But important parts of what Keynes suggested have not been explored, and better approaches to non-equilibrium ways of modeling economics exist. Perhaps if we can’t simply dump the plutocrat shills, we can make the study of macroeconomics more heterdox. Since they’ve been systematically excluded for so long, one need would be for more left economists, including Marxists and marxians.

Any advanced production economy is divided into sectors that produce inputs for each other “before”,- (i.e. that’s half logical, half temporal),- they produce for final consumption output. Hence for such an economy to reproduce itself, let alone expand or grow, the ratios and relations of its underlying reproduction scheme must be maintained. Such a reproduction scheme may or may not be mediated by market transactions, wholly or in part, but it is not derived from market transactions, but rather is a constraint the production system imposes willy-nilly on market transactions (and prices). Hence sustainable economic “growth”,- (leaving aside the issue of whether there is actually any useful content to such “growth”),- must be inter-sectorally balanced expansion. Add on the problem of underlying, ongoing technical change, which means that the ratios and relations of the reproduction scheme are themselves constantly changing, and the problem that investment is primarily driven by private profit, such that there is an inherent asymmetry and lag in the distribution of income between profits and wages from productive gains, and such that, as the available technical possibilities for investment are used up and opportunities dry up, returns to investment diminish in a backwardly lagging way, and you get a tendency to crisis precisely out of the very “success” of the prior boom, due to over-investment, inter-sectoral coordination failures and insufficient wage-based consumption demand. And of course, the crisis will be all the more severe, if the prior boom is prolonged through financial speculation in the place of diminishing real investment opportunities and thus the accumulation of masses of fictitious capital becoming unpayable debt.

This isn’t merely an “Austrian” idea. (The original Austrian idea was a time theory of production, itself based on a time theory of interest as delayed consumption, resulting in round-aboutness of production, but, among other problems, they had a peculiarly subjectivistic and abstracted conception of time). The idea of a reproduction schema goes back to the Physiocrats and was extensively reworked and elaborated by Marx.

Of course, nowadays, with MNC production platforming, the globalization of supply chains and massive, largely unregulated global financial flows, it is difficult to speak of a discrete economy on a national or regional basis and we are caught in a twilight zone between “open” economies and a single global closed economy. But, even though my window on the world is in the U.S. and yours in BRD or AUS, I think we both agree that a prime causative factor in the ongoing global crisis was massive global CA imbalances and based on that factor alone, one could foresee the coming crisis, even if not predict its exact timing and ramifying course.

My aversion to the “Austrian” economic story is largely that it tends to give too much importance to “mal-investment” – where I suspect that mal-investment is always with us. The same applies to structural change. It is very easy to see them as the primary cause of problems after the event. It makes a good narrative – but is it really getting to heart of “what is different this time”. I think household balance sheets are one enormous obvious hole in most macro models – and I think it is the really big story post World War II. If you spread wealth widely, it makes for a vital and resiliant grass roots economy – and that effect lasts for a considerable time.

I do tend to agree with you though – and disagree with McClaren (whose other contribution I thought were good) that mechanism is often missing from macro-economics. (In fact Krugman has said as much – see his oft repeated story about “immaculate transfer”.) I would want to see a much more dynamic macro-economics – one that rejects path independence and embraces the importance of history.

As against the unavoidable but largely ignored distributional effects of monetary policy.

On the other hand, I don’t so much disagree with you as see you as someone entirely ignorant of economics, but with an attitude problem about it. That’s fine, knock yourself out, but don’t assume me finding engagement with you a waste of effort as some kind of indication of a fundamental intellectual disagreement. Ain’t nothin’ intellectual about this.

Here’s the ponce theory of emploment:

All workers try to do two things:
1. Increase the amount of money they get paid for their work.
2. Decrease the amount of money they have to do to get that pay.

Saying economits don’t need to make predictions to earn their pay falls into (2)

I gotta ask, though. If you don’t think economists need to make predictions to have any value, what do you think they should do?

Gathering data, making charts and coming up with untestable speculations can be done by just about anyone.

Nice attempt to lower the bar, though I don’t think anyone outside the field expects economics to produce anything of value.

Perhaps economics is still waiting for its Einstein.

For what it’s worth, your contributions to this thread are much appreciated. Fiscal and monetary hocus-pocus is all well and good, but it definitely does obscure as much as it clarifies. Yours is the best exposition of what’s actually been obscured as any I’ve read, and is even more impressive given how compressed it has to be to fit into a comments thread like this one. In my opinion Krugman’s recent, and jaw-droppingly belated discovery of the advantages capital derives from 21st Century improvements in the technologies of production, a piece of which you link to @ 147, is pretty thin by comparison.

Bruce: thanks also, that helps clarify. You do need to write a book, you know, or start your own blog (and maybe have it lead to a book).

——————————

LFC/Bianca: Let me pick up again on the “science” thing if I may. And I have no great feelings on the question of whether economics is a “science” or not. It seems to me that the answer to that is dependent on whether one uses the term “social science” and what is meant by it. (Shorter: I don’t care too much, and don’t get hot under the collar either way.)

On predictions vs forecasts: forecasts are about events (“I think a thing is about to happen”); predictions concern implications (“according to my theory, if this then this”). I chose the latter word because of John Q’s sidenote that Williamson states that “economic theory has no implications, and that this is a good thing”. (Somewhere on SW’s blog that I don’t want to dig back through is his statement, in comments, about what he did think was a property of a good theory or model but I don’t remember what he said. It was one of his standard glib one-liners that struck me at the time as having little substance.)

To make the distinction stark, Einstein’s relativity posits that time and space are connected and that this has implications for how time passes, relative to physical movement. That’s an implication that leads to testable predictions, but Einstein didn’t forecast the event that someone would put an atomic clock on a superfast plane and compare it to a clock on the ground.

Of course, in economics and elsewhere, implications of a theory are good (useful) at least in part to the extent they allow better forecasting, because some forecasting power and accuracy is important, even allowing for the fact that all forecasts are imperfect.

So, anyway, a useful “science” should give you implications that can be used over time to assess the explanatory power of your theory or paradigm. There’s another term — “explanatory power”, which is a bit vague but has a bit of know-it-when-I-see-it utility.

I don’t have the material to hand but my recollection is that in the early days of biology, it was regarded as non-scientific compared to physics and chemistry. It was comparatively taxonomic and inductive, with less of a theoretical basis than physics and less scope for experimental approaches than chemistry. Even allowing that, would we agree that modern biology would be regarded as having considerable explanatory power?

Like I said way up above, I don’t think economics should be judged on forecasting per se, and I feel the same about biology and ecology. But economics should have enough explanatory power to do the things I highlighted way upthread:
- raise clear red flags that pressures are building that could cause a system collapse;
- identify anticipatory actions to deal with those building pressures;
- identify the appropriate responses should the worst happen ( system collapse) to ameliorate its effects and hasten recovery.

Economics can do at least some of these things already, as Barry and mclaren and others have argued, but it has been subject to a considerable internal failing of the profession, to society’s considerable detriment.

(And again, the rhetoric downunder is considerably different. Once more, this morning on a TV news show, an academic economist was shrugging and shaking his head bemusedly at the surplus fixation of the government. There’s really no credible authority figure saying “The surplus is crucial! We can’t go into deficit!”)

To a large extent, the consensus of mainstream macroeconomics, has been formed by devolving, degenerating explanations/interpretations of the Great Depression. The most influential one is that the counterfactual story created by Friedman and Schwartz in A Monetary History of the United States, 1867-1960, which blamed the Federal Reserve for bad policy creating the prolonged and rapid deflation of 1930-33, and basically denied that anything else mattered. Friedman’s view, essentially, was that if monetary policy was steady and “neutral” (inducing no purely monetary “shocks”), then the natural economy, the self-organizing, self-equilibrating “free” market, competitive economy would optimally solve all other problems. (Look ma, no hands! [but the invisible ones])

Bernanke would later re-write the Friedman counterfactual from its vocabulary, anchored in the discredited Quantity Theory of Money, into a framework of money as credit creation. So Bernanke’s implicit theory, like Friedman’s, was, apparently, that, absent the devastation of the financial sector in the deflation of 1930-1933, none of the other reforms of the New Deal (e.g. Social Security) would have emerged to hobble the economy, and things would have been just jim dandy for everyone.

Christina Romer has produced an extremely spare retrospective analysis of the economic recovery, 1933-41, which occurred during the New Deal portion of the Great Depression, explaining it all in terms that either a New Keynesian or a monetarist could love. After 1935 or so, it was all driven forward by an inadvertent monetary expansion attributable to the emigration of refugee Jews from Europe. (I kid you not.)

You’ll excuse me, if I don’t mention Amity Shlaes or Cole & Ohanian. (You can google, if you like.)

During the actual events of the 1920s and 1930s, a number of serious structural problems emerged. The U.S. emerged into the New Economy of the 1920s light-years ahead of the European powers, which devastated themselves in WWI. The Second Industrial Revolution, which began in the 1860s, entered its mature phase, producing a vast array of new products and vastly improved production methods: automobiles, movies, radio, electricity, fertilizers, hybrid corn, telephones. Many things, which were not novelties, such as mass-circulation newspapers, expanded rapidly.

The U.S. was so ridiculously far ahead of the other industrialized countries that it could hardly help, but completely dominate international trade, even discounting the unfortunate effects reparations had on Germany, or the dissolution of the Hapsburg Empire had on what had been the emerging industrial powerhouse of Eastern Europe. These structural problems put enormous pressure on the gold-exchange standard, which emerged after WWI.

When agricultural prices dropped with the end of WWI demand, U.S. agriculture went into crisis, as productivity increases from advancing technologies caused prices to fall and to become extremely volatile. Many U.S. farmers beyond the reach of roads and electricity fell disastrously behind those within the narrow geographic bounds of the New Economy in the cities of the Northeast and Great Lakes and West Coast.

WWI Federal control of the economy had resolved pre-WWI labor unrest, by a huge increase in real wages — something like 50% increase in real wages in 18 months — and suppression of the radical labor unions. The deflation of the 1921 Harding recession erased some of the wage gains, and Labor made few gains in wages in manufacturing, despite galloping increases in productivity, during the 1920s.

Electricity was key to many of the advances in industry, agriculture and consumer lifestyle. Electricity generation was also subject to vast economies of scale, which made rates, problematic. In the presence of unrealized economies of scale, there literally is no such thing as a market-clearing equilibrium. Epic political struggles ensued over hydroelectric projects on the Tennessee, at Niagara, on the Colorado, and over institution of public utility regulation of electricity (and telephone) rates. A failure of expectations over returns on electric utility investments would be a core issue in the stock market crash of 1929 that set off the crisis.

My point is that there were structural issues, big ones, emerging in the 1920s. There was, in effect, a momentous struggle going on, over income distribution, on several fronts. Some of this struggle over income distribution was papered over for a time, by the novelty of a loose money policy by the New York Fed, which, in turn fed the novelty of consumer credit to finance purchase of consumer durables to go with the housing boom fed by easy mortgage credit, and feverish stock market speculation.

Separating the structural problems — especially the struggle over income distribution and industrial wages — from the monetary and financial crisis, as Friedman did, was a magician’s sleight of hand. He hid reality behind a monetary veil.

Given the structural problems, generally falling prices and wages, were a complete catastrophe. Full-employment equilibrium was only possible at higher wages, and a higher wage share of national output, relative to Capital. The debt-deflation, instead pushed income toward Capital, the exactly wrong thing to do. Markets in vast sectors of the U.S. economy were completely incapable of generating competitive prices or allocating resources properly; agriculture was the glaring example of a dysfunctional sector: somehow, agriculture had to find a way to shed labor on a massive scale, while attracting investment to implement the new technologies, on an equally massive scale, while faced with extremely volatile product prices, (not to mention the devastation of the Dust Bowl in the heatwave of the 1930s). Also, rapidly expanding food processors were gaining enormous bargaining power of raw agricultural product prices.

In the event, the New Deal managed a number of successful institutional reforms and investments in public goods infrastructure that restructured the economy, in ways that made a full-employment equilibrium possible again, while incorporating the technological advances. Industrial wages rose during the Great Depression, despite high unemployment, as industrial unions expanded their scope and power. The Agricultural Adjustment Acts (1933,1935,1938), especially the second scheme put in place circa 1935, put in place one of the most successful industrial policies in history, setting off a remarkable increase in productivity across a broad range of crops, while enabling the outmigration of labor.

The big issue of income distribution would not be settled, finally, until WWII. People often think the WWII spending confirmed the Keynesian thesis, which it did, but it also enabled the Great Compression in income distribution, which solved one of the central problems, of a mass-production, mass-consumption economy struggling to be realized: paying people enough to buy the stuff they produced.

Economists painting with a broad brush often obscure the structural details. It is common to assume a degree of substitution of labor for capital, or vice-versa, which is simply not feasible. Technology-embodying capital tends to be very lumpy. As Pareto said, there’s only seat on the farm tractor. There’s no feasible labor-intensive alternative way to employ the technology, and the technology dominates completely craft methods. And, the “capital-intensive” method may not be capital-intensive in any common-sense meaning of the term, at least relative to traditional craft production.

The actual economy is not a “market economy” in any common-sense meaning of the phrase, and to assume otherwise is wilful ignorance of the first-order. Most of the economy consists of vast hierarchical and networked organization, with little or no reference to anything resembling an actual market. Economists should not be simply assuming that markets exist, let alone that they always exist and function in ways that can cope adequately with financial and monetary shocks, or the pressures introduced by changing technology.

Saying “stimulus spending” of no particular character (tax breaks, bridges, birth control, you choose!), nevermind the rest, which we don’t have to bother our beautiful minds with, because it will take care of itself, just doesn’t cut it.

Um, perhaps this was already getting away from criticisms of Krugman, but if I recall correctly, he was one of those who disapproved of the actual stimulus package because of its composition, not just its size. My understanding of “multipliers” is that they do in fact attempt to characterize particular types of government spending. Hence, income tax cuts (which have apparently become the only permissible sort of stimulus) generally have a low multiplier, while food stamps (which have been gutted, and then gutted some more, and have blocked passage of a farm bill for the first time in decades because House Republicans demand that yet more poor children go hungry, in the name of JAYSUS) have a high multiplier. So there have been some practical policy prescriptions (e.g., give poor people more direct government assistance rather than less); they’ve simply been ignored by the elite consensus and rejected by deranged Randian Christianists. And as was mentioned above, even if Australian economists have the “right” policy prescriptions, politicians can still simply ignore them, lest hackish newspapers run by rich sociopaths criticize the government as fiscally irresponsible.