Real-World Economics Review

from Dean Baker I was glad to see Paul’s short post explaining some of the economics of the U.S. government negotiating drug prices with the drug companies; the route Donald Trump rejected. I thought I would add a few more points. First, the monopoly profits earned by the drug companies provide a powerful incentive for rent-seeking. This is the standard story that economists always complain about with trade protection, except instead of talking about a tariff that raises the price of the...

from David Ruccio From the very beginning, the area of mainstream economics devoted to Third World development has been imbued with a utopian impulse. The basic idea has been that traditional societies need to be transformed in order to pass through the various stages of growth and, if successful, they will eventually climb the ladder of progress and achieve modern economic and social development. Perhaps the most famous theory of the stages of growth was elaborated by Walt Whitman...

from Asad Zaman Part 1: Power/Knowledge – How Macro Theory is shaped by the Powerful Why Understand Macro? If we understood macroeconomics, we would be able to understand the reasons for the major economic events currently going on all around us. For instance, increasing inequality, effects of austerity, Brexit, inequities of post-Bretton Woods dollar based financial system, impacts of emerging economy of China on global finance, and many other questions of vital importance for conduct of...

from Lars Syll A couple of years ago — in a debatewith James Galbraith and Willem Buiter — Paul Krugman made it perfectly clear that he was a strong believer of the ‘loanable funds’ theory. Unfortunately, this is not an exception among ‘New Keynesian’ economists. Neglecting anything resembling a real-world finance system, Greg Mankiw — in his intermediate textbook Macroeconomics — more or less equates finance to the neoclassical thought-construction of a ‘market for loanable funds.’ On...

Download the issue as a PDF In this issueGame Theory—A Severe Case of ‘as-if’ Model Platonism     Lars SyllUtopia and Macroeconomics     David RuccioA Better Way for Development Theory and Practice     Habtamu Girma DemiessieOn Kurien’s new book, Economics of Real-Life     Stuart BirksEconomics Education and Pedagogy     Malgorzata Dereniowska interviews Peter Söderbaum Announcements and WEA contact details Please support the WEA by paying a membership fee or making a small donation....

from Lars Syll In our extended NAIRU model, labor productivity growth is included in the wage bargaining process … The logical consequence of this broadening of the theoretical canvas has been that the NAIRU becomes endogenous itself and ceases to be an attractor — Milton Friedman’s natural, stable and timeless equilibrium point from which the system cannot permanently deviate. In our model, a deviation from the initial equilibrium affects not only wages and prices (keeping the rest of...

from David Ruccio Does anyone really need any additional evidence of the lopsided nature of the current recovery?  Employers certainly don’t. They’re managing to hire additional workers, thus lowering the unemployment rate. But they don’t have to pay the workers they hire much more than they were getting before, with wages barely staying ahead of the rate of inflation. As a result, corporate profits continue to grow. Clearly, what we’re seeing remains a one-sided recovery: employers are...

from Dean Baker Everyone with a 401(k) has been impressed by the stock market’s run-up in recent years. Even adjusting for inflation, the S&P 500 is more than 20 percent higher than its peak in the 1990 stock bubble. Of course, the economy is nearly 40 percent larger, which makes the run-up somewhat less striking. Nonetheless, the ratio of stock prices to corporate earnings is at unusually high levels. According to data from Nobel Laureate and economist Robert Shiller, the current...

from Lars Syll The problem of the DSGE-models (and more generally of rational expectations macroeconomic models) is that they assume extraordinary cognitive capabilities of individual agents. Recent developments in other disciplines including psychology and brain science overwhelmingly document that individual agents struggle with limited cognitive abilities, restricting their capacity to understand the world. As a result, individual agents use small bits of information and simple rules...