Real-World Economics Review

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...

from Asad Zaman The talk linked below explains why the positivist/nominalist methodology used in Econometrics leads to mostly nonesense regressions. It also explains how a realist alternative can be developed. “The Philosophy and Techniques for Quantitative Research” – Keynote Address by Dr. Asad Zaman, VC PIDE at Workshop on 19-20 April, 2018 Dept of Economics, Fatima Jinnah Women’s University, Rawalpindi, Pakistan. My message will come as a surprise to students gathered here to learn...

from Lars Syll What does concern me about my discipline … is that its current core — by which I mainly mean the so-called dynamic stochastic general equilibrium approach — has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one … While it often makes sense to assume rational expectations for a limited application to isolate a particular mechanism that is distinct...