the direction of our civilization’s economic thought?
  • Hebrew religiosity is therefore strongly connected with this world, not with any abstract world, and those who take pleasure in worldly possessions are not a priori doing anything wrong.
  • PROGRESS: A SECULARIZED RELIGION One of the things the writers of the Old Testament gave to mankind is the idea and notion of progress. The Old Testament stories have their development; they change the history of the Jewish nation and tie in to each other. The Jewish understanding of time is linear—it has a beginning and an end.
  • The observance of God’s Commandments in Judaism leads not to some ethereal other world, but to an abundance of material goods (Genesis 49:25–26, Leviticus 26:3–13, Deuteronomy 28:1–13) (…) There are no accusing fingers pointed at
  • There are no echoes of asceticism nor for the cleansing and spiritual effect of poverty. It is fitting therefore, that the founders of Judaism, the Patriarchs Abraham, Isaac and Jacob, were all wealthy men.12
  • about due to a linear understanding of history. If history has a beginning as well as an end, and they are not the same point, then exploration suddenly makes sense in areas where the fruits are borne only in the next generation.
  • What’s more, economic progress has almost become an assumption of modern functional societies. We expect growth. We take it automatically. Today, if nothing “new” happens, if GDP does not grow (we say it stagnates) for several quarters, we consider it an anomaly.
  • however, the idea of progress itself underwent major changes, and today we perceive it very differently. As opposed to the original spiritual conceptions, today we perceive progress almost exclusively in an economic or scientific-technological sense.
  • Because care for the soul has today been replaced by care for external things,
  • This is why we must constantly grow, because we (deep down and often implicitly) believe that we are headed toward an (economic) paradise on Earth.
  • Only since the period of scientific-technological revolution (and at a time when economics was born as an independent field) is material progress automatically assumed.
  • Jewish thought is the most grounded, most realistic school of thought of all those that have influenced our culture.17 An abstract world of ideas was unknown to the Jews. To this day it is still forbidden to even depict God, people, and animals in symbols, paintings, statues, and drawings.
  • economists have become key figures of great importance in our time (Kacířské eseje o filosofii dějin [Heretical Essays in the Philosophy of History]). They are expected to perform interpretations of reality, give prophetic services (macroeconomic forecasts), reshape reality (mitigate the impacts of the crisis, speed up growth), and, in the long run, provide leadership on the way to the Promised Land—paradise on Earth.
  • REALISM AND ANTIASCETICISM Aside from ideas of progress, the Hebrews brought another very fundamental contribution to our culture: The desacralization of heroes, nature, and rulers.
  • Voltaire writes: “It certain fact is, that in his public laws he [Moses] never so much as once made mention of a life to come, limiting all punishments and all rewards to the present life.”21
  • As opposed to Christianity, the concept of an extraterrestrial paradise or heaven was not developed much in Hebrew thought.19 The paradise of the Israelites—Eden—was originally placed on Earth at a given place in Mesopotamia20 and at a given time,
  • The Hebrews consider the world to be real—not just a shadow reflection of a better world somewhere in the cloud of ideas, something the usual interpretation of history ascribes to Plato. The soul does not struggle against the body and is not its prisoner, as Augustine would write later.
  • The land, the world, the body, and material reality are for Jews the paramount setting for divine history, the pinnacle of creation. This idea is the conditio sine qua non of the development of economics, something of an utterly earthly making,
  • The mythology of the hero-king was strongly developed in that period, which Claire Lalouette summarizes into these basic characteristics: Beauty (a perfect face, on which it is “pleasant to look upon,” but also “beauty,” expressed in the Egyptian word nefer, not only means aesthetics, but contains moral qualities as well),
  • THE HERO AND HIS UNDEIFICATION: THE DREAM NEVER SLEEPS The concept of the hero is more important than it might appear. It may be the remote origin of Keynes’s animal spirits, or the desire to follow a kind of internal archetype that a given individual accepts as his own and that society values.
  • This internal animator of ours, our internal mover, this dream, never sleeps and it influences our behavior—including economic behavior—more than we want to realize.
  • manliness and strength,28 knowledge and intelligence,29 wisdom and understanding, vigilance and performance, fame and renown (fame which overcomes enemies because “a thousand men would not be able to stand firmly in his presence”);30 the hero is a good shepherd (who takes care of his subordinates), is a copper-clad rampart, the shield of the land, and the defender of heroes.
  • Each of us probably has a sort of “hero within”—a kind of internal role-model, template, an example that we (knowingly or not) follow. It is very important what kind of archetype it is, because its role is dominantly irrational and changes depending on time and the given civilization.
  • The oldest was the so-called Trickster—a fraudster; then the culture bearer—Rabbit; the musclebound hero called Redhorn; and finally the most developed form of hero: the Twins.
  • the Egyptian ruler, just as the Sumerian, was partly a god, or the son of a god.31
  • Jacob defrauds his father Isaac and steals his brother Esau’s blessing of the firstborn. Moses murders an Egyptian. King David seduces the wife of his military commander and then has him killed. In his old age, King Solomon turns to pagan idols, and so on.
  • Anthropology knows several archetypes of heroes. The Polish-born American anthropologist Paul Radin examined the myths of North American Indians and, for example, in his most influential book, The Trickster, he describes their four basic archetypes of heroes.
  • The Torah’s heroes (if that term can be used at all) frequently make mistakes and their mistakes are carefully recorded in the Bible—maybe precisely so that none of them could be deified.32
  • We do not have to go far for examples. Noah gets so drunk he becomes a disgrace; Lot lets his own daughters seduce him in a similar state of drunkenness. Abraham lies and (repeatedly) tries to sell his wife as a concubine.
  • the Hebrew heroes correspond most to the Tricksters, the Culture Bearers, and the Twins. The divine muscleman, that dominant symbol we think of when we say hero, is absent here.
  • To a certain extent it can be said that the Hebrews—and later Christianity—added another archetype, the archetype of the heroic Sufferer.35 Job
  • Undeification, however, does not mean a call to pillage or desecration; man was put here to take care of nature (see the story of the Garden of Eden or the symbolism of the naming of the animals). This protection and care of nature is also related to the idea of progress
  • For the heroes who moved our civilization to where it is today, the heroic archetypes of the cunning trickster, culture bearer, and sufferer are rather more appropriate.
  • the Old Testament strongly emphasizes the undeification of nature.37 Nature is God’s creation, which speaks of divinity but is not the domain of moody gods
  • This is very important for democratic capitalism, because the Jewish heroic archetype lays the groundwork much better for the development of the later phenomenon of the hero, which better suits life as we know it today. “The heroes laid down their arms and set about trading to become wealthy.”
  • in an Old Testament context, the pharaoh was a mere man (whom one could disagree with, and who could be resisted!).
  • RULERS ARE MERE MEN In a similar historical context, the Old Testament teachings carried out a similar desacralization of rulers, the so-called bearers of economic policy.
  • Ultimately the entire idea of a political ruler stood against the Lord’s will, which is explicitly presented in the Torah. The Lord unequivocally preferred the judge as the highest form of rule—an
  • The needs of future generations will have to be considered; after all humankind are the guardians of God’s world. Waste of natural resources, whether privately owned or nationally owned is forbidden.”39
  • Politics lost its character of divine infallibility, and political issues were subject to questioning. Economic policy could become a subject of examination.
  • 44 God first creates with the word and then on individual days He divides light from darkness, water from dry land, day from night, and so forth—and He gives order to things.45 The world is created orderly— it is wisely, reasonably put together. The way of the world is put together at least partially46 decipherably by any other wise and reasonable being who honors rational rules.
  • which for the methodology of science and economics is very important because disorder and chaos are difficult to examine scientifically.43 Faith in some kind of rational and logical order in a system (society, the economy) is a silent assumption of any (economic) examination.
  • THE PRAISE OF ORDER AND WISDOM: MAN AS A PERFECTER OF CREATION The created world has an order of sorts, an order recognizable by us as people,
  • From the very beginning, when God distances Himself from the entire idea, there is an anticipation that there is nothing holy, let alone divine, in politics. Rulers make mistakes, and it is possible to subject them to tough criticism—which frequently occurs indiscriminately through the prophets in the Old Testament.
  • Hebrew culture laid the foundations for the scientific examination of the world.
  • Examining the world is therefore an absolutely legitimate activity, and one that is even requested by God—it is a kind of participation in the Creator’s work.51 Man is called on to understand himself and his surroundings and to use his knowledge for good.
  • I was there when he set heavens in place, when he marked out the horizon on the face of the deep (…) Then I was the craftsman at his side.47
  • There are more urgings to gain wisdom in the Old Testament. “Wisdom calls aloud in the street (…): ‘How long will you simple ones love your simple ways?’”49 Or several chapters later: “Wisdom is supreme; therefore get wisdom. Though it cost all you have, get understanding.”50
  • examination is not forbidden. The fact that order can be grasped by human reason is another unspoken assumption that serves as a cornerstone of any scientific examination.
  • then, my sons, listen to me; blessed are those who keep my ways (…) Blessed is the man who listens to me, watching daily at my doors, waiting at my doorway. For whoever finds me finds life and receives favor from the Lord.
  • the rational examination of nature has its roots, surprisingly, in religion.
  • The Lord brought me forth as the first of his works, before his deeds of old. I was appointed from eternity, from the beginning, before the world began. When there were no oceans, I was given birth, when there were no springs abounding with water, before the mountains were settled in place,
  • The Book of Proverbs emphasizes specifically several times that it was wisdom that was present at the creation of the world. Wisdom personified calls out:
  • The last act, final stroke of the brush of creation, naming of the animals—this act is given to a human, it is not done by God, as one would expect. Man was given the task of completing the act of creation that the Lord began:
  • MAN AS A FINISHER OF CREATION The creation of the world, as it is explained in Jewish teachings, is described in the Book of Genesis. Here God (i) creates, (ii) separates, and (iii) names [my emphasis]:
  • Naming is a symbolic expression. In Jewish culture (and also in our culture to this day), the right to name meant sovereign rights and belonged, for example, to explorers (new places), inventors (new principles), or parents (children)—that is, to those who were there at the genesis, at the origin. This right was handed over by God to mankind.
  • The Naming itself (the capital N is appropriate) traditionally belongs to the crowning act of the Creator and represents a kind of grand finale of creation, the last move of the brush to complete the picture—a signature of the master.
  • Without naming, reality does not exist; it is created together with language. Wittgenstein tightly names this in his tractatus—the limits of our language are the limits of our world.53
  • He invented (fictitiously and completely abstractly!) a framework that was generally accepted and soon “made into” reality. Marx invented similarly; he created the notion of class exploitation. Through his idea, the perception of history and reality was changed for a large part of the world for nearly an entire century.
  • Reality is not a given; it is not passive. Perceiving reality and “facts” requires man’s active participation. It is man who must take the last step, an act (and we
  • How does this relate to economics? Reality itself, our “objective” world, is cocreated, man himself participates in the creation; creation, which is somewhat constantly being re-created.
  • Our scientific models put the finishing touches on reality, because (1) they interpret, (2) they give phenomena a name, (3) they enable us to classify the world and phenomena according to logical forms, and (4) through these models we de facto perceive reality.
  • When man finds a new linguistic framework or analytical model, or stops using the old one, he molds or remolds reality. Models are only in our heads; they are not “in objective reality.” In this sense, Newton invented (not merely discovered!) gravity.
  • A real-ization act on our part represents the creation of a construct, the imputation of sense and order (which is beautifully expressed by the biblical act of naming, or categorization, sorting, ordering).
  • Keynes enters into the history of economic thought from the same intellectual cadence; his greatest contribution to economics was precisely the resurrection of the imperceptible—for example in the form of animal spirits or uncertainty. The economist Piero Mini even ascribes Keynes’s doubting and rebellious approach to his almost Talmudic education.63
  • God connects man with the task of guarding and protecting the Garden of Eden, and thus man actually cocreates the cultural landscape. The Czech philosopher Zdeněk Neubauer also describes this: “Such is reality, and it is so deep that it willingly crystallizes into worlds. Therefore I profess that reality is a creation and not a place of occurrence for objectively given phenomena.”61
  • in this viewpoint it is possible to see how Jewish thought is mystical—it admits the role of the incomprehensible. Therefore, through its groundedness, Jewish thought indulges mystery and defends itself against a mechanistic-causal explanation of the world: “The Jewish way of thinking, according to Veblen, emphasizes the spiritual, the miraculous, the intangible.
  • The Jews believed the exact opposite. The world is created by a good God, and evil appears in it as a result of immoral human acts. Evil, therefore, is induced by man.66 History unwinds according to the morality of human acts.
  • What’s more, history seems to be based on morals; morals seem to be the key determining factors of history. For the Hebrews, history proceeds according to how morally its actors behave.
  • The Sumerians believed in dualism—good and evil deities exist, and the earth of people becomes their passive battlefield.
  • GOOD AND EVIL IN US: A MORAL EXPLANATION OF WELL-BEING We have seen that in the Epic of Gilgamesh, good and evil are not yet addressed systematically on a moral level.
  • This was not about moral-human evil, but rather a kind of natural evil. It is as if good and evil were not touched by morality at all. Evil simply occurred. Period.
  • the epic, good and evil are not envisaged morally—they are not the result of an (a)moral act. Evil was not associated with free moral action or individual will.
  • Hebrew thought, on the other hand, deals intensively with moral good and evil. A moral dimension touches the core of its stories.65
  • discrepancy between savings and investment, and others are convinced of the monetary essence
  • The entire history of the Jewish nation is interpreted and perceived in terms of morality. Morality has become, so to speak, a mover and shaker of Hebrew history.
  • sunspots. The Hebrews came up with the idea that morals were behind good and bad years, behind the economic cycle. But we would be getting ahead of ourselves. Pharaoh’s Dream: Joseph and the First Business Cycle To
  • It is the Pharaoh’s well-known dream of seven fat and seven lean cows, which he told to Joseph, the son of Jacob. Joseph interpreted the dream as a macroeconomic prediction of sorts: Seven years of abundance were to be followed by seven years of poverty, famine, and misery.
  • Self-Contradicting Prophecy Here, let’s make several observations on this: Through taxation74 on the level of one-fifth of a crop75 in good years to save the crop and then open granaries in bad years, the prophecy was de facto prevented (prosperous years were limited and hunger averted—through a predecessor of fiscal stabilization).
  • The Old Testament prophesies therefore were not any deterministic look into the future, but warnings and strategic variations of the possible, which demanded some kind of reaction. If the reaction was adequate, what was prophesied would frequently not occur at all.
  • This principle stands directly against the self-fulfilling prophecy,80 the well-known concept of social science. Certain prophecies become self-fulfilling when expressed (and believed) while others become self-contradicting prophecies when pronounced (and believed).
  • If the threat is anticipated, it is possible to totally or at least partially avoid it. Neither Joseph nor the pharaoh had the power to avoid bounty or crop failure (in this the dream interpretation was true and the appearance of the future mystical), but they avoided the impacts and implications of the prophecy (in this the interpretation of the dream was “false”)—famine did not ultimately occur in Egypt, and this was due to the application of reasonable and very intuitive economic policy.
  • Let us further note that the first “macroeconomic forecast” appears in a dream.
  • back to Torah: Later in this story we will notice that there is no reason offered as to why the cycle occurs (that will come later). Fat years will simply come, and then lean years after them.
  • Moral Explanation of a Business Cycle That is fundamentally different from later Hebrew interpretations, when the Jewish nation tries to offer reasons why the nation fared well or poorly. And those reasons are moral.
  • If you pay attention to these laws and are careful to follow them, then the Lord your God will keep his covenant of love with you, as he swore to your forefathers. He will love you and bless you and increase your numbers.
  • Only in recent times have some currents of economics again become aware of the importance of morals and trust in the form of measuring the quality of institutions, the level of justice, business ethics, corruption, and so forth, and examining their influence on the economy,
  • From today’s perspective, we can state that the moral dimension entirely disappeared from economic thought for a long time, especially due to the implementation of Mandeville’s concept of private vices that contrarily support the public welfare
  • Without being timid, we can say this is the first documented attempt to explain the economic cycle. The economic cycle, the explanation of which is to this day a mystery to economists, is explained morally in the Old Testament.
  • But how do we consolidate these two conflicting interpretations of the economic cycle: Can ethics be responsible for it or not? Can we influence reality around us through our acts?
  • it is not within the scope of this book to answer that question; justice has been done to the question if it manages to sketch out the main contours of possible searches for answers.
  • THE ECONOMICS OF GOOD AND EVIL: DOES GOOD PAY OFF? This is probably the most difficult moral problem we could ask.
  • Kant, the most important modern thinker in the area of ethics, answers on the contrary that if we carry out a “moral” act on the basis of economic calculus (therefore we carry out an hedonistic consideration; see below) in the expectation of later recompense, its morality is lost. Recompense, according to the strict Kant, annuls ethics.
  • Inquiring about the economics of good and evil, however, is not that easy. Where would Kant’s “moral dimension of ethics” go if ethics paid? If we do good for profit, the question of ethics becomes a mere question of rationality.
  • Job’s friends try to show that he must have sinned in some way and, in doing so, deserved God’s punishment. They are absolutely unable to imagine a situation in which Job, as a righteous man, would suffer without (moral) cause. Nevertheless, Job insists that he deserves no punishment because he has committed no offense: “God has wronged me and drawn his net around me.”94
  • But Job remains righteous, even though it does not pay to do so: Though he slay me, yet will I hope in him.95 And till I die, I will not deny my integrity I will maintain my righteousness and never let go of it; my conscience will not reproach me as long as I live.96
  • He remains righteous, even if his only reward is death. What economic advantage could he have from that?
  • morals cannot be considered in the economic dimension of productivity and calculus. The role of the Hebrews was to do good, whether it paid off or not. If good (outgoing) is rewarded by incoming goodness, it is a bonus,99 not a reason to do outgoing good. Good and reward do not correlate to each other.
  • This reasoning takes on a dimension of its own in the Old Testament. Good (incoming) has already happened to us. We must do good (outgoing) out of gratitude for the good (incoming) shown to us in the past.
  • So why do good? After all, suffering is the fate of many biblical figures. The answer can only be: For good itself. Good has the power to be its own reward. In this sense, goodness gets its reward, which may or may not take on a material dimension.
  • the Hebrews offered an interesting compromise between the teachings of the Stoics and Epicureans. We will go into it in detail later, so only briefly
  • constraint. It calls for bounded optimalization (with limits). A kind of symbiosis existed between the legitimate search for one’s own utility (or enjoyment of life) and maintaining rules, which are not negotiable and which are not subject to optimalization.
  • In other words, clear (exogenously given) rules exist that must be observed and cannot be contravened. But within these borders it is absolutely possible, and even recommended, to increase utility.
  • the mining of enjoyment must not come at the expense of exogenously given rules. “Judaism comes therefore to train or educate the unbounded desire … for wealth, so that market activities and patterns of consumption operate within a God-given morality.”102
  • The Epicureans acted with the goal of maximizing utility without regard for rules (rules developed endogenously, from within the system, computed from that which increased utility—this was one of the main trumps of the Epicurean school; they did not need exogenously given norms, and argued that they could “calculate” ethics (what to do) for every given situation from the situation itself).
  • The Stoics could not seek their enjoyment—or, by another name, utility. They could not in any way look back on it, and in no way could they count on it. They could only live according to rules (the greatest weakness of this school was to defend where exogenously the given rules came from and whether they are universal) and take a indifferent stand to the results of their actions.
  • To Love the Law The Jews not only had to observe the law (perhaps the word covenant would be more appropriate), but they were to love it because it was good.
  • Their relationship to the law was not supposed to be one of duty,105 but one of gratitude, love. Hebrews were to do good (outgoing), because goodness (incoming) has already been done to them.
  • This is in stark contrast with today’s legal system, where, naturally, no mention of love or gratefulness exists. But God expects a full internalization of the commandments and their fulfillment with love, not as much duty. By no means was this on the basis of the cost-benefit analyses so widespread in economics today, which determines when it pays to break the law and when not to (calculated on the basis of probability of being caught and the amount of punishment vis-à-vis the possible gain).
  • And now, O Israel, what does the Lord your God ask of you but to fear the Lord your God, to walk in all his ways, to love him, to serve the Lord your God with all your heart and with all your soul, and to observe the Lord’s commands and decrees that I am giving you today for your own good? To the Lord your God belong the heavens, even the highest heavens, the earth and everything in it. Yet the Lord set his affection on your forefathers and loved them….
  • the principle of doing good (outgoing) on the basis of a priori demonstrated good (incoming) was also taken over by the New Testament. Atonement itself is based on an a priori principle; all our acts are preceded by good.
  • The Hebrews, originally a nomadic tribe, preferred to be unrestrained and grew up in constant freedom of motion.
  • Human laws, if they are in conflict with the responsibilities given by God, are subordinate to personal responsibility, and a Jew cannot simply join the majority, even if it is legally allowed. Ethics, the concept of good, is therefore always superior to all local laws, rules, and customs:
  • THE SHACKLES OF THE CITY Owing to the Hebrew’s liberation from Egyptian slavery, freedom and responsibility become the key values of Jewish thought.
  • Laws given by God are binding for Jews, and God is the absolute source of all values,
  • The Hebrew ideal is represented by the paradise of the Garden of Eden, not a city.116 The despised city civilization or the tendency to see in it a sinful and shackling way of life appears in glimpses and allusions in many places in the Old Testament.
  • The nomadic Jewish ethos is frequently derived from Abraham, who left the Chaldean city of Ur on the basis of a command:
  • In addition, they were aware of a thin two-way line between owner and owned. We own material assets, but—to a certain extent—they own us and tie us down. Once we become used to a certain material
  • This way of life had understandably immense economic impacts. First, such a society lived in much more connected relationships, where there was no doubt that everyone mutually depended on each other. Second, their frequent wanderings meant the inability to own more than they could carry; the gathering up of material assets did not have great weight—precisely because the physical weight (mass) of things was tied to one place.
  • One of Moses’s greatest deeds was that he managed to explain to his nation once and for all that it is better to remain hungry and liberated than to be a slave with food “at no cost.”
  • SOCIAL WELFARE: NOT TO ACT IN THE MANNER OF SODOM
  • regulations is developed in the Old Testament, one we hardly find in any other nation of the time. In Hebrew teachings, aside from individual utility, indications of the concept of maximalizing utility societywide appear for the first time as embodied in the Talmudic principle of Kofin al midat S´dom, which can be translated as “one is compelled not to act in the manner of Sodom” and to take care of the weaker members of society.
  • In a jubilee year, debts were to be forgiven,125 and Israelites who fell into slavery due to their indebtedness were to be set free.126
  • Such provisions can be seen as the antimonopoly and social measures of the time. The economic system even then had a clear tendency to converge toward asset concentration, and therefore power as well. It would appear that these provisions were supposed to prevent this process
  • Land at the time could be “sold,” and it was not sale, but rent. The price (rent) of real estate depended on how long there was until a forgiveness year. It was about the awareness that we may work the land, but in the last instance we are merely “aliens and strangers,” who have the land only rented to us for a fixed time. All land and riches came from the Lord.
  • These provisions express a conviction that freedom and inheritance should not be permanently taken away from any Israelite. Last but not least, this system reminds us that no ownership lasts forever and that the fields we plow are not ours but the Lord’s.
  • Glean Another social provision was the right to glean, which in Old Testament times ensured at least basic sustenance for the poorest. Anyone who owned a field had the responsibility not to harvest it to the last grain but to leave the remains in the field for the poor.
  • Tithes and Early Social Net Every Israelite also had the responsibility of levying a tithe from their entire crop. They had to be aware from whom all ownership comes and, by doing so, express their thanks.
  • “Since the community has an obligation to provide food, shelter, and basic economic goods for the needy, it has a moral right and duty to tax its members for this purpose. In line with this duty, it may have to regulate markets, prices and competition, to protect the interests of its weakest members.”135
  • In Judaism, charity is not perceived as a sign of goodness; it is more of a responsibility. Such a society then has the right to regulate its economy in such a way that the responsibility of charity is carried out to its satisfaction.
  • With a number of responsibilities, however, comes the difficulty of getting them into practice. Their fulfillment, then, in cases when it can be done, takes place gradually “in layers.” Charitable activities are classified in the Talmud according to several target groups with various priorities, classified according to, it could be said, rules of subsidiarity.
  • Do not mistreat an alien or oppress him, for you were aliens in Egypt.140 As one can see, aside from widows and orphans, the Old Testament also includes immigrants in its area of social protection.141 The Israelites had to have the same rules apply for them as for themselves—they could not discriminate on the basis of their origin.
  • ABSTRACT MONEY, FORBIDDEN INTEREST, AND OUR DEBT AGE If it appears to us that today’s era is based on money and debt, and our time will be written into history as the “Debt age,” then it will certainly be interesting to follow how this development occurred.
  • Money is a social abstractum. It is a social agreement, an unwritten contract.
  • The first money came in the form of clay tablets from Mesopotamia, on which debts were written. These debts were transferable, so the debts became currency. In the end, “It is no coincidence that in English the root of ‘credit’ is ‘credo,’ the Latin for ‘I believe.’”
  • To a certain extent it could be said that credit, or trust, was the first currency. It can materialize, it can be embodied in coins, but what is certain is that “money is not metal,” even the rarest metal, “it is trust inscribed,”
  • Inseparably, with the original credit (money) goes interest. For the Hebrews, the problem of interest was a social issue: “If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest.”
  • there were also clearly set rules setting how far one could go in setting guarantees and the nonpayment of debts. No one should become indebted to the extent that they could lose the source of their livelihood:
  • In the end, the term “bank” comes from the Italian banci, or the benches that Jewish lenders sat on.157
  • Money is playing not only its classical roles (as a means of exchange, a holder of value, etc.) but also a much greater, stronger role: It can stimulate, drive (or slow down) the whole economy. Money plays a national economic role.
  • In the course of history, however, the role of loans changed, and the rich borrowed especially for investment purposes,
  • Today the position and significance of money and debt has gone so far and reached such a dominant position in society that operating with debts (fiscal policy) or interest or money supply (monetary policy) means that these can, to a certain extent, direct (or at least strongly influence) the whole economy and society.
  • In such a case a ban on interest did not have great ethical significance. Thomas Aquinas, a medieval scholar (1225-1274), also considers similarly; in his time, the strict ban on lending with usurious interest was loosened, possibly due to him.
  • As a form of energy, money can travel in three dimensions, vertically (those who have capital lend to those who do not) and horizontally (speed and freedom in horizontal or geographic motion has become the by-product—or driving force?—of globalization). But money (as opposed to people) can also travel through time.
  • money is something like energy that can travel through time. And it is a very useful energy, but at the same time very dangerous as well. Wherever
  • Aristotle condemned interest162 not only from a moral standpoint, but also for metaphysical reasons. Thomas Aquinas shared the same fear of interest and he too argued that time does not belong to us, and that is why we must not require interest.
  • MONEY AS ENERGY: TIME TRAVEL AND GROSS DEBT PRODUCT (GDP)
  • Due to this characteristic, we can energy-strip the future to the benefit of the present. Debt can transfer energy from the future to the present.163 On the other hand, saving can accumulate energy from the past and send it to the present.
  • labor was not considered degrading in the Old Testament. On the contrary, the subjugation of nature is even a mission from God that originally belonged to man’s very first blessings.
  • LABOR AND REST: THE SABBATH ECONOMY
  • The Jews as well as Aristotle behaved very guardedly toward loans. The issue of interest/usury became one of the first economic debates. Without having an inkling of the future role of economic policy (fiscal and monetary), the ancient Hebrews may have unwittingly felt that they were discovering in interest a very powerful weapon, one that can be a good servant, but (literally) an enslaving master as well.
  • It’s something like a dam. When we build one, we are preventing periods of drought and flooding in the valley; we are limiting nature’s whims and, to a large extent, avoiding its incalculable cycles. Using dams, we can regulate the flow of water to nearly a constant. With it we tame the river (and we can also gain
  • But if we do not regulate the water wisely, it may happen that we would overfill the dam and it would break. For the cities lying in the valley, their end would be worse than if a dam were never there.
  • If man lived in harmony with nature before, now, after the fall, he must fight; nature stands against him and he against it and the animals. From the Garden we have moved unto a (battle)field.
  • Only after man’s fall does labor turn into a curse.168 It could even be said that this is actually the only curse, the curse of the unpleasantness of labor, that the Lord places on Adam.
  • Both Plato and Aristotle consider labor to be necessary for survival, but that only the lower classes should devote themselves to it so that the elites would not have to be bothered with it and so that they could devote themselves to “purely spiritual matters—art, philosophy, and politics.”
  • Work is also not only a source of pleasure but a social standing; It is considered an honor. “Do you see a man skilled in his work? He will serve before kings.”170 None of the surrounding cultures appreciate work as much. The idea of the dignity of labor is unique in the Hebrew tradition.
  • Hebrew thinking is characterized by a strict separation of the sacred from the profane. In life, there are simply areas that are holy, and in which it is not allowed to economize, rationalize, or maximize efficiency.
  • good example is the commandment on the Sabbath. No one at all could work on this day, not even the ones who were subordinate to an observant Jew:
  • the message of the commandment on Saturday communicated that people were not primarily created for labor.
  • Paradoxically, it is precisely this commandment out of all ten that is probably the most violated today.
  • Aristotle even considers labor to be “a corrupted waste of time which only burdens people’s path to true honour.”
  • we have days when we must not toil connected (at least lexically) with the word meaning emptiness: the English term “vacation” (or emptying), as with the French term, les vacances, or German die Freizeit, meaning open time, free time, but also…
  • Translated into economic language: The meaning of utility is not to increase it permanently but to rest among existing gains. Why do we learn how to constantly increase gains but not how to…
  • This dimension has disappeared from today’s economics. Economic effort has no goal at which it would be possible to rest. Today we only know growth for growth’s sake, and if our company or country prospers, that does not…
  • Six-sevenths of time either be dissatisfied and reshape the world into your own image, man, but one-seventh you will rest and not change the creation. On the seventh day, enjoy creation and enjoy the work of your hands.
  • the purpose of creation was not just creating but that it had an end, a goal. The process was just a process, not a purpose. The whole of Being was created so…
  • Saturday was not established to increase efficiency. It was a real ontological break that followed the example of the Lord’s seventh day of creation. Just as the Lord did not rest due to tiredness or to regenerate strength; but because He was done. He was done with His work, so that He could enjoy it, to cherish in His creation.
  • If we believe in rest at all today, it is for different reasons. It is the rest of the exhausted machine, the rest of the weak, and the rest of those who can’t handle the tempo. It’s no wonder that the word “rest…
  • Related to this, we have studied the first mention of a business cycle with the pharaoh’s dream as well as seen a first attempt (that we may call…
  • We have tried to show that the quest for a heaven on Earth (similar to the Jewish one) has, in its desacralized form, actually also been the same quest for many of the…
  • We have also seen that the Hebrews tried to explain the business cycle with morality and ethics. For the Hebrews,…
  • ancient Greek economic ethos, we will examine two extreme approaches to laws and rules. While the Stoics considered laws to be absolutely valid, and utility had infinitesimal meaning in their philosophy, the Epicureans, at least in the usual historical explanation, placed utility and pleasure in first place—rules were to be made based on the principle of utility.
  • CONCLUSION: BETWEEN UTILITY AND PRINCIPLE The influence of Jewish thought on the development of market democracy cannot be overestimated. The key heritage for us was the lack of ascetic perception of the world, respect to law and private…
  • We have tried to show how the Torah desacralized three important areas in our lives: the earthly ruler, nature,…
  • What is the relationship between the good and evil that we do (outgoing) and the utility of disutility that we (expect to) get as a reward (incoming)? We have seen…
  • The Hebrews never despised material wealth; on contrary, the Jewish faith puts great responsibility on property management. Also the idea of progress and the linear perception of time gives our (economic)…
  • the Hebrews managed to find something of a happy compromise between both of these principles.
  • will not be able to completely understand the development of the modern notion of economics without understanding the disputes between the Epicureans and the Stoics;
  • poets actually went even further, and with their speech they shaped and established reality and truth. Honor, adventure, great deeds, and the acclaim connected with them played an important role in the establishment of the true, the real.
  • those who are famous will be remembered by people. They become more real, part of the story, and they start to be “realized,” “made real” in the lives of other people. That which is stored in memory is real; that which is forgotten is as if it never existed.
  • Today’s scientific truth is founded on the notion of exact and objective facts, but poetic truth stands on an interior (emotional) consonance with the story or poem. “It is not addressed first to the brain … [myth] talks directly to the feeling system.”
  • “epic and tragic poets were widely assumed to be the central ethical thinkers and teachers of Greece; nobody thought of their work as less serious, less aimed at truth, than the speculative prose treatises of historians and philosophers.”5 Truth and reality were hidden in speech, stories, and narration.
  • Ancient philosophy, just as science would later, tries to find constancy, constants, quantities, inalterabilities. Science seeks (creates?) order and neglects everything else as much as it can. In their own experiences, everyone knows that life is not like that,
  • Just as scientists do today, artists drew images of the world that were representative, and therefore symbolic, picturelike, and simplifying (but thus also misleading), just like scientific models, which often do not strive to be “realistic.”
  • general? In the end, poetry could be more sensitive to the truth than the philosophical method or, later, the scientific method. “Tragic poems, in virtue of their subject matter and their social function, are likely to confront and explore problems about human beings and luck that a philosophical text might be able to omit or avoid.”8
Javier E

The Real Trouble With Economics - NYTimes.com - 1 views

  • far from acting as a free-spirited improviser, Bernanke has been largely implementing recipes developed in the academic literature years before.
  • They also misunderstand the nature of economists’ predictive failures. It’s true that few economists predicted the onset of crisis. Once crisis struck, however, basic macroeconomic models did a very good job in key respects — in particular, they did much better than people who relied on their intuitive feelings.
  • wonks who relied on suitably interpreted IS-LM confidently declared that all this intuition, based on experiences in a different environment, would prove wrong — and they were right. From my point of view, these past 5 years have been a triumph for and vindication of economic modeling.
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  • Yet obviously something is deeply wrong with economics. While economists using textbook macro models got things mostly and impressively right, many famous economists refused to use those models — in fact, they made it clear in discussion that they didn’t understand points that had been worked out generations ago.
  • Moreover, it’s hard to find any economists who changed their minds when their predictions, say of sharply higher inflation, turned out wrong.
  • let’s grant that economics as practiced doesn’t look like a science. But that’s not because the subject is inherently unsuited to the scientific method. Sure, it’s highly imperfect — it’s a complex area, and our understanding is in its early stages.
  • And sure, the economy itself changes over time, so that what was true 75 years ago may not be true today — although what really impresses you if you study macro, in particular, is the continuity, so that Bagehot and Wicksell and Irving Fisher and, of course, Keynes remain quite relevant today.
  • No, the problem lies not in the inherent unsuitability of economics for scientific thinking as in the sociology of the economics profession — a profession that somehow, at least in macro, has ceased rewarding research that produces successful predictions and rewards research that fits preconceptions
Javier E

A Heartbreaking Work of Staggering Folly - NYTimes.com - 0 views

  • few anticipated the severity of the 2008 crisis — but that wasn’t a deep failure of theory, it was a failure of observation. We actually had a pretty good understanding of bank runs; we just failed to notice that traditional banks were a much smaller share of the system than before
  • the aftermath of the crisis — persistent low interest rates despite high deficits, impotence of monetary policy, major negative impacts of fiscal austerity — may not have been what most economists or government agencies predicted, but it’s what they should have predicted; Econ 101 macroeconomics, as I often point out, has worked pretty well.
  • in Europe, recovery is now behind where it was at the same point of the Great Depression. Here’s European industrial production from the League of Nations starting in 1929 and Eurostat starting in 2007:
Javier E

Opinion | Unicorns of the Intellectual Right - The New York Times - 0 views

  • trying to find influential conservative economic intellectuals is basically a hopeless task, for two reasons.
  • First, while there are many conservative economists with appointments at top universities, publications in top journals, and so on, they have no influence on conservative policymaking
  • What the right wants are charlatans and cranks, in (conservative) Greg Mankiw’s famous phrase. If they use actual economists, they use them the way a drunkard uses a lamppost: for support, not illumination.
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  • if you get a conservative economist who isn’t a charlatan and crank, you are more or less by definition getting someone with no influence on policymakers. But that’s not the only problem.
  • But even among conservative economists who didn’t go down that rabbit hole, there has been a moral collapse – a willingness to put political loyalty over professional standards.
  • the intellectual decadence. In macroeconomics, what began in the 60s and 70s as a usefully challenging critique of Keynesian views went all wrong in the 80s, because the anti-Keynesians refused to reconsider their views when their own models failed the reality test while Keynesian models, with some modification, performed pretty well.
  • By the time the Great Recession struck, the right-leaning side of the profession had entered a Dark Age, having retrogressed to the point where famous economists trotted out 30s-era fallacies as deep insights.
  • The second problem with conservative economic thought is that even aside from its complete lack of policy influence, it’s in an advanced state of both intellectual and moral decadence – something that has been obvious for a while, but became utterly clear after the 2008 crisis.
  • We saw that most recently in the way leading conservative economists raced to endorse ludicrous claims for the efficacy of the Trump tax cuts, then tried to climb down without admitting what they had done. We saw it in the false claims that Obama had presided over a massive expansion of government programs and refusal to admit that he hadn’t, the warnings that Fed policy would cause huge inflation followed by refusal to admit having been wrong, and on and on.
  • What accounts for this moral decline? I suspect that it’s about a desperate attempt to retain some influence on a party that prefers the likes of Kudlow or Stephen Moore.
  • no, you don’t see the same thing on the other side. Liberal economists have made plenty of bad predictions – if you never get it wrong, you’re not taking enough risks – but have generally been willing to admit to and learn from mistakes, and have rarely been sycophants to people in power. In this, as in so much else, we’re looking at asymmetric polarization.
  • Am I saying that there are no conservative economists who have maintained their principles? Not at all. But they have no influence, zero, on GOP thinking. So in economics, a news organization trying to represent conservative thought either has to publish people with no constituency or go with the charlatans who actually matter.
  • And I think that’s true across the board. The left has genuine public intellectuals with actual ideas and at least some real influence; the right does not. News organizations don’t seem to have figured out how to deal with this reality, except by pretending that it doesn’t exist
  • the real problem here is that media organizations are looking for unicorns: serious, honest, conservative intellectuals with real influence. Forty or fifty years ago, such people did exist. But now they don’t.
Javier E

Minsky's moment | The Economist - 0 views

  • Minsky started with an explanation of investment. It is, in essence, an exchange of money today for money tomorrow. A firm pays now for the construction of a factory; profits from running the facility will, all going well, translate into money for it in coming years.
  • Put crudely, money today can come from one of two sources: the firm’s own cash or that of others (for example, if the firm borrows from a bank). The balance between the two is the key question for the financial system.
  • Minsky distinguished between three kinds of financing. The first, which he called “hedge financing”, is the safest: firms rely on their future cashflow to repay all their borrowings. For this to work, they need to have very limited borrowings and healthy profits. The second, speculative financing, is a bit riskier: firms rely on their cashflow to repay the interest on their borrowings but must roll over their debt to repay the principal. This should be manageable as long as the economy functions smoothly, but a downturn could cause distress. The third, Ponzi financing, is the most dangerous. Cashflow covers neither principal nor interest; firms are betting only that the underlying asset will appreciate by enough to cover their liabilities. If that fails to happen, they will be left exposed.
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  • Economies dominated by hedge financing—that is, those with strong cashflows and low debt levels—are the most stable. When speculative and, especially, Ponzi financing come to the fore, financial systems are more vulnerable. If asset values start to fall, either because of monetary tightening or some external shock, the most overstretched firms will be forced to sell their positions. This further undermines asset values, causing pain for even more firms. They could avoid this trouble by restricting themselves to hedge financing. But over time, particularly when the economy is in fine fettle, the temptation to take on debt is irresistible. When growth looks assured, why not borrow more? Banks add to the dynamic, lowering their credit standards the longer booms last. If defaults are minimal, why not lend more? Minsky’s conclusion was unsettling. Economic stability breeds instability. Periods of prosperity give way to financial fragility.
  • Minsky’s insight might sound obvious. Of course, debt and finance matter. But for decades the study of economics paid little heed to the former and relegated the latter to a sub-discipline, not an essential element in broader theories.
  • Minsky was a maverick. He challenged both the Keynesian backbone of macroeconomics and a prevailing belief in efficient markets.
  • t Messrs Hicks and Hansen largely left the financial sector out of the picture, even though Keynes was keenly aware of the importance of markets. To Minsky, this was an “unfair and naive representation of Keynes’s subtle and sophisticated views”. Minsky’s financial-instability hypothesis helped fill in the holes.
  • His challenge to the prophets of efficient markets was even more acute. Eugene Fama and Robert Lucas, among others, persuaded most of academia and policymaking circles that markets tended towards equilibrium as people digested all available information. The structure of the financial system was treated as almost irrelevant
  • In recent years, behavioural economists have attacked one plank of efficient-market theory: people, far from being rational actors who maximise their gains, are often clueless about what they want and make the wrong decisions.
  • But years earlier Minsky had attacked another: deep-seated forces in financial systems propel them towards trouble, he argued, with stability only ever a fleeting illusion.
  • Investors were faster than professors to latch onto his views. More than anyone else it was Paul McCulley of PIMCO, a fund-management group, who popularised his ideas. He coined the term “Minsky moment” to describe a situation when debt levels reach breaking-point and asset prices across the board start plunging. Mr McCulley initially used the term in explaining the Russian financial crisis of 1998. Since the global turmoil of 2008, it has become ubiquitous. For investment analysts and fund managers, a “Minsky moment” is now virtually synonymous with a financial crisis.
  • it would be a stretch to expect the financial-instability hypothesis to become a new foundation for economic theory. Minsky’s legacy has more to do with focusing on the right things than correctly structuring quantifiable models. It is enough to observe that debt and financial instability, his main preoccupations, have become some of the principal topics of inquiry for economists today
  • As Mr Krugman has quipped: “We are all Minskyites now.”
Javier E

New Thinking and Old Books Revisited - NYTimes.com - 0 views

  • Mark Thoma’s classic crack — “I’ve learned that new economic thinking means reading old books” — has a serious point to it. We’ve had a couple of centuries of economic thought at this point, and quite a few smart people doing the thinking. It’s possible to come up with truly new concepts and approaches, but it takes a lot more than good intentions and casual observation to get there.
  • There is definitely a faction within economics that considers it taboo to introduce anything into its analysis that isn’t grounded in rational behavior and market equilibrium
  • what I do, and what everyone I’ve just named plus many others does, is a more modest, more eclectic form of analysis. You use maximization and equilibrium where it seems reasonably consistent with reality, because of its clarifying power, but you introduce ad hoc deviations where experience seems to demand them — downward rigidity of wages, balance-sheet constraints, bubbles (which are hard to predict, but you can say a lot about their consequences).
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  • You may say that what we need is reconstruction from the ground up — an economics with no vestige of equilibrium analysis. Well, show me some results. As it happens, the hybrid, eclectic approach I’ve just described has done pretty well in this crisis, so you had better show me some really superior results before it gets thrown out the window.
  • if you think you’ve found a fundamental logical flaw in one of our workhorse economic models, the odds are very strong that you’ve just made a mistake.
  • it’s quite clear that the teaching of macroeconomics has gone seriously astray. As Saraceno says, the simple models that have proved so useful since 2008 are by and large taught only at the undergrad level — they’re treated as too simple, too ad hoc, whatever, to make it into the grad courses even at places that aren’t very ideological.
  • to temper your modeling with a sense of realism you need to know something about reality — and not just the statistical properties of U.S. time series since 1947. Economic history — global economic history — should be a core part of the curriculum. Nobody should be making pronouncements on macro without knowing a fair bit about the collapse of the gold standard in the 1930s, what actually happened in the stagflation of the 1970s, the Asian financial crisis of the 90s, and, looking forward, the euro crisis.
Javier E

A Reply To Jonathan Chait On Stimulus | The New Republic - 0 views

  • It is certainly true that a large majority of professional economists accept the view that “increasing spending or reducing taxes temporarily increases economic growth”—but that is very far from claiming that disputing it is largely a political campaign.
  • in a genuinely scientific field which has accepted a predictive rule as valid to the point that there is a true consensus—such that the only reason for refusal to accept it is crankery or, in Chait’s terms, “politics”—you don’t usually see: several full professors at the top two departments in the subject, when speaking directly in their area of research expertise, challenge it; 10 percent of all practitioners in the field refuse to accept it; and the two leading global general circulation publications in field running op-eds questioning it.
  • A great many leading economists may accept the proposition that enough stimulus spending will probably cause at least some increase in output for a short period of time in some circumstances, yet are still uncomfortable with the kind of stimulus spending strategy that is the actual subject of current political debate. In 2009, James Buchanan (1986 Nobel Laureate in Economics), Edward Prescott (2004 Nobel Laureate in Economics), and Vernon Smith (2002 Nobel Laureate in Economics) promulgated this statement: “Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance.”
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  • It is nerdy-sounding, but I believe critical to this discussion, to distinguish between measurement and knowledge. I made a very strong claim about measurement, and a very specific claim about knowledge. I claim that we cannot usefully measure the effect of the stimulus program launched in 2009 at all.
  • All potentially useful predictions made about the output impact of the stimulus program are non-falsifiable. Failure of predictions can be simply justified by this sort of ad hoc explanation after the fact.
  • This argument will always degenerate back into endlessly dueling regressions, because there is no ability to adjudicate among them via experiment.
  • It simply means that we have no scientific knowledge about this topic. Macroeconomic assertions about the effect of a proposed stimulus policy are not valueless, but despite their complex mathematical justifications, do not have standing as knowledge that can trump common sense, historical reasoning, and so on in the same way that a predictive rule that has been verified through experimental testing can.
  • When using stimulus to ameliorate the economic crisis, we are like primitive tribesmen using herbs to treat an infection, and we should not allow ourselves to imagine that we are using antibiotics that have been proven through clinical trials. This should not imply merely a different feeling about the same actions, but should rationally lead us to greater circumspection.
  •  
    An incisive analysis of knowledge claims in economics, and Keynesian approaches.
Javier E

A New Report Argues Inequality Is Causing Slower Growth. Here's Why It Matters. - NYTim... - 0 views

  • Is income inequality holding back the United States economy? A new report argues that it is, that an unequal distribution in incomes is making it harder for the nation to recover from the recession
  • The fact that S.&P., an apolitical organization that aims to produce reliable research for bond investors and others, is raising alarms about the risks that emerge from income inequality is a small but important sign of how a debate that has been largely confined to the academic world and left-of-center political circles is becoming more mainstream.
  • “Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening G.D.P. growth,” the S.&P. researchers write
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  • To understand why this matters, you have to know a little bit about the many tribes within the world of economics.
  • There are the academic economists who study the forces shaping the modern economy. Their work is rigorous but often obscure. Some of them end up in important policy jobs (See: Bernanke, B.) or write books for a mass audience (Piketty, T.), but many labor in the halls of academia for decades writing carefully vetted articles for academic journals that are rigorous as can be but are read by, to a first approximation, no one.
  • Then there are the economists in what can broadly be called the business forecasting community. They wear nicer suits than the academics, and are better at offering a glib, confident analysis of the latest jobs numbers delivered on CNBC or in front of a room full of executives who are their clients. They work for ratings firms like S.&P., forecasting firms like Macroeconomic Advisers and the economics research departments of all the big banks.
  • they are trying to do the practical work of explaining to clients — companies trying to forecast future demand, investors trying to allocate assets — how the economy is likely to evolve. They’re not really driven by ideology, or by models that are rigorous enough in their theoretical underpinnings to pass academic peer review. Rather, their success or failure hinges on whether they’re successful at giving those clients an accurate picture of where the economy is heading.
  • worries that income inequality is a factor behind subpar economic growth over the last five years (and really the last 15 years) is going from an idiosyncratic argument made mainly by left-of center economists to something that even the tribe of business forecasters needs to wrestle with.
  • Because the affluent tend to save more of what they earn rather than spend it, as more and more of the nation’s income goes to people at the top income brackets, there isn’t enough demand for goods and services to maintain strong growth, and attempts to bridge that gap with debt feed a boom-bust cycle of crises, the report argues. High inequality can feed on itself, as the wealthy use their resources to influence the political system toward policies that help maintain that advantage, like low tax rates on high incomes and low estate taxes, and underinvestment in education and infrastructur
  • The report itself does not break any major new analytical or empirical ground. It spends many pages summarizing the findings of various academic and government economists who have studied inequality and its discontents, and stops short of recommending any radical policy changes
Javier E

Knowledge Isn't Power - NYTimes.com - 1 views

  • It usually turns out that there is much less professional controversy about an issue than the cacophony in the news media might have led you to expect.
  • This was certainly true of the most recent poll, which asked whether the American Recovery and Reinvestment Act — the Obama “stimulus” — reduced unemployment. All but one of those who responded said that it did, a vote of 36 to 1. A follow-up question on whether the stimulus was worth it produced a slightly weaker but still overwhelming 25 to 2 consensus.
  • Let me ask, instead, whether you knew that the pro-stimulus consensus among experts was this strong, or whether you even knew that such a consensus existed.
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  • over the past several years policy makers across the Western world have pretty much ignored the professional consensus on government spending and everything else, placing their faith instead in doctrines most economists firmly reject.
  • Am I saying that the professional consensus is always right? No. But when politicians pick and choose which experts — or, in many cases, “experts” — to believe, the odds are that they will choose badly.
  • Moreover, experience shows that there is no accountability in such matters. Bear in mind that the American right is still taking its economic advice mainly from people who have spent many years wrongly predicting runaway inflation and a collapsing dollar.
  • All of which raises a troubling question: Are we as societies even capable of taking good policy advice?
  • Economists used to assert confidently that nothing like the Great Depression could happen again. After all, we know far more than our great-grandfathers did about the causes of and cures for slumps, so how could we fail to do better? When crises struck, however, much of what we’ve learned over the past 80 years was simply tossed aside.
  • macroeconomics, of course, isn’t the only challenge we face. In fact, it should be easy compared with many other issues that need to be addressed with specialized knowledge, above all climate change. So you really have to wonder whether and how we’ll avoid disaster.
Javier E

Yes, Economics Is a Science - The New York Times - 0 views

  • if you ask three economists a question, you’ll get three different answers.
  • What kind of science, people wondered, bestows its most distinguished honor on scholars with opposing ideas?
  • the Nobel Memorial Prize in Economic Science was awarded to three economists, two of whom, Robert J. Shiller of Yale and Eugene F. Fama of the University of Chicago, might be seen as having conflicting views about the workings of financial markets. At first blush, Mr. Shiller’s thinking about the role of “irrational exuberance” in stock markets and housing markets appears to contradict Mr. Fama’s work showing that such markets efficiently incorporate news into prices.
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  • But the headline-grabbing differences between the findings of these Nobel laureates are less significant than the profound agreement in their scientific approach to economic questions, which is characterized by formulating and testing precise hypotheses
  • I’m troubled by the sense among skeptics that disagreements about the answers to certain questions suggest that economics is a confused discipline, a fake science whose findings cannot be a useful basis for making policy decisions.
  • It is true that the answers to many “big picture” macroeconomic questions — like the causes of recessions or the determinants of growth — remain elusive.
  • As is the case with epidemiologists, the fundamental challenge faced by economists — and a root cause of many disagreements in the field — is our limited ability to run experiments
  • economists have recently begun to overcome these challenges by developing tools that approximate scientific experiments to obtain compelling answer
  • Other economic studies have taken advantage of the constraints inherent in a particular policy to obtain scientific evidence
  • Even when such experiments are unfeasible, there are ways to use “big data” to help answer policy questions
Javier E

The Facebooking of Economics - NYTimes.com - 2 views

  • there has been a major erosion of the old norms. It used to be the case that to have a role in the economics discourse you had to have formal credentials and a position of authority; you had to be a tenured professor at a top school publishing in top journals, or a senior government official. Today the ongoing discourse, especially in macroeconomics, is much more free-form.
  • you don’t get to play a major role in that discourse by publishing clever Slateish snark; you get there by saying smart things backed by data.
  • Economics journals stopped being a way to communicate ideas at least 25 years ago, replaced by working papers; publication was more about certification for the purposes of tenure than anything else.
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  • at this point the real discussion in macro, and to a lesser extent in other fields, is taking place in the econoblogosphere. This is true even for research done at official institutions like the IMF and the Fed
  • How does the econoblogosphere work? It’s a lot like the 17th-century coffee shop culture Tom Standage describes in his lovely book Writing on the Wall. People with shared interests in effect meet in cyberspace (although many of them are, as it happens, also sitting in real coffee shops at the time, as I am now), exchange ideas, write them up, and make those writeups available to others when they think they’re especially interesting.
  • who are the players in this world? Well, look at any of the various rankings of economics blogs — say, the one at Onalytica. I don’t see any of Brooks’s Thought Leaders there. I see a lot of solid professional economists; a number of equally solid economic journalists; and a few people who don’t fall into standard categories
  • Does this new, amorphous system work? Yes!
caelengrubb

Microeconomics - Econlib - 0 views

  • The motivating force for the change came from the macro side, with modern macroeconomics being far more explicit than old-fashioned monetary theory about fluctuations in income and employment (as well as the price level).
  • Many different distortions can create similar anomalies. If cotton is subsidized, the price farmers get will exceed, by the amount of the subsidy, the value to consumers. Society thus stands to gain by eliminating the subsidy and moving to a price that is the same for both buyers and sellers.
  • Public finance (see public choice) looks at how the government enters the scene. Traditionally, its focus was on taxes, which automatically introduce “wedges” (differences between the price the buyer pays and the price the seller receives) and cause inefficiency.
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  • Applied welfare economics is the fruition of microeconomics.
  • It is hard to imagine a basic course in microeconomics failing to include numerous cases and examples drawn from all of the fields listed above. This is because microeconomics is so basic. It represents the trunk of the tree from which all the listed subfields have branche
  • The specialization of production and the institutions of trade, commerce, and markets long antedated the science of economics. Indeed, one can fairly say that from the very outset the science of economics entailed the study of the market forms that arose quite naturally (and without any help from economists) out of human behavior
  • In microeconomics this is translated into the notion of people maximizing their personal “utility,” or welfare.
  • At the beginning of the process, those who adopted the new hybrids made handsome profits.
  • The economics of supply and demand has a sort of moral or normative overtone, at least when it comes to dealing with a wide range of market distortions. In an undistorted market, buyers pay the market price up to the point where they judge further units not to be worth that price, while competitive sellers supply added units as long as they can make money on each increment.
  • The strength of microeconomics comes from the simplicity of its underlying structure and its close touch with the real world. In a nutshell, microeconomics has to do with supply and demand, and with the way they interact in various markets.
  • If price controls keep bread (or anything else) artificially cheap, the predictable result is that less will be supplied than is demanded.
  • Had the government given wheat farmers coupons, each of which permitted the farmer to market one bushel of wheat, wheat marketings could have been cut by the desired amount. Production inefficiencies could be avoided by allowing the farmers to buy and sell coupons among themselves.
  • monopoly represents the artificial restriction of production by an entity having sufficient “market power” to do so.
  • Modern monopolies are a bit less transparent, for two reasons. First, even though governments still grant monopolies, they usually grant them to the producers. Second, some monopolies just happen without government creating them, although these are usually short-lived.
  • A final example of what occurs with official prices that are too high is the phenomenon of “rent seeking,” which occurs when someone enters a business to earn a profit that the government has tried to make unusually high.
  • If the wage does not adjust downward to equate supply and demand, the rate of urban unemployment will rise until further migration is deterred. Still other examples are in banking and drugs.
  • Rent seeking also occurs when something of value (like import licenses or radio/TV franchises) is being given away or sold below its true value
  • The great unifying principles of microeconomics are, ever and always, supply and demand. The normative overtone of microeconomics comes from the fact that competitive supply price represents value as seen by suppliers, and competitive demand price represents value as seen by demanders.
caelengrubb

Climate change: Erratic weather slows down the economy -- ScienceDaily - 1 views

  • Through these seemingly small variations climate change may have strong effects on economic growth.
  • In a new study in Nature Climate Change, they juxtapose observed daily temperature changes with economic data from more than 1,500 regions worldwide over 40 years -- with startling results
  • We have known for a while that changes in annual mean temperature impacts macroeconomic growth," explains lead author Maximilian Kotz from PIK. "Yet now, for the first time, we're also able to show that day-to-day variations in temperature, i.e. short-term variability, has a substantial impact.
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  • If this variability increases by one degree Celsius, economic growth is reduced on average by 5 percentage-points."
  • "We find that familiarity with temperature variations is important: Economies in Canada or Russia, where average monthly temperature varies by more than 40°C within a year, seem better prepared to cope with daily temperature fluctuations than low-latitude regions such as parts of Latin America or Southeast Asia, where seasonal temperature differences can be as small as 3°C.
  • Furthermore, income protects against losses,
  • Comparing each year's day-to-day temperature variability between 1979 and 2018 with the corresponding regional economic data, the researchers analyzed a total of 29,000 individual observations.
  • "Rapid temperature variability is something completely different than long-term changes," explains Co-Author Anders Levermann from PIK and Columbia University, New York.
  • "The real problem caused by a changing climate are the unexpected impacts, because they are more difficult to adapt to. Farmers and other businesses around the world have started to adapt to climate change. But what if weather becomes simply more erratic and unpredictable? What we have shown is that erratic weather slows down the economy. Policy makers and industry need to take this into account when discussing the real cost of climate change."
Javier E

How to Get It Wrong - NYTimes.com - 2 views

  • economics needs rethinking in the wake of a disastrous crisis, a crisis that was neither predicted nor prevented.
  • it’s important to realize that the enormous intellectual failure of recent years took place at several levels. Clearly, economics as a discipline went badly astray in the years — actually decades — leading up to the crisis. But the failings of economics were greatly aggravated by the sins of economists, who far too often let partisanship or personal self-aggrandizement trump their professionalism. Last but not least, economic policy makers systematically chose to hear only what they wanted to hear. And it is this multilevel failure — not the inadequacy of economics alone — that accounts for the terrible performance of Western economies since 2008.
  • Hardly anyone predicted the 2008 crisis, but that in itself is arguably excusable in a complicated world.
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  • More damning was the widespread conviction among economists that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.
  • In what sense did economics go astray?
  • But would it have mattered if economists had behaved better? Or would people in power have done the same thing regardless?
  • assuming away irrationality and market failure meant assuming away the very possibility of the kind of catastrophe that overtook the developed world six years ago.
  • while economic models didn’t perform all that badly after the crisis, all too many influential economists did — refusing to acknowledge error, letting naked partisanship trump analysis, or both.
  • starting in the 1980s it became harder and harder to publish anything questioning these idealized models in major journals. Economists trying to take account of imperfect reality faced what Harvard’s Kenneth Rogoff, hardly a radical figure (and someone I’ve sparred with) once called “new neoclassical repression.”
  • If you imagine that policy makers have spent the past five or six years in thrall to economic orthodoxy, you’ve been misled. On the contrary, key decision makers have been highly receptive to innovative, unorthodox economic ideas — ideas that also happen to be wrong but which offered excuses to do what these decision makers wanted to do anyway.
  • The great majority of policy-oriented economists believe that increasing government spending in a depressed economy creates jobs, and that slashing it destroys jobs — but European leaders and U.S. Republicans decided to believe the handful of economists asserting the opposite. Neither theory nor history justifies panic over current levels of government debt, but politicians decided to panic anyway, citing unvetted (and, it turned out, flawed) research as justification.
tongoscar

Chinese economy clobbered by coronavirus but set to recover soon: Reuters poll - 0 views

  • The coronavirus-hit Chinese economy will grow at its slowest rate since the financial crisis in the current quarter, according to a Reuters poll of economists who said the downturn will be short-lived if the outbreak is contained.
  • However, economists were optimistic the economy would bounce back as soon as the second quarter, with growth then forecast to recover to a median 5.7%, according to the poll.
  • That figure was pushed higher by several optimistic forecasts from economists based in mainland China. The range was 2.9%-6.5%.
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  • "I think the virus will be under control by April. However, in the worst-case scenario, growth may fall to 2-3% in the first quarter and to 5% in (full-year) 2020," said Bingnan Ye, senior macroeconomic analyst at Bank of China International in Beijing.
  • China's share of the global economy has quadrupled to 16% since the SARS outbreak, so any major disruption to economic activity is likely to have a bigger impact on the world economy now.
  • "Every day is a deadline in February as Wuhan coronavirus data roll in," noted Lee Hardman, currency strategist at MUFG, the most accurate forecaster for Asian currencies in 2019. "For the yuan, the overall depreciation story continues."
Javier E

'The Fourth Turning' Enters Pop Culture - The New York Times - 0 views

  • According to “fourth turning” proponents, American history goes through recurring cycles. Each one, which lasts about 80 to 100 years, consists of four generation-long seasons, or “turnings.” The winter season is a time of upheaval and reconstruction — a fourth turning.
  • The theory first appeared in “The Fourth Turning,” a work of pop political science that has had a cult following more or less since it was published in 1997. In the last few years of political turmoil, the book and its ideas have bubbled into the mainstream.
  • According to “The Fourth Turning,” previous crisis periods include the American Revolution, the Civil War and World War II. America entered its latest fourth turning in the mid-2000s. It will culminate in a crisis sometime in the 2020s — i.e., now.
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  • One of the book’s authors, Neil Howe, 71, has become a frequent podcast guest. A follow-up, “The Fourth Turning Is Here,” comes out this month.
  • The play’s author, Will Arbery, 33, said he heard about “The Fourth Turning” while researching Stephen K. Bannon, the right-wing firebrand and former adviser to President Donald J. Trump, who is a longtime fan of the book and directed a 2010 documentary based on its ideas.
  • He described it as “this almost fun theory about history,” but added: “And yet there’s something deeply menacing about it.”
  • Mr. Arbery, who said he does not subscribe to the theory, sees parallels between the fourth turning and other nonscientific beliefs. “I modeled the way that Teresa talks about the fourth turning on the way that young liberals talk about astrology,” he said.
  • The book’s outlook on the near future has made it appealing to macro traders and crypto enthusiasts, and it is frequently cited on the podcasts “Macro Voices,” “Wealthion” and “On the Margin.”
  • In the new book, he describes what a coming civil war or geopolitical conflict might look like — though he shies away from casting himself as a modern-day Nostradamus.
  • “The Fourth Turning” captured a mood of decline in recent American life. “I remember feeling safe in the ’90s, and then as soon as 9/11 hit, the world went topsy-turvy,” he said. “Every time my cohort got to the point where we were optimistic, another crisis happened. When I read the book, I was like, ‘That makes sense.’”
  • “The Fourth Turning” was conceived during a period of relative calm. In the late 1980s, Mr. Howe, a Washington, D.C., policy analyst, teamed with William Strauss, a founder of the political satire troupe the Capitol Steps.
  • Their first book, “Generations,” told a story of American history through generational profiles going back to the 1600s. The book was said to have influenced Bill Clinton to choose a fellow baby boomer, Al Gore, as his running mate
  • when the 2008 financial crisis hit at almost exactly the point when the start of the fourth turning was predicted, it seemed to many that the authors might have been onto something. Recent events — the pandemic, the storming of the Capitol — have seemingly provided more evidence for the book’s fans.
  • Historically, a fourth turning crisis has always translated into a civil war, a war of great nations, or both, according to the book. Either is possible over the next decade, Mr. Howe said. But he is a doomsayer with an optimistic streak: Each fourth turning, in his telling, kicks off a renaissance in civic life.
  • “I’ve read ‘The Fourth Turning,’ and indeed found it useful from a macroeconomic investing perspective,” Lyn Alden, 35, an investment analyst, wrote in an email. “History doesn’t repeat, but it kind of gives us a loose framework to work with.”
  • “This big tidal shift is arriving,” Mr. Howe said. “But if you’re asking me which wave is going to knock down the lighthouse, I can’t do that. I can just tell you that this is the time period. It gives you a good idea of what to watch for.”
Javier E

Opinion | America's Irrational Macreconomic Freak Out - The New York Times - 0 views

  • The same inflationary forces that pushed these prices higher have also pushed wages to be 22 percent higher than on the eve of the pandemic. Official statistics show that the stuff that a typical American buys now costs 20 percent more over the same period. Some prices rose a little more, some a little less, but they all roughly rose in parallel.
  • It follows that the typical worker can now afford two percent more stuff. That doesn’t sound like a lot, but it’s a faster rate of improvement than the average rate of real wage growth over the past few decades.
  • many folks feel that they’re falling behind, even when a careful analysis of the numbers suggests they’re not.
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  • That’s because real people — and yes, even professional economists — tend to process the parallel rise of prices and wages in quite different ways.
  • In brief, researchers have found that we tend to internalize the gains due to inflation and externalize the losses. These different processes yield different emotional responses.
  • Let’s start with higher prices. Sticker shock hurts. Even as someone who closely studies the inflation statistics, I’m still often surprised by higher prices. They feel unfair. They undermine my spending power, and my sense of control and order.
  • in reality, higher prices are only the first act of the inflationary play. It’s a play that economists have seen before. In episode after episode, surges in prices have led to — or been preceded by — a proportional surge in wages.
  • Even though wages tend to rise hand-in-hand with prices, we tell ourselves a different story, in which the wage rises we get have nothing to do with price rises that cause them.
  • But then my economist brain took over, and slowly it sunk in that my raise wasn’t a reward for hard work, but rather a cost-of-living adjustment
  • Internalizing the gain and externalizing the cost of inflation protects you from this deflating realization. But it also distorts your sense of reality.
  • The reason so many Americans feel that inflation is stealing their purchasing power is that they give themselves unearned credit for the offsetting wage rises that actually restore it.
  • younger folks — anyone under 60 — had never experienced sustained inflation rates greater than 5 percent in their adult lives. And I think this explains why they’re so angry about today’s inflation.
  • While older Americans understood that the pain of inflation is transitory, younger folks aren’t so sure. Inflation is a lot scarier when you fear that today’s price rises will permanently undermine your ability to make ends meet.
  • Perhaps this explains why the recent moderate burst of inflation has created seemingly more anxiety than previous inflationary episodes.
  • More generally, being an economist makes me an optimist. Social media is awash with (false) claims that we’re in a “silent depression,” and those who want to make American great again are certain it was once so much better.
  • in reality, our economy this year is larger, more productive and will yield higher average incomes than in any prior year on record in American history
  • And because the United States is the world’s richest major economy, we can now say that we are almost certainly part of the richest large society in its richest year in the history of humanity.
  • The income of the average American will double approximately every 39 years. And so when my kids are my age, average income will be roughly double what it is today. Far from being fearful for my kids, I’m envious of the extraordinary riches their generation will enjoy.
  • Psychologists describe anxiety disorders as occurring when the panic you feel is out of proportion to the danger you face. By this definition, we’re in the midst of a macroeconomic anxiety attack.
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