The reductionism stops here

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One of the defin­ing fea­tures of neo­clas­si­cal eco­nom­ics is the belief that macro­eco­nom­ic analy­sis has to be not mere­ly com­pat­i­ble with, but deriv­able from, micro­eco­nom­ic analy­sis. The devel­op­ment of eco­nom­ic the­o­ry has been dri­ven far more by this belief than by the desire to make the the­o­ry com­pat­i­ble with the observed behav­iour of the econ­o­my.

This ‘reduc­tion­ist’ aspect of eco­nom­ics – the attempt to reduce the high­er lev­el top­ic of macro­eco­nom­ics to an applied ver­sion of the low­er lev­el top­ic of micro­eco­nom­ics – is at odds with the last 50 years of gen­uine sci­ences, where com­plex­i­ty has ruled the roost, for rea­sons that were elo­quent­ly put by Physics Nobel Lau­re­ate Philip Ander­son in a high­ly read­able paper enti­tled More Is Dif­fer­ent”.

Will the Australian house price souffle rise twice? (1)

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One of the advan­tages of being over­seas right now is that it takes less effort to avoid lis­ten­ing to the insipid dis­course that pass­es for polit­i­cal debate dur­ing this Aus­tralian elec­tion. As Kevin Rudd and Tony Abbott com­pete over who can be more obnox­ious to refugees, I find myself pin­ing for the days of sen­si­ble and humane poli­cies under Mal­colm Fras­er. As politi­cians make them­selves the butt of their own unin­ten­tion­al sup­pos­i­to­ry jokes, I pine for some­one who could deliv­er a killer line against his oppo­nent, rather than against him­self: Paul Keat­ing.

What Janet Yellen—And Almost Everyone Else—Got Wrong

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I was delight­ed to see, in Paul Krugman’s post – ‘What Janet Yellen – And Every­one Else – Got Wrong’ – that he now iden­ti­fies ‘the debt over­hang’ as the rea­son this eco­nom­ic down­turn has per­sist­ed for so long.

The best expla­na­tion, I think, lies in the debt over­hang. For the most part, even those who cor­rect­ly diag­nosed a hous­ing bub­ble failed to notice or at least to acknowl­edge the impor­tance of the sharp rise in house­hold debt that accom­pa­nied the bub­ble. And I would argue that this debt over­hang has held back spend­ing even though finan­cial mar­kets are oper­at­ing more or less nor­mal­ly again. In short, get­ting the bub­ble right, while no small thing, wasn’t enough; Yellen (and many oth­er peo­ple, myself includ­ed) under­es­ti­mat­ed the fragili­ty of the finan­cial sys­tem, but also the impor­tance of house­hold debt.

15 Easy Minsky Pieces

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Dr. Rus­sell Stan­dish and I have been work­ing on Min­sky now for almost two years now–ever since we received the $125K from INET’s Spring 2011 grant round: Rus­sell as builder (cod­ing in C++ and Tcl/Tk) and me as archi­tect (play­ing with each release, spot­ting bugs and sug­gest­ing fea­tures). It’s been a part-time endeav­or: Rus­sell, as a con­tract pro­gram­mer, has to keep more than one iron in the fire, while I have a fair few balls in the air myself. Rus­sell has put in about 2000 hours of cod­ing over that time, and we still have funds to sup­port about anoth­er 250 hours after the suc­cess­ful Kick­starter cam­paign ear­li­er this year.

Minsky Release Candidate Available

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The lat­est “Pet­ty” ver­sion of Min­sky final­ly qual­i­fies as a 1.0 release: there are enough sys­tem dynam­ic and user-inter­face fea­tures in it to declare it a sta­ble release. We’ll mod­i­fy it to remove any bugs that are identified–and I just spot­ted one inter­mit­tent one involv­ing wiring (see https://sourceforge.net/p/minsky/tickets/324/)–but oth­er­wise this will remain a sta­ble release, with no new fea­tures to be added.

Debt Deflation Modelled in Minsky

From now on, new fea­tures will be added in the “Mun” devel­op­ment fork.

You can down­load the PC ver­sion from here:

https://sourceforge.net/projects/minsky/files/latest/download

The Mac ver­sion is avail­able here:

https://sourceforge.net/projects/minsky/files/Mac%20Binaries/

Who’s responsible for Australia’s ‘debt crisis’?

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Anoth­er elec­tion is on in Aus­tralia, and the top­ic du jour – the polit­i­cal top­ic du cen­tu­ry it seems – is that, hor­ror of hor­rors, the government’s bud­get next year will be in deficit to the tune of $30 bil­lion! It’s a scan­dal! Our debt is bal­loon­ing! And it’s all Labor’s fault! Why, all you have to do is look at the respon­si­ble Howard peri­od – falling debt – and com­pare it to the irre­spon­si­ble Labor peri­od – ris­ing debt – and you know who to vote for, don’t you?

Fig­ure 1: From the respon­si­ble Howard to the irre­spon­si­ble Rudd?

Determining America’s debt

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Well there’s a rose in the fist­ed glove
And eagle flies with the dove
And if you can’t be with the one you love hon­ey
Love the one you’re with
(Stephen Stills 1970)

As I not­ed in the pre­vi­ous post, I’m work­ing with the Governor’s Woods Foun­da­tion to pro­duce a com­pre­hen­sive data set on pri­vate debt for its Debt-Eco­nom­ics project (see www.debt-economics.org). As part of that, last week I real­ized that the Flow of Funds data on finan­cial sec­tor debt wasn’t what I had hoped it was, and I had to revise down my esti­mates of the US pri­vate debt to GDP ratio from 1952 till today. That revi­sion implied that today’s “Peak Debt” lev­el was low­er than that of the Great Depres­sion.

ISP Woes

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I haven’t had much luck with ISPs recent­ly! One had a total hard­ware crash that wiped my entire blog out–fortunately a sup­port­er was able to recon­struct it (at a cost of many grey hairs!). I then moved to anoth­er… who had a seri­ous sys­temic out­age for sev­er­al days.

In the process, my Ama­zon AWS ser­vice went AWOL, mak­ing it impos­si­ble for me (or any­one else) to log on to the site. The lat­ter prob­lem has been fixed; the for­mer is being addressed by anoth­er sup­port­er (who has­n’t as yet acquired as many grey hairs!).

The self-destruction of Economics (3)

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This is the third arti­cle in a three-part series on the self-destruc­tion of neo­clas­si­cal eco­nom­ic the­o­ry. See part one here and part two here.

To say that the long self-destruc­tion of the aca­d­e­m­ic eco­nom­ic tra­di­tion was giv­en a final push towards the cliff by the glob­al finan­cial cri­sis paints a pret­ty bleak pic­ture of the future of the dis­mal sci­ence. But I can also see some rays of sun­shine.

The first is to look out­side the Acad­e­my, to for­mal eco­nom­ic bod­ies – to cen­tral banks and Trea­suries in par­tic­u­lar. In the past, these bod­ies uncrit­i­cal­ly repro­duced what­ev­er was the lat­est fad in aca­d­e­m­ic eco­nom­ics (wit­ness the rapid shift from IS-LM and AS-AD mod­els to DSGE mod­els when aca­d­e­m­ic econ­o­mists pro­claimed that the for­mer fell vic­tim to the Lucas Cri­tique).