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It seems increasingly clear that there is no real solution within the existing economic theory. Instead, that theory is the problem. And resolute adherence to that theory is the reason that all of the solutions only make things worse. Yanis Varoufakis has an excellent macro view of the situation in Europe which is now expressed in two new books reviewed by Brian Collins in The Los Angeles Review of Books. An excellent summary while waiting for the books to arrive.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 21st, 2011 at 03:16:26 PM EST
To the contrary, conventional economic theory, for all its faults, has been pretty clear all along that the Euro would be problematic for some European countries, and it has pretty clear solutions now -- let some Eurozone countries free of the Euro, and let defaults occur so that bankers bear the costs, not workers in indebted countries.

I'll have to look at that review, but what I see occurring, as Krugman and many others have pointed out, is a stubborn refusal to accept basic, textbook economic theory in the present situation in Europe as well as the US. Force banks to accept the losses on their balance sheets thus and relieve everyone, countries and individuals alike, from a significant portion of their debts. It's not theory that's holding things up -- it's the power of banks to stop any progress regardless of the facts.  

The whole "blame the economists" narrative takes pressure off the people who are really problem -- bankers. They're completely replaceable but have somehow convinced policymakers and much of the public that they are critical to everyone's well being.

by santiago on Fri Oct 21st, 2011 at 08:54:30 PM EST
[ Parent ]
Hi, Santiago! Long time no see. I see that we still have areas of agreement and disagreement:
It's not theory that's holding things up -- it's the power of banks to stop any progress regardless of the facts.

Well, there is that whole Efficient Market thing combined with Modern Portfolio Theory and the Gaussian Copula theory that was such a major part of economic practice from the '90s on. I will grant you that most of this might not have existed when you were in grad school, but it sure has been prominent over the last two decades. And it was these sorts of theories that were used to justify the dismantling of regulation that set the stage for the GFC of 2008 to whenever the final collapse of the current system is acknowledged.

But I certainly agree about the problem of governmental capture by bankers and the need to break that control and impose the costs of the collapse on those who caused it. Any suggestions on how that might be accomplished, other than something like a neutron bomb over Wall Street, if even that would break the grip, unlikely and unwanted as that seems?

The only positive I see is that the awareness of the extent of the problem is starting to spread out of the blogosphere and into the general public consciousness. But the problem of the 99% forcing their interests onto the agenda still seems daunting, even if a majority of that 99% can agree on some common desiderata.

To the contrary, conventional economic theory, for all its faults, has been pretty clear all along that the Euro would be problematic for some European countries, and it has pretty clear solutions now -- let some Eurozone countries free of the Euro, and let defaults occur so that bankers bear the costs, not workers in indebted countries.

Granted. I recall seeing some US grad school course work, (not mine), in 1999 that went into all of the problems with the Euro in apocalyptic detail, but then the Euro wasn't a US dream, so perhaps the weaknesses in that system were more apparent to us, especially as those flaws served to delegitimate a potential currency rival.

On the other hand, the rise of the neo-liberal/neo-classical project with its emphasis on privatization, globalization and "reform" and its infiltration into the EU administrative apparatus, culminating in a Brussels Consensus similar to the Washington Consensus has not helped the situation in the Euro-zone either. And much of that thrust was bound up with the same magic market mentality described above.

Then there is the problem that the role of debt in US mainstream economic analysis was denied, for instance, by Bernanke, and, even now, cannot be dealt with from the inside of the DSGE model and is not incorporated into "mainstream" theory except, perhaps, occasionally on an ad hoc basis. Nor does the mainstream theory include a mechanism for endogenous money creation or provide a means of dealing with stock and flow problems.

Finally, I would argue that the whole intellectual foundation of NCE, resting as it does on assertion of axioms and deduction of consequences, is adequate to support a science based analysis of the existing behavior of the economy. While I agree with you that we need a system capable of dealing with moral and political implications, to me it does not follow that such a system flows more reasonably from an axiomatic, deductive system than from an observational and inductive approach more typical of the evolutionary sciences.  


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Oct 21st, 2011 at 10:07:44 PM EST
[ Parent ]
Finally, I would argue that the whole intellectual foundation of NCE, resting as it does on assertion of axioms and deduction of consequences, is adequate to support a science based analysis of the existing behavior of the economy. While I agree with you that we need a system capable of dealing with moral and political implications, to me it does not follow that such a system flows more reasonably from an axiomatic, deductive system than from an observational and inductive approach more typical of the evolutionary sciences.

I think there's a lot of truth in this statement, and behavioral economics approaches like that of Robert Schiller of the Case-Schiller housing index offer a hopeful new way of thinking about these things for many new economists.

The axiomatic approaches are derived from the fact that economics is an evolved species of the field of moral philosophy, not of natural philsophy (i.e, natural science).  And abstract axiomatic arguments are the stock and trade of philosophy (not just theoretical physics), as anyone who has tried to read Wittgenstein can attest.

Policy implications taken from economic analysis therefore are, by definition, moral arguments, and, rightly or wrongly, an argument that can connect a moral argument to one observable in nature simply carries more weight in political discourse because it provides a clearer narrative regarding what people might collectively do about problems, thus encouraging better cooperation to do it. (Why? Because political discourse is an entirely moral discourse too.)  

Arguments that allow for more ambiguity between the moral sphere and the naturally observable one just aren't very useful in getting a group of people to all get on the same page and coordinate their activities toward the same end, even if they are objectively more true.

NCE has been able to assert a compelling, widely held moral claim about humanity -- that of individual liberty and the primacy of the individual over the community within a narrative of rights (which is so compelling because of the self-evidence that only individuals can experience our own, unique deaths -- the community cannot experience it for us).  Once accepted as a given that individual liberty takes precedence over community outcomes, ceteris paribus, the set of implications from observable outcomes is naturally reduced to the Venn diagram of the intersection of the set of observable outcomes and the set of morally acceptable outcomes (i.e., that individual liberty is upheld first and foremost). This allows for essentially algebraically eliminating a lot of things that actually do occur but should not be allowed to occur, thus providing the means of apparently solving social conundrums in neat, mathematical arguments for which economics is both famous and infamous.

by santiago on Fri Oct 28th, 2011 at 11:55:11 AM EST
[ Parent ]
I have to agree with Santiago.

The Standard economic solution in all schools of macro is printing money. There is a huge and great debate in the US about who must receive this money and what is the best way to print it. Give it to the state or just a threat to by any asset? give it to people with mortgages or give it to banks with a threat? It is better to target spending or nominal  GDP

It is a great discussion with neo-keynnesians, modern monetarists and MMT agreeing the fundamentals (pritn money or threat that you will print money) but disagreeing on who would receive the money.

The fact is that in the US macroeconomics is cleaning itself up of crazy and paid for-WS people in the blogosphere and in accademia, and three different schools have appeared with less differences than before the crisis. RBC and austrians are considered a joke, worse they are the with-hunters or doctors bleeding the patient. Republicans are the scorn of everybody except for a small group in Chicago who is being marginalized.

Here, we are still with austerity.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Sun Oct 23rd, 2011 at 04:35:05 PM EST
[ Parent ]
I, too, have to agree with Santiago.  Macroeconomic theory explains it just fine.  Even a right-wing economist like Friedman would tell you that Europe is insane to push these programs, to say nothing of raising interest rates in the face of a depression.

You have to wade pretty deep in with the nutbags to get theory that supports what's being done to the periphery.

Unfortunately, that seems to be exactly what the Angela Merkels and Axel Webers of the world have done.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Tue Oct 25th, 2011 at 01:42:39 PM EST
[ Parent ]
In fact, we've spent a lot of time pointing out that even in terms of their own supposed theoretical underpinnings bugger all of what the serious people have been doing for years makes any sense.

That their theories are also bunk is another issue.

by Colman (colman at eurotrib.com) on Tue Oct 25th, 2011 at 01:46:31 PM EST
[ Parent ]
WAR IS PEACE
FREEDOM IS SLAVERY
CONTRACTION IS EXPANSION

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Oct 25th, 2011 at 01:58:56 PM EST
[ Parent ]

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