How did this ever pass the peer-review procedure… In an article in the Journal of Political Economy Edward Prescott and Finn Kydland argue in favor of (undemocratic) rules instead of (democratic) economic policies. One of the methods they use to push their idea is the using examples. One particular famous one is the one about floodplains. But the example is wrong. Government policies are not as benevolent, rational and effective as Prescott and Kydland think they are. And people are not as rational. Here’s the example:

This is not what happens. What happens (and it happened after 1570 and 1717 and 1825 and 1916 and 1953 in the Netherlands and in Germany (around Hamburg) in 1962 and in the USA in New Orleans after 2005) is the next thing:
People build houses, farms, factories
The

Graph 1. Printing Francs to satisfy external demand for Francs led to a fast increase of the amount of money in Switzerland. Did this lead to inflation?

After 2008 rich people from all over the globe started to  buy Swiss Francs. This, of course led to appreciation of the Swiss Franc. The Swiss national bank didn’t like this: bad for exports. And, related to this but much worse, structural lower demand for export products of a small country like Switzerland will erode the manufacturing base of this country. Highly productive fixed capital, specialized knowledge hubs, production ecosystems – these all will flounder. Not good. What to do?
Switzerland is a monetary sovereign country. In 2011 the national bank decided to print money and sell it at a fixed Euro-price to foreign rich

From Jan Kregel  source

The 10th anniversary of the September collapse of the US financial system has led to a number of commentaries on the causes of the Lehman bankruptcy and cures for its aftermath. Most tend to focus on identifying the proximate causes of the crisis in an attempt to assess the adequacy of the regulations put in place after the crisis to prevent a repetition. It is interesting that while Hyman Minsky’s work became a touchstone of attempts to analyze the crisis as it was occurring last September, his work is notably absent in the current discussions.
While it is impossible to discern how Minsky might have answered these questions, his work does provide an indication of his likely response. Those familiar with Minsky’s work would recall his emphasis on the

According to D. Trump “The GDP rate (4,2%) is higher than the unemployment rate (3,9%) for the first time in over 100 years!”. This tweet.  Comparing the rate of GDP growth with the unemployment rate surely is interesting. And situations where the unemployment rate is lower than the rate of growth (U

There we go again. According to mister Mersch, a central banker, the ECB only has to care about consumer price inflation and not about financial stability. Mister Mersch knows this isn’t right. Legally, the ECB do has to care about financial stability. It’s part of the mandate of the bank. In a practical sense, caring about financial stability is what central banks do. While they do not excel at influencing the rate of consumer price inflation (which is influenced by wages, profit margins, productivity changes, prices of intermediate products like oil and also, but only to a limited extent, by interest costs). Mister Mersch knows all this. He is an old man. he must have studied ancient textbooks. What did the textbooks of yonder state about central banks (and I have little to add)?

In October 2015 I wrote a post in which I compared Bitcoin with Yap island stone money. Farfetched? No. Today, Sciencenews published an article by Bruce Bower. He states that archeologists nowadays argue the same thing. An excerpt:
Archaeologist Scott Fitzpatrick and finance professor Stephen McKeon, both of the University of Oregon in Eugene, see parallels between the public, decentralized way in which rai limestone money on the island of Yap was valued and distributed and the modern-day blockchain technology used for Bitcoin and other digital currency transactions.
Mining
Rai: Yap residents traveled to nearby islands where limestone was mined and carved into circular rai. At home, the miners described each item’s manufacturing history to the community so that everyone knew a rai’s

A well-known criticism of national income is thre ‘Ïf you marry your maid you will diminish national income‘ mrmr. Sigh. We should forget about this silly male fantasy and give women their due by replacing it by what really happened. Domestic workers did not marry their single masters. They left them, as they had better paying things to do. Or the income of their family rose, which enabled them to get an education or to care for their own kids. Unprotected labor by Vanessa May is a good book about the work and life of domestic servants in new York, 1870-1940. The influence of this on how we have to understand GDP is important. So, what happened?
Once upon a time, every middle class family and many other families had a maid living in. As Allyson Grossman shows, around 1870, more than

From Merijn Knibbe
I’m trying to write a book about the relation (not) of neoclassical macro-economic concepts to the concepts of macro-economic statistics. Which leads one to interesting places one can’t explore. If there is anybody out there in search for an interesting idea for a master thesis or something light that, these might do:
A qualitative and quantitative exploration of ‘hoboism’ in the 1930’s looking at it using the lens of ‘involuntary part time unemployment’
An international and historical extension of existing estimates of domestic servants and how this relates to our estimates of GDP.

Ad 1. If you do this well you can make it to the American Economic Review. It’s also great fun. In the thirties, there were hundreds of thousands of ‘hobo’s’ in the USA, mainly young men

A lot of my students do internships or write theses based upon problems of companies or NGO’s. Many teachers want them to play the research game. I prefer them to design something for the company or organisation as I really want them to learn that they don’t have to learn what their teacher wants them to learn…. or wait….
Anyway: what did I learn?
Some of the companies involved were: Agradi (Den Bosch). Cavallo (Bad Oeynhausen), Anicura (Amstelveen, John Maynard Keynes road…), PAVO (Heijen), EC De Peelbergen (Kronenberg), QHP (Drachten), Prins (Veenendaal). All of these except for EC De Peelbergen and Anicura (which are dominated by private equity) are what the Germans call ‘Mittelstand’. All of them except for De Peelbergen and Anicura (which organize events or companies) design

Considering the present architecture of the Eurozone – there is according to Erwan Mahé no obvious way to solve the Italian Euro crisis…
From: Erwan Mahé
I sent this little collage on 25 May, via IB Bloomberg chat, as the BTP began to decline, since it seemed to sum up the best attitude to take towards the near hysteria afflicting the Italian debt market at the time.

From a high of 132.88 on Monday 25 May, it plunged to as low as 120.10 the next day, reflecting a full one per cent rate shift on the eurozone on the 10-year maturity! Lucky for us, the trade we flagged on Tuesday 29 May on the 2-year Italian maturity, with a bloc of 14,000 2-year futures (i.e. 25% of usual BTP daily volume!), fell 1 point below market price in the wake of rumours about huge losses at some carry funds,

On Voxeu, Hervé Boulhol and Christian Geppert  published an article a about population ageing and pensions which tries to scare us: “on average in the OECD, stabilising the old-age dependency ratio between 2015 and 2050 requires an increase in retirement age of a stunning 8.4 years. This number far exceeds the projected increase in longevity and increases in retirement age driven by pension reforms alone.”. The pension age has to go up. But not for the reasons and by the amount they state. What’s wrong with their article?
Their base line is wrong. They calculate a post 1980 dependency ratio (the number of young and old people per person in the working age) by using a 20 year and a 65 year threshold. During the 1980-2015 period, many people retired before 65 which means that the

Inter-EU flows of ‘labour’ have dramatically increased (figure 1, figure 2), which leads to problems in sending as well as receiving countries. New EU legislation tries to restrict the extent to which entrants can be used to circumvent existing labour laws to unfairly undercutting labour in the receiving countries (and ‘fairness’ is as fundamental an incentive to people working as their wage). This legislation is welcome. But it is too late. Or is it ‘too little’? Can sending countries afford to lose up to 15% of their active labour force in a few years? Can receiving countries deal with the influx? Aside – this is not just about the EU. Albania has a population of about 2,9 million people. About 500.000 of these seem to be residing in Italy alone…

The EU knows four economic

By Yanis Varoufakis.  Source
I concede that there are issues over which I would welcome the Italian President’s use of constitutional powers that (in my humble opinion) he should not have.(*)  One such issue is the outrageous policy of the Lega and the promise of its leader, Mr Salvini, to expel five hundred thousand migrants from Italy. Had President Mattarella refused Mr Salvini the post of Interior Minister, on the basis that he rejects such a monstrous project, I would be compelled to support him. But, no, Mr Mattarella had no such qualms. Not even for a moment did he consider vetoing the formation of a 5S-Lega government on the basis that there is no place in a European country for scenes involving security forces rounding up hundreds of thousands of people, caging them,

There is a somewhat fuzzy discussion going on about exports, imports and the economy: are (net) exports (imports) good for Australia a country, or not. Look here. And here. It is a complicated question, which made Steve Keen state: “I don’t want to see, and obviously won’t tolerate, further arguments about exports as costs and imports as benefits. I want to see a detailed double-entry bookkeeping exploration of the monetary (and capacity-utilization/real GDP/physical) implications of trade surpluses and deficits“. The good news: such systems are available. No need to invent them. ‘Supply and use’ tables which also keep track of physical flows are alive and kicking, see graph, source here. Same for input-output models, here a bit on the influence of exports on German employment.

The

The neoclassical macro ‘DSGE’ models do not seem to have a rigorous model consistent ‘production boundary’.
A ‘prior’ in macro economics is the production boundary: what are we talking about? Famously, Adam Smith more or less excluded services – or at least services from personal servants. While the present national accounts  basically include everything which yields a monetary income, including illegal activities. The phrases ‘more or less’ and ‘basically’ of course indicate that delineating the boundary is not easy. Daniel Urban wrote a very clear piece about the classical boundary, the national accounts boundary, the neoclassical micro boundary (everything which yields ‘utility’, whatever that is) and the Marxian boundary (everything wich employs wage labour which produces surplus

Tomorrow will be the 200th anniversary of Marx. A lot of people write about this. The most interesting pieces I read were by Veblen (1906 part 1 and part 2). Some excerpts (the beginning of part 1 and the end of part 2, as always with Veblen one has to read the whole thing). One of the main points of Veblen is that Marx takes the ideas of ‘bourgeois’ economists more serious than these economists themselves, culminating among other things in the idea that, in an economics sense, ‘capital’ is not machines or buildings but ownership rights of such assets, ownership rights which enable the owners to drain money from companies and to boss labour around.
Part 1:

The system of doctrines worked out by Marx is characterized by a certain boldness of conception and a great logical consistency.

I’ve always been wondering why small farmers enjoying ‘Fair Trade’ privileges are not modernizing faster in the sense that they invest and modernize, capture the market and do not need ‘us’ anymore. Yes, I know that many international trade rules are not exactly fair. And the words ‘Banana republic’ and ‘Banana wars‘ come from somewhere – the official phrase for such ‘politically enforced’ global value systems is ‘empire‘ (TTIP anyone?). But even then – why do many small farmers and even slaves (cocoa production!) in more or less stable countries still need western NGO’s and benevolent consumers and companies like Chocolonely? There are reasons for this – as it surely is possible that, when circumstances are ‘right’, development can be very fast. My ideas about this were influenced by

“I apprehend that bank notes, bills, or cheques, as such, do not act on prices at all. What does act on prices is Credit, in whatever shape given, and whether it gives rise to any transferable instruments capable of passing into circulation or not.”
John Stuart Mill, 1848
“The relation of changes in M (money) to Y (income) and r (the interest rate) depends, in the first instance, on the way in which changes in M come about.”
John Maynard Keynes, 1936
John Cochrane has an interesting post about a Milton Friedman article. But the post does, fifty years after Friedman published the article, still not address the Main Monetarist Mistake: ignoring credit.  The entire discussion if money is neutral is redundant as money creating credit is not. Definitely not. Changes in credit – to be more

Only after Mario Draghi’s ‘Whatever it takes’ (26 July 2012) low ECB policy interest rates started to translate decisively to lower rates for Mediterranean Eurozone borrowers. But ‘WIT’ did not only save (or at least: made live a little easier for) Italian and Spanish borrowers with legacy debts. Somehow, Dutch mortgage rates were also tied to the European bond rate instead of the ECB rate oor Dutch government bond rates (second graph) which meant that it was only after 26 July 2012, four years after the onset of the crisis, that Dutch households too could start with decreasing the amount of ‘debt service’ they had to pay (interest on savings accounts is of course also lower – but those rates did start to decline before 26 July 2012).

What does this mean for economic theory? According

According to the accepted narrative after about 1950 female participation rates started to rise thanks to inventions like the washing machine and kept rising forever after. Reality is more confusing. According to a recent book by Julia Sophie Wörsdorfer, washing machines were, contrary to the ideas of Ha-Joon Chang, not that important. Neither cross sectional data nor time series analysis yields a strong correlation between ownership of a washing machine and high female labour force participation. But there is a strong link between the rise of the washing machine and a rise of public and personal cleanliness standards – more kinds of clothes were washed more often than before in less time. The Japanese data also contradict the washing machine thesis. It explains neither the post 1960

Source: Bureau of Labor Statistics
Broad unemployment today is, compared with the period before 1994, worse than you think. A new way of estimating ‘part time workers for economic reasons’ shifted this series downward with almost 1% of the labor force. To gain a proper understanding of historical developments present day data have to be increased or historical data have to be decreased a little. 
I’m trying to write a book about the relation between economic statistics and neoclassical econ. It’s not going fast: how do you explain to non econ’s why when people like Robert Lucas or Edward Prescott (both Nobel prize winners) write ‘leisure’ they actually mean what you and I call ‘unemployment’…. Anyway, to convince such people that ‘involuntary unemployment’ exist, I was writing a

Hardcore neoclassical economist John Taylor has edited a new handbook of macro-economics. The good news: the sands are shifting. After 2008, more attention has been paid to the obvious fact that we’re living in a monetary world. Guess what: it  turns out that money is non-neutral after all. Two examples (summaries below):
(A) Bordo and Meissner claim that whenever a country has a large banking sector it has a choice, during a financial crisis. It can bail out the banks or it can try to mitigate the crisis and prevent unemployment to increase to extreme levels.
And (B): Mian and Sufi’s work implicates that the ‘representative consumer’ is bogus: differences between renters and house owners in combination with data on indebtedness and house price booms and busts explain a lot of the

From Yanis Varoufakis
At the source a link to the UK House of Commons discussion where this idea was put forward can be found.
Britain used to have wage councils that set the minimum wage per sector. Mrs Thatcher saw to it that they were abolished, together (effectively) with trades unions and council houses – thus yielding the present Precariat-Proletariat whose palpable anger and frustration is evident across the land. There is no doubt that we need to bring back a modernised for of wage councils. Not just in the UK but across Europe! It is the only way we can safeguard genuine freedom of movement. Here is why:
The oligarchs in Eastern Europe, and elsewhere, want the freedom of moving their money around and the freedom to export surplus labour from their country – people who would

It seems that at this moment in time lower unemployment does not lead to higher inflation but to increasing wages, lower profits and increasing productivity.
Since 2008, the (European) world has been characterized by high unemployment, a double dip (2008-2013), a historically unprecedented stalling of productivity and low interest rates. This situation seems to be changing. Since 2014, employment is increasing and unemployment is declining. New growth sectors (like ‘information and communication’ and ‘tourism and hospitality’) are thriving. And in countries like Germany, the Czech Republic and Switzerland, the latest (but only the latest) data seem to indicate that productivity is on a roll again – while large swathes of especially these countries at this moment know medium and, more

On this blog neoclassical economics are regularly discussed. Thorstein Veblen is credited with introducing, around 1900, the phrase ‘neo-classical’ (see the excerpt below). A lot of his criticisms of neo-classical authors still apply today: they assume what they should explain. The Keynes in the text is the father of John Maynard Keynes. Veblen was a very talented writer – which shows when you read the excerpt (and the entire text) twice. From the website of the AFEE.
Of the foundations of later theory, in so far as the postulates of later economists differ characteristically from those of Mill and Cairnes, little can be said in this place. Nothing but the very general features of the later development can be taken up; and even these general features of the existing theoretic situation

S
Source (p. 32)
Oops. Mark Gertler (with Kiyotaki and Prestipino) does it again: “There has been considerable progress in developing macroeconomic models of banking crises. However, most of this literature focuses on the retail sector where banks obtain deposits from households.” After ‘obtaining’ deposits, these banks are supposed to lend the ‘money’  to households and companies. Source: the 2000+ pages Handbook of [neoclassical, M.K.] Macroeconomics edited by John Taylor. As we know, this is not true. In reality, ‘loans create deposits’. A joint act of lender and borrower, in my 1975 Dutch textbook this was called ‘wederzijdse schuldaanvaarding’ or ‘mutual acceptance of debt’. The lender has a liability towards the borrower (the deposits on the account have to be freely available to

John Taylor edited the new 2000+ pages plus ‘Handbook of macro-economics’, effectively a ‘Handbook of neoclassical macroeconomics’. Neoclassical economics is known for its illicit use of garbled language which hides and convolutes instead of explains. As the title of the book exemplifies. An interesting example is the chapter by Edward Prescott, titled ‘RBC Methodology and the Development of Aggregate Economic Theory’ (ungated version). Let’s first give the floor to him (emphasis added), mind that ‘leisure’ means ‘measured unemployment’.:
“What turned out to be the big breakthrough was the use of growth theory to study business cycle fluctuations … based on micro theory reasoning, dynamic economic theory was viewed as being useless in understanding business cycle fluctuations. This

Eurostat made new data on broad unemployment available. For some countries (Ireland, Greece, Switzerland), these show a less rosy picture than the ‘normal’ unemployment data. Only the Czech Republic has low normal as well as low broad unemployment though Poland, Hungary, Bulgaria (!) and Germany seem to be heading that way. Altogether, labor slack is still immense. At this moment, wage increases are still low in non-Eastern European countries. Considering the slack this might stay so for a while, though there are more opportunities to obtain a better paying job.
In my country, the Netherlands, the labor market shows signs of normalizing. “Help wanted’ signs are becoming are becoming normal (a sign of a normal labor market, NOT of an overheated one) and ‘normal’ unemployment is down

Martin Sandbu is, in the Financial Times, wrong about neoclassical macroeconomic models. Let me explain by responding to his text, paragraph by paragraph. No links, I might add these later.
What do macroeconomists actually do? Without an answer to that question, it is difficult to articulate what they might be doing wrong. The rebuilding macroeconomic theory project is useful also to non-economists — perhaps especially to them — because it takes the time to dwell on how macroeconomists do what they do, in order to argue what they must do better.
Two points.
Sandbu answers this question by discussing what some macroeconomists do. To be precise: what neoclassical macroeconomists do. Stock and flow consistent modelling is left out of the discussion. NBER business cycle analysis is left

In 1921 King, Macaulay and Mitchell published their milestone ‘Income in the United States: Its Amount and Distribution, 1909-1919’ which estimated time series of nominal and real income in the USA. Why did they measure this? The last sentence of their introduction reads: “Last but most interesting of all, we shall consider the way in which the National Income is distributed among individuals”. Distribution was paramount. The authors were also well aware of the limited nature of their estimates of monetary income: it was not a measure of welfare or prosperity. To quote them again: “Following common practice once more, we do not count as part of the National Income anything for which a price is commonly not paid. On this score we omit several of the most important factors in social