Home > Economics - General > The macro foundations of micro (crossposted at Crooked Timber)

The macro foundations of micro (crossposted at Crooked Timber)

October 25th, 2013

Twitter alerted me to an amusing exchange between Chris Auld, posting a list of “18 signs you’re reading bad criticism of economics and Unlearning Economics, responding with 18 Signs Economists Haven’t the Foggiest. UL suggests that Stephen Williamson manages an impressive 9 out of 18 in his review of Zombie Economics (my response here with more from Noah Smith.

Scoring myself against Chris Auld’s list, I’d say I’m in the clear. But quite a few commenters on Zombie Economics have made complaints along the lines of his point 1, that I focus too much on macroeconomics (and finance). The implication is that, even if macro is totally wrong, only a minority of economists do it, and microeconomists are in the clear.

This defense doesn’t work, at least not in general.

The basic problem is that standard neoclassical microeconomics is itself a macroeconomic theory in the sense that it’s derived from a general equilibrium model as a whole. The standard GE model takes full employment (in an appropriate technical sense) as given, and derives a whole series of fundamental results from this. Conversely, if the economy can exhibit sustained high unemployment, there must be something badly wrong with standard neoclassical microeconomics.

Most notably, in a competitive GE with full information, no externalities and so on, prices of goods reflect the social opportunity cost of producing them. This means, that, other than redistributing the initial endowments of property rights, governments can’t do anything to improve on the competitive market allocation of resources.

Once you have involuntary unemployment, all of this fails. Keynes’ famous thought experiment of burying pound notes in coal mines made the point that an intervention that would be totally absurd in terms of standard microeconomic reasoning might nonetheless help to alleviate a recession and therefore make society better off.

The point can be made in more detail with respect to labour economics, finance theory, public economics and industrial organization. None of the standard conclusions of these fields of microeconomics can be assumed to be valid under conditions of sustained high unemployment.

Keynes specifically presented his macroeconomic ideas as making the world safe for neoclassical micro. If governments could stabilise the aggregate economy with fiscal policy, there was no need for comprehensive economic planning of the kind being practised, with apparent success, in the Soviet Union, or for ad hoc interventions like the price-fixing elements of the New Deal.

In summary, the failure of macroeconomists and finance economists to provide either a warning of the Global Financial Crisis or any consistent advice on how to deal with the ensuing Great Recession it isn’t just a problem for them. It undermines the whole economics profession. The sooner we realise that the entire discipline is in a state of scientific crisis the sooner we might start to do something about it.

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  1. Spelling B
    October 25th, 2013 at 21:07 | #1

    Much to consider here, but “defense” or “defence” in Or-stray-ya?

  2. John Quiggin
    October 25th, 2013 at 21:18 | #2

    Crossposted from a mostly US blog

  3. John Quiggin
    October 25th, 2013 at 21:18 | #3

    Besides, US spelling is more sensible – we should adopt it across the board.

  4. Jim Rose
    October 25th, 2013 at 21:32 | #4

    I wonder if critics of the efficient markets hypothesis follow its advice for their own retirement savings.

  5. October 25th, 2013 at 22:03 | #5

    “18 Signs Economists Haven’t the Foggiest”: that reminds me of a newspaper correspondence I saw in the U.K. in the early ’70s.

    On the first day, a letter to the editor appeared stating “We, the undersigned economists, think that it would be a bad idea for the U.K. to join the E.E.C. [as it then was]”, with an impressive list of signatories.

    On the second day, a letter appeared stating “We, the undersigned economists, think on the contrary that it would be a good idea for the U.K. to join the E.E.C.”, with an equally impressive list of signatories. (I may possibly have confused which of these letters came first).

    And finally, on the third day, a letter appeared stating “We, the undersigned economists, haven’t got the faintest idea whether it would be good or bad for the U.K. to join the E.E.C. “, with yet another impressive list of signatories.

    At least in those days economists did not take themselves too seriously (I’m afraid I forgot to check if there was any overlap between the lists of signatories).

  6. rog
    October 26th, 2013 at 05:17 | #6

    @Jim Rose Most if not all of the investment industry advise retirees to keep sufficient cash to keep them going for 2 or 3 years and nobody suggests investing 100% in the stockmarket.

  7. BilB
    October 26th, 2013 at 07:37 | #7

    While you are mixing it all up here, I want to ask a question.

    Does economic theory as applied, macro or micro, attempt to determine what makes up a balanced economy with regard to industry sectors. Is there research to determine if there are minimum industry share ratios for an economy to remain healthy.

    ie

    an economy of all politicians is unlikely to be stable or survive without a constant infeed of external capital. Furthermore any one assemblage of people is certain to provide a mix of interests and capabilities to quickly for a differentiation of activities, inter-relationships, and ultimately industry sectors depending on the available resources and opportunities. Is there a universal pattern to this observable over many economies? and if so can any complete sector be removed without destabilising the economy.

    I put the question in reaction to a number of comments made during the car industry discussion where some people said

    “the manufacturing industry has been in decline for a long time, we should get rid of it altogether”.

    My personal intuition tells me that an economy without a manufacturing/agriculture sector is unviable and that manufacturing and agriculture must sum to a basic percentage for an economy to be stable. If one is reduced then the other must be increased. Either or both can be reduced but this would require the expansion of some other industry sector and an essentially broad intercountry free trade, but would create a growing body of marginally employable people within the economy, and ultimately lead to instability.

    thoughts?

  8. Donald Oats
    October 26th, 2013 at 07:57 | #8

    Doc Kuhn would see this as the prelude to a revolution.

    As the adage goes, paradigm sh*t happens 🙂

  9. J-D
    October 26th, 2013 at 08:21 | #9

    @BilB
    I see an obvious problem with your line of reasoning. Suppose we agreed on some minimum percentage of agriculture and manufacturing that is necessary for an economy to be ‘healthy’ or ‘stable’ (however you’re defining those terms). Does that mean only that it’s necessary for the economy of Australia to maintain that minimum percentage? Or is it also necessary for the economy of New South Wales? How about the economy of Sydney, or the economy of Mosman? Is it ‘unhealthy’ or ‘unstable’ for the economy of Mosman to fall below that minimum percentage of agriculture and manufacturing?

    At this point I imagine you objecting that Mosman’s economy is not separate and isolated, but embedded in the economy of Australia. That’s true. But the economy of Australia is also embedded in the economy of the world. Obviously if Australia stopped growing any food at all and if trade with the world outside Australia was then cut off, Australia would have a catastrophic problem. But then, if Mosman stopped growing any food at all and if trade with Australia (and the world) outside Mosman was then cut off, Mosman would have a catastrophic problem.

  10. Jim Rose
    October 26th, 2013 at 08:28 | #10

    @rog did you invest your super while saving for retirement in funds that tried to beat the market?. Would you advise others to do so?

  11. Ikonoclast
    October 26th, 2013 at 10:13 | #11

    BLACK SWANS NEVER FLY IN FORMATION.

    It takes plenty of courage and intellectual honesty to make the summary statement J.Q. made from within the profession. Relatively few contemporary economists have demonstrated this level of courage and intellectual honesty IMO.

    I pose a set of questions. These are honest enough questions if you follow them right through.

    1. Was the predictive failure complete or did some heterodox economists predict the GFC? Steve Keen claims a study by Dirk Bezemer validates predictions of the GFC by 11 economists or economic commentators. Steve Keen is one of the named economists. Bezemer identified four common elements namely a concern with:

    – financial assets as distinct from real-sector assets,
    – the credit flows that finance both forms of wealth,
    – the debt growth accompanying growth in financial wealth, and
    – the accounting relation between the financial and real economy.

    IIRC, Bill Mitchell also claims to have predicted the GFC. Please note, these predictions were simply that it would happen. Again, IIRC, nobody on the list was foolish enough to attempt timing predictions. The common model element was a concern for macroecomics and financial flows.

    2. Was the fact that the above economists/commentators predicted the GFC due to good predictive models or good luck? If the predictions of these heterodox economists were not fully predictive but rather fortuitious in one sense or another was it complete pure luck or another kind of luck? This time, for this kind of crisis, did their models just happen to be the right models? This question implies that their class of models though fortuitously the right models to predict this style of crisis, would not necessarily be the right models to predict the next style of crisis.

    4. Is it possible that any model that forgets the political part (including war for example) of political economy will fail to predict the next crisis? Also, is it possible that any model that forgets the real material and energetic resources of the environment might fail to predict the next crisis?

    5. Every crisis is different. They say that generals always fight the last war. Do economists always predict the last crisis? The heterodox “Bezemerites” and MMT advocates are now emboldened by one predictive success. Will they now keep predicting “macro financial flow” crises and crashes? Yet, will the next crash be induced quite differently?

    Perhaps the holy grail of predictive success in political economy is exactly that, an unattainable holy grail. Black swans never fly in formation.

    Then again, perhaps the value in economics is not and never will be in scientific prediction but in producing general heuristics for avoiding the very worst mistakes. Clearly the call for more financial regulation and control of debt money (bank lending) is a reasonable call for the implementation of a general heuristic for avoiding severe financial bubbles and their consequent damage to the real economy. Applied economics is an heuristic discipline not an algorithmic discipline. There is no precise recipe for a perfect or even a near-perfect economy.

  12. BilB
    October 26th, 2013 at 10:21 | #12

    I think, J-D, that you resolved your own challenge. To my thinking a balance of functional capability is relevent at all levels from the national right down to the individual.

    The underlying principle would be that our modern human living situation is enabled by a mixture of accesses, capabilities, and performances.

    Access to natural resources energy, land and opportunities. (food materials water air space energy heritage resources)

    Capabilities in the form of knowledge and situation to utilise the resources.

    Performance in applying personal physical and mental energy to utilise the above.

    Our standard of living can be quantified by the success and efficiency with which these properties are utilised.

    My suggestion is that each of the industry sectors are the macro expression of the individual’s needs, and in any society (community) their is a body of individuals who are naturally adept at servicing each of those needs. If by accident or design an industry sector is removed then the society/economy becomes less resilient over time, and hence less stable.

  13. Ikonoclast
    October 26th, 2013 at 10:28 | #13

    BTW, is my sentence, “Black swans never fly in formation”, original? It seems to good to be something I came up with. But if it is original, I gift it to Prof. J.Q. for a book title.

  14. BilB
    October 26th, 2013 at 10:28 | #14

    Ike,

    Interesting read.

    But your conclusion

    “There is no precise recipe for a perfect or even a near-perfect economy”

    ……I’m arguing that there is a recipe for a sound economy, and I’m asking the question do we have the insite to determine what that is.

  15. BilB
    October 26th, 2013 at 10:32 | #15

    Spoiler alert

    “The flight formation of Black Swans as they take to the skies is spectacular, in part due to their size but also due to the sight from the ground as they fly in a V formation with their necks outstretched.”

    http://www.wildlifewarriors.org.au/wildlife_hospital/birds.html

  16. BilB
    October 26th, 2013 at 10:40 | #16

    I think, Ike, that the title

    “Drunk Black Swans never fly in Formation”

    Might hold true. It is certainly will never be tested for validity.

    But the only Rugby football match that I ever want to see is one in which every player is completely blind drunk. That I think I could enjoy, and it has a good chance to be someday put to the test.

  17. Ikonoclast
    October 26th, 2013 at 10:51 | #17

    @BilB

    You say, “I’m arguing that there is a recipe for a sound economy, and I’m asking the question do we have the insite to determine what that is.”

    I guess it hinges on how you understand the word “recipe”. Do you mean an algorithmically precise recipe (50 grams of butter, 5 grams of salt etc.) or an heuristic recipe with a “pinch” of this and a “dash” of that? Can you quantify all parameters of all policy settings (social, political, economic) to get an algorithm (precise recipe)? I think not.

  18. J-D
    October 26th, 2013 at 11:20 | #18

    @BilB
    Abstract generalities that fall apart when applied to specific concrete cases are valueless. Either you do think it’s a problem for Mosman that there’s no significant agricultural sector there or you don’t. I can of course describe conceivable scenarios in which the people of Mosman would suffer for their lack of an agricultural base, but it strikes me as making no sense at all to suggest that, in the actual existing present circumstances, it should be a priority for the people of Mosman to do more farming.

    A serious case could perhaps be made in favour of supporting the continuing existence of an Australian manufacturing industry sector on the basis of specific concrete facts. But if the only basis you have for your argument is ‘Well, everybody should do some manufacturing’, then it’s smoke and moonshine.

  19. BilB
    October 26th, 2013 at 11:32 | #19

    General bulk material formulation, eggs, flour, sugar, water/milk, meat/vegetables, spice and season to taste, blend and bake by popular vote, cool and share with all.

  20. BilB
    October 26th, 2013 at 11:33 | #20

    Mosman people are very likely to be fishing and herb growing people, J-D. It’s food of a different flavour, but food just the same.

  21. BilB
    October 26th, 2013 at 11:42 | #21

    What I should have pointed out J-D is that if you read the text agriculture and manufacturing are regionally balanced. Mosman is an industry and commerce sustained, Bathurst is Agriculturally sustainded and both are mutually supportative.

  22. rog
    October 26th, 2013 at 16:07 | #22

    @rog I don’t invest in funds. A few years ago Cannex did a study on fund performance which found that over time all funds have the same performance.

    The failure of EMH is demonstrated by the word “correction”. If markets correct they must be in error?

  23. Nathanael
    October 27th, 2013 at 01:36 | #23

    Micro is rotten. As far as I can tell, classical microeconomics is the theory of coal mining — and I’m not kidding. It’s a theory of non-perishable fungible commodities where more labor => more production, and most products *do not work that way*. Either more labor doesn’t lead to more production (or not consistently), or the product isn’t a fungible commodity (one brand is different from another), or the product is perishable. Classical microeconomics analyzes all of these markets *really really badly* — the problem is that in these markets are determiners of price which are far more important than supply or demand, rendering the standard models dreadful.

    “@rog I don’t invest in funds. A few years ago Cannex did a study on fund performance which found that over time all funds have the same performance.”
    @rog: I believe that this is due to “Nathanael’s Law of Investment Advisors”, according to which any fund manager or investment advisor who can actually beat the market will increase his fee until he collects all the excess profits. 🙂 He can beat the market: his clients can’t.

  24. Peter Principle
    October 27th, 2013 at 04:35 | #24

    @John Quiggin
    Not sure I agree. Why spell fence with a c and defense with an s?

  25. J-D
    October 27th, 2013 at 06:04 | #25

    @BilB
    But that’s precisely my point. There’s no difference I can see between a situation where there are different localities with different economic specialisations which supply each other’s deficiencies and different countries with different economic specialisations which supply each other’s deficiencies. If it’s reasonable for some localities to do without a significant local agricultural sector (and I’m confident that any herb-growing done in Mosman falls far short of any minimum percentage of the local economy that you’d like to set) and to rely on other localities as sources of agricultural produce, then I can’t see why it isn’t equally reasonable for some countries to do without a significant local agricultural sector and to rely on other localities as sources of agricultural produce.

  26. Ernestine Gross
    October 27th, 2013 at 08:44 | #26

    IMHO, Chris Auld’s 18 signs of reading bad economic criticism are succinct indicators; I agree with most.

    Had Steve Keen titled his book ‘Debunking the Economics I learned in the first years of my undergraduate studies’, instead of ‘Dedunking Economics’ I would not agree. But, as it is, I do agree with Chris Auld. Similarly, had Chris Auld written ‘finitely lived planet’, instead of ‘finite planet’, I would not agree with him on this item. But as it is, I do agree.

    I particularly liked his point ‘4.Refers to “the” neoclassical model or otherwise suggests all of economic thought is contained in Walras (1874). ‘

    I have some reservations about his ’13.Misconstrues jargon: “efficient” (financial sense) or “efficient” (Pareto sense). ‘ because the financial sense (eg Fama) is not what it claims to be and, furthermore, there are several other notions of efficiency (eg constrained Pareto efficient, technical efficiency, generic Pareto inefficiency).

    Unlearningecon suggests in a comment on Auld’s blog that Auld should
    ‘Try “hey, maybe I should show everyone the great work economists are doing” instead of “I’ll show these people how stupid they really are”.’.

    My reading of Auld’s blog is different. I would not infer Auld’s motivation is to show these people how stupid they really are but rather that he is fed up with criticisms for the wrong reason.

    As an aside, repeated attempts to compare economics with natural science is not helpful in my opinion. Physicists don’t have to deal with Tea Party particles and Chicago School particles, or Monckton, Christopher, Lord, particles, do they?

  27. BilB
    October 27th, 2013 at 10:12 | #27

    I think J-D the missing balancing element, which I took as understood, is the political, monetary, taxation and redistribution system boundary.

    There is another defining element and that is time. We routinely think of time as being static in that from one year to the next no much changes. Certainly form a local view point that is largely true. But from a global point of view there is a very rapid one way transition occuring.

    In the course of my life the global population will have tripled from 2.5 billion to more than 7.5 billion. Resources have gone from abundant to measurable to their exhaustion. Yet we make decisions as if we had endless options, as if it was possible to dispose of whole economic sectors and then snap them back effortlessly and without cost.

    We are a little bit fooled by our memories and the way we perceive our personal presence. We all feel as we felt when we came of age, and the memorable things that happened twenty or thirty years ago we can think of as if they happened yesterday.

    Smart phones are a very good example. Once you have one and are comfortable with them it is as if they were always there because all of the previous phone systems fade rapidly from memory. Yet smart phones have been over thirty years in the making. I remember a conversation with a colleague 35 years ago over the then new hand held computers and what they could develop into, and wouldn’t that be great. Well here today is exactly what we envisaged. It was not at all a rapid development path. And the earth’s population has double in that time.

    What I am really saying is that we are rushing in our human experience to a very uncertain future and very possibly a conclusion, while still making hasty decisions as if there was endless time to recover from our bad choices.

    At age 48 Basha al-Assad was prepared to trash his country simply to retain power, as if there were thousands of years ahead to profit from his power. Syria may never recover from its self demolition before climate change makes that area of the world completely maginally habitable. Similarly bad economic choices made, even in a wealthy country, may be unrecoverable simply because the conditions required to rebuild those economic sectors abandoned through economic “fads” may never present themselves again.

  28. John Quiggin
    October 27th, 2013 at 13:30 | #28

    More relevantly, why spell “defence” one way and “defensive” the other?

  29. Ikonoclast
    October 27th, 2013 at 14:13 | #29

    Applied economics (macroeconomics) as government economic policy is an heuristic discipline not an algorithmic discipline nor a strict mathematical discipine (outside of book-keeping for national accounts).

    In the first case, it’s about avoiding the worst mistakes. Policies which clearly sink the economy quickly must be avoided. Austerity (as pro-cyclical fiscal policy) is clearly to be avoided for example. Other “worst mistakes” are allowing high unemployment (over about 2% frictional), allowing high levels of inequality and allowing high inflation of hyper-inflation.

    Clearly, some worst mistake avoidance involves trade-offs. Equally clearly, we are not currently avoiding some of these “worst” mistakes very well at all. The economy could be managed better if the levers were not effectively captured (as they are) by wealthy sectional interests.

  30. davidp
    October 27th, 2013 at 14:15 | #30

    Two concerns. First, the claim that none of the standard conclusions of a bunch of subfields are invalid if there is sustained high unemployment is way too strong unless am missing something. By definition the subfields focus on particular problems with particular markets (or not even markets) so the observed failure of the labour market to clear (or problems with financial markets) don’t immediately apply to all markets. Would argue both labour and financial markets do differ in significant ways to many markets for goods and services. For example, most IO theory since the 1970s is partial equilibrium and concerned with strategic interaction between firms (there is even a set of theories concerned with firms exiting under declining demand). I can’t see where a period of sustained unemployment affects the results of these theories.

    Second, I don’t want to understate the impact of those made unemployed by the GFC, but over the long term the GFC much smaller than the Great Depression (and don’t want to downplay this either) which is still not large compared to the growth in per capita income over the last 150 years. If the profession wasn’t in crisis because of the Great Depression or any of the major fluctuations that occurred during the 19th century why does the GFC throw it into crisis? The basic lessons of applied micro theory don’t seem any less useful for understanding what goes on much of the world (where applicable).

  31. davidp
    October 27th, 2013 at 14:40 | #31

    P.S. I saw someone made a similar point (to the first one) at Crooked Timber – the example is not a standard IO problem. There is a subfield of IO that does engage with GE and macro (it was surveyed in the Handbook of IO) but the macro-GE stuff in the main doesn’t obviously affect the main concerns of IO – how firms interact with each other and the welfare consequences.

    That being said macro fluctuations have been built into some more standard IO models e.g. are cartels more likely to breakdown when demand is high or low – and examined empirically.

  32. davidp
    October 27th, 2013 at 14:40 | #32

    P.P.S. that should read “the example that was provided in return is not…”

  33. Jim Rose
    October 27th, 2013 at 14:47 | #33

    @Ernestine Gross I find the 18 strong list good markers as to when people are forgetting their manners and starting to attack at the personal level and sneer.

    too many are too ready to attribute difference of views and errors to personal moral failings because they subscribe to what Popper called the conspiracy theory of ignorance:

    The conspiracy theory of ignorance which interprets ignorance not as a mere lack of knowledge but as the work of some sinister power, the source of impure and evil influ­ences which pervert and poison our minds and instil in us the habit of res­ist­ance to know­ledge

    The truth is plain to see but for malevolent forces.

    The possibility that are ignorance is large in the social sciences and many consequences are unintended is not as an exciting an explanation.

  34. Vegetarian
    October 27th, 2013 at 15:09 | #34

    @John Quiggin

    English teacher here. It’s common in “English” English to use “c” for the noun and “s” for the verb, e.g., ‘advise, advice” or “practise, practice”. The adjective, e.g. “advisory” is made from the verb. The verb of “defence” is of course “defend”, but maybe someone was trying to be consistent.

  35. Ernestine Gross
    October 27th, 2013 at 15:19 | #35

    Here we are, Jim Rose. When it comes to interpretations, particularly of motivations, there are potentially as many as there are people.

  36. BilB
    October 27th, 2013 at 16:04 | #36

    If you were to think of an economy as a creature and an economist as its physician the macro economist would have a thorough grasp of the heart muscle and fully understand blood flow, be competent with intercreature blood exchanges, transfusions, and not much else. The specialist (micro) economist would have a thorough grasp of how blood flow promotes movement, how energy was transmitted to muscles and why movement was useful, but not much else.

    An economist’s creature can be missing limbs and organs, be completely constipated, and be half brain dead but the economist is unlikely to be concerned. Whoa, not my job…not what I am here for, and look,… the blood is still flowing.

    Your car mechanic is a more effective and successful professional.

    I don’t need 18 points.

  37. Ernestine Gross
    October 27th, 2013 at 17:44 | #37

    “The basic problem is that standard neoclassical microeconomics is itself a macroeconomic theory in the sense that it’s derived from a general equilibrium model as a whole.”

    I wrote something similar in a comment on an earlier thread (… micro-economic decision making problems which belong to complete markets models (eg MRS = p)). But in In this theoretical framework, the distinction between micro-economics and macro-economics makes no sense. I don’t understand in which sense micro-economics can be said to be derived from a general equilibrium model.

    “The standard GE model takes full employment (in an appropriate technical sense) as given, and derives a whole series of fundamental results from this.”

    It seems to me the foregoing is an expression of belief, possibly held widely during the 19th century and the first 2 or 3 decades of the 20th century and recycled since the latter part of the 20th century.
    If the Arrow-Debreu model is considered ‘standard’ than the quoted statement is not true. (IMO, the A-D model is a precise theoretical model of the economic aspects of the philosophical idea of laissez faire. The model provides conditions under which the idea is conceivable in the logic of mathematics. As such it does not claim to take full-employment as given. It is an empirical question to compare the theoretical conditions with the actual conditions. As acknowledged on this blogsite, the axiomatic method used in the A-D model has facilitated the development of theoretical models that take important aspects in our economies into account. These are also GE models.) I do not know the general equilibrium model for which the quoted statement is true. Please identify.

    “Conversely, if the economy can exhibit sustained high unemployment, there must be something badly wrong with standard neoclassical microeconomics.”

    I don’t know the asserted ‘standard GE model’ for which this implication is supposed to hold. If I were to take, say Douglas McTaggart et all, Economics, as ‘the standard’, then I’d say there is a problem with the standard.

    “Most notably, in a competitive GE with full information, no externalities and so on, prices of goods reflect the social opportunity cost of producing them.”

    Well, yes, if the conditions under which the solution to a theoretical model of a competitive private ownership economy (eg A-D) hold, then the prediction of the model is as specified above.

    “This means, that, other than redistributing the initial endowments of property rights, governments can’t do anything to improve on the competitive market allocation of resources.” No, not in the A-D model because there is no government. If you take Daffie’s model as ‘the standard’ GE model with complete securities markets, then the redistribution is sufficient. Again the question is whether the theoretical conditions sufficiently closely approximate the actual conditions. The answer is NO.

    “The point can be made in more detail with respect to labour economics, finance theory, public economics and industrial organization. None of the standard conclusions of these fields of microeconomics can be assumed to be valid under conditions of sustained high unemployment.”

    There is again the problem with ‘standard’. Another point that can be made is that unemployment is not meaningful (irrelevant) for conceivable wealth distributions.

    “Keynes specifically presented his macroeconomic ideas as making the world safe for neoclassical micro. If governments could stabilise the aggregate economy with fiscal policy, there was no need for comprehensive economic planning of the kind being practised, with apparent success, in the Soviet Union, or for ad hoc interventions like the price-fixing elements of the New Deal.”

    In a historical context, Keynes may have achieved this. However, historical conditions hardly ever, if at all, repeat themselves. This raises questions about the theoretical conditions under which ‘stabilising the aggregate economy with fiscal policy’ are conceivable.

    As is so often the case, I agree with the conclusion of hour host but for apparently totally different reasons.

  38. J-D
    October 27th, 2013 at 18:32 | #38

    @BilB
    I don’t see how any of those abstract generalities justify the conclusion that there’s some universal requirement for a country to have a minimum percentage of its economy in the agricultural and manufacturing sectors or else face the prospect of (unspecified) negative consequences.

    That was what you started out by asserting.

    Now you’re discussing all sorts of other things, which makes it look as if you can’t justify your original assertion and are trying to disguise that fact by changing the subject without admitting it.

    As I said before, there may be serious arguments in favour of trying to maintain specific kinds of economic activity in Australia, but ‘You never know what’s going to happen next because, ooh, look, smartphones’ is not one of them.

  39. BilB
    October 27th, 2013 at 19:49 | #39

    Yes it is what I asserted J-D, and I hold to that.

    The assertion is based on the structure that made our standard of living possible. But far more than that.

    There are economic sectors that are significant employers and promote small business entrepreneurialism. We can give these sectors up to the cheapest global provider, but in the so doing we weaken our economy quite significantly. We hear a lot about trickle down. Wealth eventually serves to feed the multitude. But the whole process is jet up trickle down, and only a very small percentage actually trickles down with most of it trickling into other economies. This is the US’s problem where a very large percentage of consumer (manufactured goods) are sourced externally at a very low cost bypassing the US productive base to be sold at retail rates with minimal US employment involved the distribution and marketing. That is the Jet up feature.

    I believe that if various productive sectors are weakened beyond unspecified ratios then the economy can reach a tipping point where unemployment rises, social service costs rise, taxation falls, standard of living falls, domestic consumption reduces, the economy stabalises at a lower level. Then at another time the whole cycle repeats possibly triggered by climate destruction or rising energy costs.

    The question is what are the ratios that keep the economy resilient.

  40. J-D
    October 27th, 2013 at 21:03 | #40

    @BilB
    It seems, then, that we have your personal intuition on one side and the observable facts on the other.

    Personally I’m going to be guided by the facts, but you can of course suit yourself.

  41. October 27th, 2013 at 22:04 | #41

    @John Quiggin
    You mean “across the bord” 🙂

  42. Jordan
    October 27th, 2013 at 22:14 | #42

    “Standard” or neoclassical economics do not take conditions of monetary system into account. There is a matrix that should differentiate between where what economics should apply.
    In fiat money systems, fiat money is determined by floating exchange rate and sovereign debt in its own currency. Examples are US, UK, Aus, Canada, Switzerland and Japan. Potentialy EU.

    In fiat money systems micro is supply determined but macro is demand determined.

    In Gold Standard money systems, like single currency or fixed exchange rate with debts in non issuing currency, micro and macro are supply determined in the long run only, while in the short run macro is also demand determined. Medium run terms are determined by infancy of economic developement- how quick will it come under threat of debt. Example is EU with effective Gold Standard. In short term demand drove borrowing which suplemented incomes, but in medium term such debt received a cap on the rise of demand trough rising interest rates. Merkels’ anouncing that multikulturalism is over which was followed by each country should cover their banks and such debt is not going to be federated is political decision to apply Gold Standard where there is no need for it. This became War of the Banks for EU market.

    This mechanism does not apply to the US, but politics of believing in Gold Standard made it apply.
    Japan did not suffer such politics most of the time.

  43. Jordan
    October 27th, 2013 at 22:22 | #43

    Yanis Varoufakis is in my opinion a leading economist on Surplus recyclyng mechanism in macro explaining it all in laiman terms and he gave a presentation:
    THE DIRTY WAR FOR EUROPE’S INTEGRITY & SOUL
    The University of Western Sydney Inaugural Europe Lecture
    State Library of New South Wales, 23rd October 2013

    Transcript is here

  44. BilB
    October 27th, 2013 at 23:47 | #44

    J-D, the observable facts are wide spread economic instability, loss of living standard, and xtremely high unemployment of the young.

    We will see how it plays out and if economists can make an ounce of difference through their knowledge and analytical capacities.

  45. J-D
    October 28th, 2013 at 06:23 | #45

    @BilB
    The observable facts are not economic instability, loss of living standards, and high youth unemployment in localities with low levels of agriculture and manufacturing contrasted with economic stability, maintained living standards, and low youth unemployment in localities with high levels of agriculture and manufacturing.

    A correlation between economic stability, living standards, and youth employment on the one hand and levels of agriculture and manufacturing is supported only by your ‘personal intuition’, as is obviously demonstrated by the fact that you began this discussion by asking for somebody else to produce the evidence, clearly indicating that you have none.

  46. Ikonoclast
    October 28th, 2013 at 08:29 | #46

    @J-D

    I am not defending BilB’s views in detail. However, there is the bigger geostrategic and limits to growth (LTG) picture. I expect large, continental superpowers like the USA and China would plan to maintain strong primary, secondary and tertiary sectors. Thus, under conditions of war (including trade wars, currency wars, cyber wars and proxy regional wars) such countries can maintain an effort for a considerable period even if inter-continental trade is highly disrupted. Note, the USA is not doing a very good job currently of keeping its sectors balanced. There is much capacity under-utilisation in its manufacturing sector and its labour market. Its FIRE sector (Finance, Insurance, Real Estate) is bloated and parasitic on the productive sectors.

    Even eschewing the idea of conflict, it is not extreme to imagine a near future time of greatly reduced trade, especially inter-continental trade. Resource depletion will tend to have this effect. Surpluses are exported. As resource depletion accelerates surpluses disappear and nations will impose export bans to meet domectic requirements. International trade will greatly diminish as we are now hitting limits to growth.

    People get tired of me banging on about this, I know, but limits to growth conditions EVERYTHING else. Discussion of economics without acknowledging LTG and without acknowledging the fact that we there now… well, such discussions are a complete waste of time. It would be like me discussing all the wonderful things I was going to do and buy with my bank balance low and shrinking, my income declining each year and my outgoings increasing. That is global our position with respect to the economy and LTG.

    In conditions of collapsed international trade, nations with balanced sectors will be better placed to pursue the necessary policies of autarky that will be mandated by a new, harsh reality.

  47. BilB
    October 28th, 2013 at 08:57 | #47

    Already happening

    “As resource depletion accelerates surpluses disappear and nations will impose export bans to meet domectic requirements”

    Examples Helium, Phosphoric Acid, Rare Earth Metals. Saudi Arabia is not that many years away from clamping off sections of their oil production to preserve resources for their people in the future. China is agressively buying up agricultural land in countries near and far. They do this by offering loans to their people at 1.5%, well below the finance rates in most countries giving these people a clear operational advantage over the target country operators, not to mention the guaranteed market for produce.

    We do ourselves no good service by failing to understand the strategic nature of other market player’s actions, while deluding ourselves that there is a global market level playing field.

  48. Jim Rose
    October 28th, 2013 at 08:59 | #48

    Best evidence of bad criticisms and bias is going on about the methodology of economics. Who does that for sociology?

  49. BilB
    October 28th, 2013 at 09:05 | #49

    I think J-D that you are exercising UE option 9 on this.

  50. J-D
    October 28th, 2013 at 10:55 | #50

    @Ikonoclast
    I have acknowledged more than once that specific circumstances could provide a specific argument for the importance of maintaining the size of a country’s agricultural sector, or its manufacturing sector, or both. For example, if there were reason to suppose that there was a serious prospect of no longer being able to buy agricultural produce from outside the country, it would be a strong argument for the importance of maintaining the country’s own agricultural sector, just as it would become important for Mosman to grow its own food if there was a serious prospect of no longer being able to buy food from outside Mosman.

    All I was saying that BilB was presenting no such argument and instead baldly asserting that there is some minimum size of agricultural sector, or manufacturing sector, or both, that every country must maintain in all circumstances whatever, on the basis of no evidence–in fact, as I have pointed out, BilB began by saying ‘I know this must be true, so does anybody have the evidence to prove I’m right?’.

  51. J-D
    October 28th, 2013 at 10:56 | #51

    @Jim Rose
    I’m not sure I understand your question, nor why you think it’s relevant, but if you’re asking ‘Who goes on about the methodology of sociology?’, then I’m confident the answer is ‘Sociologists’.

  52. BilB
    October 28th, 2013 at 17:04 | #52

    J-D,

    This

    “as I have pointed out, BilB began by saying ‘I know this must be true, so does anybody have the evidence to prove I’m right?’.”

    is you quoting you, not me. That is your interpretation put in your words. Not Mine.

    And I am certain that I wused the term sector “ratio” not size.

    Anyway, you don’t agree. That is fine. Thanks for you opinion, J-D, that is what I asked for.

  53. Geoff Andrews
    October 28th, 2013 at 17:27 | #53

    @J-D

    Well put, sir.

    Also, sociologists don’t have the ear of government no matter how they may argue amongst themselves.

    Economists are like King Lear’s Fool whispering into the ear of the current king. This gives them a false sense of relevance and importance for their profession. Also, socialists are obviously socialists (why they didn’t call themselves “communologists” and give Jim Rose something serious to winge about, I don’t know)

    Surely, the most important economic question today is: what is the ideal (nay ANY) economic model that would allow the inhabitants of a country or, preferably, the world to live without undue stress and discomfort when the population is DECREASING (or at least staying the same) rather than increasing as it has been since the metaphorical adam walked the planet?

    Any idiot can make money on a rising share or property market but a smartie can survive, even prosper, on a falling market.

    Is there any equivalent economic theory that can be applied to a world depopulation that stabilises the decreases?

    No? Then we are doomed and a pox on all your economic theories; your profession will be as relevant as wheelwrights in a future world.

  54. Jordan
    October 29th, 2013 at 01:22 | #54

    Geof
    There is MMT that opens up possibilities on depopulation secure increase of living standard.
    To understand it how, you can not apply conventional thinking about money.

  55. Ernestine Gross
    October 29th, 2013 at 20:08 | #55

    @Geoff Andrews

    If, as you say, economists wisper in the ears of policy makers, then, it seems to me, the predominantly legally trained ears transform the message into the conceptual space of commerce.

    A decreasing in population reduces the demand on natural resources. It also reduces the demand for net debt generators’ services, both public and private. I say net debt generators because borrowing and lending would not have to stop; it merely would look more like that described in introductory economic textbooks.

  56. Ernestine Gross
    October 29th, 2013 at 20:10 | #56

    Sorry, I introduced an error when editing a sentence. A decreasing population reduces … is what I meant to write.

  57. jrkrideau
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