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June 19, 2021


Patrick Carter

yeah, I am not convinced by some of this. Possibly mainstream econ sailed on unperturbed by the CCC for reasons other than mainstream econs being duffers.

The idea that interest rates have something to do with what returns it is possible to get by borrowing for productive investment, and that marginal returns broadly speaking diminish as more capital is accumulation, is not negated by the observation that there is a good deal of heterogeneity in the returns you can get from productive investment, nor by the possibility of reswitching. And there are many other considerations and complications if you want to move away from incredibly simply abstractions towards messy reality.

And of course aggregate production functions don't exist - it is beyond me what anyone even means by "existence" in that context. It's simplifications, all the way down. Of course there is no neat way of adding apples and oranges - the fact that the prices of capital goods might partially reflect the returns one can make with them is just one of many problems with using prices to construct aggregates, but again is not enough to throw the whole enterprise out - anyone using aggregates of anything ought to have no illusions about what they are - anyone trying to pretend we can do without aggregates is kidding themselves.

To my eyes, a lot of these points are not nearly as clever as they appear (that one not observing marginal costs or products because in some theoretical setting nobody ever does anything is moronic) and there is a tendency to think you've put one in the back of the net for your team and wheel away waving your shirt around your head, rather than doing the more intelligent thing and asking, OK then, how would be interest rates be determined in the presence of heterogeneity and possible reswitching. for example.

Patrick Carter

oh and once more for those at the back of the room THE IDEA THAT WAGES ARE SET BY BARGAINING IS NOT HETERODOX

and bargaining does not mean "has nothing to do with individual productivity"

(although the approach to bargaining in labour econ is pretty crude from what I know of it - I don't know why the idea of wages as Shapely values didn't catch on more https://www.jstor.org/stable/2297888?seq=1#metadata_info_tab_contents )


I think the problems are much deeper than this.

It relates to the fetish of formalism and quantification. This goes back to at least Samuelson. It is the insistence of trying to explain the world in terms of rational choice models, and that predates New Classical Economics. Any partial attempt to move away from this by Keynes, and I stress partial - although later in life he basically said classical economics was "nonsense" - was undone by Samuelson and Hicks who reestablished classical frameworks (although latter at least expressed some regret for this). This objective of trying to fit everything into a rational choice framework with fundamental assumptions about constrained optimisation to get a model seems to trump any intellectual curiosity about what really happens.

Ontology and epistemology - questions of when where economic theory arose and how it took form it did and therefore why economics is done the way it is are not raised. For example, there should be obvious questions connected to the fact that its development was connected to periods of British Imperial and then American political hegemony.

For historians or people outside the economics profession it is a bizarre discipline.


"I don’t like talking about “mainstream” economics because it is often a straw man."

Why? We know what we are talking about; it is something that has the unquestioned starting point that people have unlimited wants and there are limited resources which sets you up for demand and supply curves, indifference curves, budget constraints etc. It uses models and econometrics. Its understanding of a societies is that it is a summation of individual utilities.

All of these things can explain why it is an inadequate manner of inquiry to understand the world's new (and possible old) problems.


Shouldn't you be remembering Fischer Black's 1986 essay "Noise"?

"the price level and rate of inflation are literally indeterminate. They are whatever people think they will be. They are determined by expectations, but expectations follow no rational rules. If people believe that certain changes in the money stock will cause changes in the rate of inflation, that may well happen, because their expectations will be built into their long term contracts."

Why can't central banks set inflation expectations by buying and selling inflation swaps, as part of open market operations?

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Ralph Musgrave

Makes you wonder why the so called "professional" economists who did the "forgetting" still have their jobs. I suggest the reason is that economics is a respectable middle class profession where no one gets called out for incompetence, thus we have see grotesque incompetents like Kenneth Rogoff and Carmen rise to the top of the profession (at Harvard of all places).

Adam Smith pointed to this sort of thing long ago when he said "People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public..."

Ralph Musgrave

Oooops . . . I should have said "Carmen Reinhart" above, not "Carmen".


The argument that our blogger is making seems to me:

* There are different "schools" of political economy.

* So-called "mainstream Economics" as championed by Mankiw, Lucas, Hubbard, Rogoff, Feldstein, is a largely american school that has ignored pre-Reagan/Thatcher political economy approaches, and has been given huge prominence by mainstream media and policy makers.

* There have been other schools of political economy, mostly in Europe, but also in some isolated corners of american academia, that have continued work using pre-Reagan/Thatcher approaches, and have been largely ignored be the mainstream media and policy makers.

* Some (not many) americans are rediscovering those pre-Reagan/Thatcher approaches that in Europe did not reach near-extinction as much as in the american context, and are thinking they are "heterodox" and new and exciting.

My comment: amusing, but what is given prominence by mainstream media and policy makers is "policy based evidence", so I am a bit cynical.

Jan Wiklund

Perhaps we will one day rediscover Erik Dahmén's idea that it does matter WHAT one produces and that two businesses are NOT the same just because they employ the same "labour" and "capital". And perhaps, perhaps we will one day rediscover the postwar truth that governments can actually improve businesses as good as capitalists can.

Adrian Bailey

Or it could all be much more simple that economic theory mostly seeks to describe how the fundamental energy flows into the system can be apportioned.

The economic theory of the 80's that abandoned the class consciousness of the 70's was enabled by the North slope, the North Sea and the Gulf of Mexico coming online to produce the final boom years of the nineties.

The step back now to 'forgotten' ideas could be because we are quickly sliding down the curve of lower energy inputs and the division that that will bring in society as the pie shrinks and once again explodes the class war.

The tiny bump of US shale will do nothing overall to solve that inexorable predicament, and all of the economic theory in the world will do nothing to solve that hard limit.

As Priests and Philosophers have sought to rationalise the reality of human suffering over the history of human civilization, suffering continues to exist in abundance regardless.


Adrian: if you replace "energy" with money, don't you get a better description of the out-the-window world?

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