Archive

Given the choice, would you accept to live in a society where happiness and prosperity is guaranteed for all on the condition that one single person be kept permanently unhappy? Is the well-being of thousands of people “worth” the sacrifice and suffering of a single innocent child? Such is the dilemma to which the inhabitants of the utopian city of Omelas are confronted in Ursula Le Guin’s philosophical short-story “The Ones Who Walk Away from Omelas”. In her parable, most people are ultimately able to come to terms with the atrocity. The few citizens who cannot end up walking away from the city — nobody knows where they go and they are never heard from again.

What is most demoralizing to participants in the financial markets? Falling prices? Constant volatility? How about a vacuum of trust?

More than five years after the fall of Lehman Brothers we are still dealing with the problem of high unemployment, the worst kind of “waste” in economic theory. Is there a better approach?

The main goal of the macroeconomist is to understand the sources behind business cycles and the behavior of financial markets in the modern economy.

I’ve already blogged on how undergraduate education evolved at MIT in the postwar era here and here, but since Mike Konczal and Paul Krugman make the case that, to bring introductory economics closer to the real world, macro should be taught before micro as Samuelson did in the first 13 editions of his Economics textbook, it may be worth returning to it.

What happens when a market-based economy becomes a market-based society?

In the past decade, the volume of literature in the history of economics has been of 500 articles and just under 50 books a year. The graph below traces the count in two year intervals (articles left axis, books right axis). The absolute volume is stable but given the growth of economic literature in the period, stable might be rebranded as static.

Household indebtedness in the United States grew dramatically during the decades leading up to the financial crisis.

The Bank of England took the first step in putting the brakes on the surging property market as it scrapped the United Kingdom’s flagship initiative that encourages mortgage lending, introduced earlier this year by Treasury minster George Osborne.

Germany’s economic policies are under attack from all sides.

Historians like labels. X history. History of y. The labels carve out subjects, set boundaries in time and space, at times even suggest methodological commitments.

Jan Kregel on the Continuing Risk of Derivatives

Most of us probably think of management consultancy as a technocratic function, helping companies fix internal problems in order to become more productive. But Institute for New Economic Thinking grantee Kimberley Chong thinks about it in a different way, by viewing management consultancy through the lens of cultural anthropology.

The short answer is yes. For the long answer I will make you sit through seven paragraphs.

In response to widespread discontent among students, employers, and university teachers, a project to create a new core curriculum for economics was launched at a seminar hosted by HM Treasury today. The CORE curriculum project, funded by the Institute for New Economic Thinking, convened the meeting, which was attended by academics, policymakers, business leaders, and students from around the world.

Institute for New Economic Thinking grantee James K. Galbraith will be awarded the 2014 Leontief Prize.

Why does Benn Steil’s history of Bretton Woods distort the ideas of Harry Dexter White?

Adair Lord Turner, former Chairman of Great Britain’s Financial Services Authority and current Senior Fellow at the Institute for New Economic Thinking, argued in a keynote address to the Federal Reserve Bank of Chicago on Thursday that central banks must be equipped in future to address the dangers of excessive private sector leverage, using both pre-emptive interest rate policy and macro-prudential policy tools.

In our two papers, we analyze how changes in personal and functional (wages versus profits) income distribution interact to produce different macroeconomic outcomes in different countries. On the basis of a stock-flow consistent model calibrated for the United States, Germany, and China, simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the United States since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and certain institutions (e.g. easy access to credit, privately financed education and health care systems).

Adair Lord Turner, former Chairman of Great Britain’s Financial Services Authority and current Senior Fellow at the Institute for New Economic Thinking, will argue in a keynote address to the Federal Reserve Bank of Chicago on Thursday that central banks must be equipped in future to address the dangers of excessive private sector leverage, using both pre-emptive interest rate policy and macro-prudential policy tools.

Studies in psychology, neuroscience, biology, and many of the social sciences have long illustrated that human beings react very different from what economics textbooks tell you to expect when they are operating under conditions of radical uncertainty.

We develop a three-country, stock-flow consistent macroeconomic model to study the effects of changes in both personal and functional income distribution on national current account balances.

In this interview, Eric Weinstein explores many creative ways that physics and more sophisticated forms of math can be used to rescue economics from itself and restore its now tarnished reputation.

The destruction of trust is not an accident.

This workshop has the dual aim to expose mathematicians to new research problems in economics and economists to new techniques and developments in mathematics.

The rescue of Cyprus was a microcosm of how the nations of Europe have failed to work together to adequately address their ongoing financial crises.

In the aftermath of the 2008 financial crisis, distrust in the financial sector was widespread. Even after the mess appeared to be cleaned up, the uncertainty over whether the worst was over remained real.

Finance is built on trust. It is based on promises about tomorrow, often paper promises backed by nothing other than words on a page. When trust in those promises breaks down, so too does the financial system. That is the lesson of thousands of years of history.

In standard economics, inequality in outcomes is typically attributed to inequality of inputs, for example, from differences in education. Yakovenko thinks about inequality in a different way by extending some ideas from statistical physics.

The United States government openly flirting with a default on its debt is, to the financial system, like a Pope wondering out loud about the existence of God.

When Greece’s sovereign-debt crisis threatened the euro’s survival, U.S. officials called their European counterparts to express bewilderment at their inability to resolve the issue.

Inequalities in skills are fundamentally linked to economic and social inequalities.

So, most Nobel Prize exegetes went a long way, this week, toward explaining that asset pricing is not primarily born out of theoretical reflection but out of prize-deserving empirical work.

In the aftermath of the global financial crisis, few would dispute the risks of excessive borrowing. But which debts should one worry about – public or private? This column presents new research on the interplay of public and private debts since 1870 in 17 advanced economies. History demonstrates that excessive private-sector borrowing plays a greater role than fiscal profligacy in generating financial instability. However, when the credit boom collapses, the government’s capacity to alleviate the downturn is limited by the prevailing level of public debt.

This episode features grantee D’Maris Coffman of the Centre for Financial History talking about her organization’s commitment to a New Financial History and what the fruits of their approach can tell us about modern debt crises and sustainable debt levels.

Advisory Board members Carmen Reinhart and Kenneth Rogoff today issued a response to recent criticism of their paper “Growth in a Time of Debt.”

This episode features Pier Carlo Padoan, Chief Economist and Deputy Secretary-General of the OECD, talking about the euro zone crisis, Europe’s structural problems, and how uncertainty has damaged economic growth in Europe.

If Congress and the White House fail to raise the debt ceiling this week and the United States defaults on its debt, what can we expect and how can we protect ourselves against these events?

This morning, when I woke up a few hours before the Nobel announcement, I felt seriously dissatisfied. I had meant to write a post on Thomson Reuters’s prediction that Card, Angrist and Krueger may win the Nobel for their work on empirical microeconomics.

“You are now leaving the world as you know it.”

This episode features David Vines of Oxford University talking about the euro crisis. Can the monetary union survive the crisis?

World leaders who are gathering for the APEC summit next week had hoped to be signing the Trans-Pacific Partnership Agreement (TPP). The pact would bring together key Pacific-rim countries into a trading bloc that the United States hopes could counter China’s growing influence in the region.

How does economic theory match up with reality?

The current economic and financial crisis has given rise to a vigorous debate about the state of economics, and the training which graduate and undergraduates economics students are receiving. Importantly, among those arguing most strongly for a change in the way that young economists are trained are the ultimate employers of these students, in both the private and the public sector. Employers are increasingly complaining that young economists don’t understand how the financial system actually works, and are ill-prepared to think about appropriate policies at a time of crisis.

Anat Admati, author of The Bankers’ New Clothes: Whats Wrong with Banking and What to Do about It, talks about how to fix our broken banking sector.

Sadly, it is questionable whether the economy has really improved.

What do we need to do to get the financial sector back on track?

Friedrich von Hayek described the economist’s task as demonstrating how little we really know about what we imagine we can design

what would measures of systematic risk have indicated to Treasury Secretary Paulsen if they had been available at that time?

How can we contain institutional failure?

A look at the large role the trade deficit of the United States has played since the 1980s.

The failure of Lehman Brothers on 15 September 2008 marked the beginning of the end of the world’s love affair with financialization.

What can emerging economies learn from the financial meltdown in advanced economies?

With the collapse of Lehman Brothers in September 2008, a crisis in part driven by derivatives on subprime mortgages, a seemingly obscure sector of the financial market help fuel the worst economic crisis since the Great Depression.

what have we learned from the crisis and what should we have learned?

Simon Johnson, Professor at MIT and former chief economist of the IMF, calls for much higher capital requirements for big banks.

How could reputable ratings agencies – and investment banks – misjudge things so badly?

Five years after the collapse of the U.S. investment bank Lehman Brothers, the world has still not addressed the fundamental cause of the subsequent financial crisis – an excess of debt. And that is why economic recovery has progressed much more slowly than anyone expected (in some countries, it has not come at all).

What have we learned about the American political economy from the crisis and its aftermath?

What happens when professionals lose touch with the people they’re supposed to serve?

Ronald Coase, who passed away last week at age 102, spent his academic career swimming against the current.

What’s behind rapidly worsening inequality in the United States?

What was the political dynamic driving post-crisis economic policy?

Let Them Eat Credit: Has Financial Capitalism Failed the World?

Can China lead the way on innovation?

Can China lead the way on innovation?

Economic theories that have been predominant over the past few decades have broken down, and we now have to start creating a new economics that reflects the realities of today.

Every nation faces the challenge of imagining what a good life means. Sound nutrition, shelter, health care, personal safety, social stability, security of savings, clean air and water, and the development of children are among the elements of what many envision as vital to a happy and healthy society.

The global financial cycle has transformed the well-known trilemma into a ‘dilemma’. Independent monetary policies are possible if and only if the capital account is managed directly or indirectly. This column argues the right policies to deal with the ‘dilemma’ should aim at curbing excessive leverage and credit growth. A combination of macroprudential policies guided by aggressive stress‐testing and tougher leverage ratios are needed. Some capital controls may also be useful.

Where will today’s innovation come from?

Kiel Institute President Dennis Snower talks about the euro zone crisis

The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate.

The course explores how money markets they work, in the U.S. and internationally.

The battle for a living wage for the nation’s poorest workers is set against the backdrop of mass unemployment and the highest level of economic inequality in the U.S. in almost a century.

Institute for New Economic Thinking grantee Hans-Joachim Voth talks about the crisis in Europe.

what is economically correct must always be balanced with what is morally right.

William White, chairman of the Economic Development and Review Committee (EDRC) at the OECD in Paris

We are coming up to the fifth anniversary of the Lehman crash in September 2008. How bad was it? Have we fixed the problems?

How can we get the financial sector back to serving its intended function?

economists still conceive of law too narrowly, mainly as a means to reduce transaction costs and protect investors.

Why didn’t central banks see the financial crisis coming?

The Obama stimulus remains controversial even as we approach the fourth anniversary of its launch.

What does the bankruptcy of Detroit say about the US social contract?

Should China internationalize the RMB? Will it take the lead on sustainable development? Can it maintain growth and productivity?

The shortage of liquidity in the interbank market in China has sparked off a fear of “monetary famine.” This seems rather odd when the national savings rate is 50 per cent of GDP

Adam Posen, President of the Peterson Institute for International Economics, discussing the lessons of macroeconomic stimulus provided by the recent histories of Japan and Great Britain.

Recent austerity policies have been guided by ideology rather than research. This column discusses research that reconciles disparate estimates of fiscal multipliers in the literature. It finds that common identification assumptions are problematic. Matching methods based on propensity scores show how contractionary austerity really is, especially in economies operating below potential.

Did the global economic collapse in 2008 stem from structural failures in the capitalist system?

“How could Michigan officials possibly talk about cutting the average $19,000-a-year pension benefit for municipal workers while reaffirming their pledge of$283 million in taxpayer money to a professional hockey stadium?

Warren Mosler, president of the financial services firm Valance Company and one of the founders of Modern Monetary Theory (MMT), speaks about what MMT tells us about economic policy. How can MMT help get the economy back on track?

Changing the incentives for how economists determine both the content of the subject and their approach to scientific research could increase the range of thinking in the profession

In introducing game theory (in chapters 7-9), MWG build upon the theory of rational choice by individual agents, developed previously in the book to attempt to analyze (describe, explain, and even predict?) the interactions of such agents as well as the outcomes to which they give rise. In previous chapters, MWG discuss interactions only in the form of the arms-length interactions of numerous firms and consumers in specific markets (e.g. under ‘perfect competition’, in chapters 3 and 5).

Orville Schell, Director of the Asia Society’s Center on U.S.-China Relations, discussing his new book, “Wealth and Power: China’s Long March to the Twenty First Century.”

Is China is “too big to fail.”?

Economic theories are powerful things, to be used and misused. Those who write economic theory and do economic policy need to be aware of the consequences of what they are doing.

Will Abenomics succeed in getting Japan’s economy back on the path to sustainable growth? Or is it doomed to fail?

A review of The Entrepreneurial State: Debunking Public vs. Private Sector Myths, the new book by Mariana Mazzucato

Between July 5th and 12th, the second annual summer school in development economics, jointly sponsored by Azim Premji University and the Institute for New Economic Thinking, was held in Bangalore, India.

Matheus Grasselli discusses how the use of advanced mathematics in economics enables innovative new thinking.