Real-World Economics Review

from Maria Alejandra Madi From the 1950s onwards, the macroeconomic models of the neoclassical synthesis, based a system of simultaneous equations, focused on the interaction between the market for goods and services and the money market in the context of a general equilibrium analysis. According to John Hicks (1904-1989),  in the general case, the capitalist economy is at full employment level of output.  The underlying employment theory is based on the demand and supply of labour in a...

from David Ruccio Last week, to judge by the commentary on the latest Census Bureau report, Income and Poverty in the United States: 2015 (pdf), you’d think the fountain of broadly shared economic prosperity had just been discovered. Binyamin Appelbaum is a good example:   Americans last year reaped the largest economic gains in nearly a generation as poverty fell, health insurance coverage spread and incomes rose sharply for households on every rung of the economic ladder, ending years...

from David Ruccio The other day, I argued (as I have many times over the years) that contemporary mainstream macroeconomics is in a sorry state. Mainstream macroeconomists didn’t predict the crash. They didn’t even include the possibility of such a crash within their theory or models. And they certainly didn’t know what to do once the crash occurred. I’m certainly not the only one who is critical of the basic theory and models of contemporary mainstream macroeconomics. And, at least...

from David Ruccio According to the norms of both neoclassical economic theory and capitalism itself, workers’ wages should increase at roughly the same rate as their productivity.* Clearly, in recent years they have not.  The chart above, which was produced by B. Ravikumar and Lin Shao for the Federal Reserve Bank of St. Louis, shows that labor compensation has grown slowly during the recovery of the U.S. economy from the 2007-09 recession. In fact, real labor compensation per hour in...

from Dean Baker Last week marked the eighth anniversary of the collapse of Lehman Brothers, the huge Wall Street investment bank. This bankruptcy sent financial markets into a panic with the remaining investment banks, like Goldman Sachs and Morgan Stanley, set to soon topple. The largest commercial banks, like Citigroup and Bank of America, were not far behind on the death watch. The cascade of collapses was halted when the Fed and Treasury went into full-scale bailout mode. They lent...

In the USA there is an amusing discussion going on about the decline of the participation rate of (young) men. some people state that this might be caused by digital amusement. Dean Baker rightly points out that we should not restrict this discussion to American not yet dad’s. I want to make the case that we should not even restrict this discussion to the USA. Below three graphs (source: Eurostat) which show that: A) The average participation rate in Europe increased, even after 2008 (the...

from David Ruccio A constant refrain among mainstream economists and pundits since the crash of 2007-08 has been that, while the state of mainstream macroeconomics is poor, all is well within microeconomics. The problems within macroeconomics are, of course, well known: Mainstream macroeconomists didn’t predict the crash. They didn’t even include the possibility of such a crash within their theory or models. And they certainly didn’t know what to do once the crash occurred. What about...

Paul Romer has just published a devastating critique of DSGE (or, in his parlance, ‘Post Real’) macro models. He’s not the first important insider to write an article like this. Look here for Paul Krugman, ‘How did economists get it so wrong‘. Look here for Willem Buiter, ‘The unfortunate uselessness of most ‘state of the art’ academic monetary economics’. Look here for Charles Goodhart, ‘Whatever became of the monetary aggregates‘. And look here for the insider of insiders, Olivier...

Exhibit 10 from The other half of macroeconomics and the three stages of economic development Richard C. Koo 

from David Ruccio You’d think a Harvard economics professor would be able to do better than invoke horizontal equity as the sole argument for reducing the U.S. inheritance tax. But not Gregory Mankiw, who uses the silly parable of the Frugals and the Profligates to make his case for a low tax rate on the estates of the wealthiest 0.2 percent of Americans who actually owe any estate tax.* I’ll leave it to readers to judge whether or not it’s worth spending the time to compose a column on a...