The Phillips Curve: Missing the obvious and looking in all the wrong places

Originally posted on Real-World Economics Review Blog:

from Thomas Palley

There is an old story about a policeman who sees a drunk looking for something under a streetlight and asks what he is looking for. The drunk replies he has lost his car keys and the policeman joins in the search. A few minutes later the policeman asks if he is sure he lost them here and the drunk replies “No, I lost them in the park.” The policeman then asks “So why are you looking here?” to which the drunk replies “Because this is where the light is.”That story has much relevance for the economics profession’s approach to the Phillips curve.

Recently, there has been another flare-up in discussion of the Phillips curve involving Paul Krugman [Here], Chris House [Here], and Simon Wren-Lewis [Here]. It is précised by Mark Thoma [Here].

The question triggering the discussion is can Phillips curve (PC) theory…

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Krugman & Mankiw on the loanable funds theory — so wrong, so wrong

Originally posted on LARS P. SYLL:

Last year Dirk Ehnts had an interesting post up where he took Paul Krugman to task for still being married to the loanable funds theory.

Unfortunately this is not an exception among “New Keynesian” economists.

Neglecting anything resembling a real-world finance system, Greg Mankiw — in the 8th edition of his intermediate textbook Macroeconomics — has appended a new chapter to the other nineteen chapters where finance more or less is equated to the neoclassical thought-construction of a “market for loanable funds.”

On the subject of financial crises he admits that

perhaps we should view speculative excess and its ramifications as an inherent feature of market economies … but preventing them entirely may be too much to ask given our current knowledge.

This is of course self-evident for all of us who understand that both ontologically and epistemologically founded uncertainty makes any such hopes totally unfounded. But it’s rather odd to…

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Game theory — a critical introduction

Originally posted on LARS P. SYLL:

Back in 1991, when yours truly earned his first Ph.D. with a dissertation on decision making and rationality in social choice theory and game theory, I concluded that “repeatedly it seems as though mathematical tractability and elegance — rather than realism and relevance — have been the most applied guidelines for the behavioural assumptions being made. On a political and social level it is doubtful if the methodological individualism, ahistoricity and formalism they are advocating are especially valid.”

This, of course, was like swearing in church. My mainstream neoclassical colleagues were — to say the least — not exactly überjoyed.

For those of you who are not familiar with game theory, but eager to learn something relevant about it, I have three suggestions:

Start with the best introduction there is


and then go on to read more on the objections that can be raised against game theory and its underlying…

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What to do to make economics a relevant and realist science

Originally posted on LARS P. SYLL:

The other day yours trulywrotereKrugman‘s dangerous neglect of methodological reflection:

The financial crisis of 2007-08 and its aftermath definitely shows that something has gone terribly wrong with our macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable … Modern mainstream macroeconomics obviously did not anticipate the enormity of the problems that unregulated ‘efficient’ financial markets created. Why? Because it builds on the myth of us knowing the ‘data-generating process’ … Mainstream macroeconomists … want to be able to use their hammer. They decide to pretend that the world looks like a nail and that uncertainty can be reduced to risk. So they construct their mathematical models on that assumption–and the ensuing results are financial crises and economic havoc.

Now Brad DeLong earlier today commented on my critique:

OK …

Suppose we decide that we are no longer going to:


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Full employment and the path to shared prosperity (3 graphs)

Originally posted on Real-World Economics Review Blog:

from Dean Baker and  Jared Bernstein

There are many policies that can reduce inequality, but there is none as straightforward conceptually and as difficult politically as full employment. The basic point is simple: at low rates of unemployment, the demand for labor allows workers at the middle and bottom of the wage distribution to achieve gains in hourly wages, annual hours of work, and thus income.

Levels of unemployment are not the gift or curse of the gods; they are the result of conscious economic policy. The decision to tolerate high rates of unemployment is a choice. It is one that has enor-mous implications not just for the millions of people who are needlessly unemployed or underemployed but also for tens of millions of workers in the bottom half of the wage distribution whose bar-gaining power is undermined by high unemployment.

Unemployment and Wage Growth

In discussions of inequality and…

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A Post-Keynesian ECB, Part II

Originally posted on Real-World Economics Review Blog:

From: Erwan Mahé (guest post)

In our latest Thaler’s Corner, last Friday 6 June, we examined the impact of the ECB’s lowering of benchmark interest rates (see PDF, attached), but, as we pointed out, that was hardly the only noteworthy decision the central bank made last Thursday! Today, we will explain how these measures make perfect sense when taken together and how they flow directly from a programme based on the principles of a modern currency. We leave aside for the time being its role of fiscal watchdog that it persists in playing, although such a role does not fall within its mandate and is totally counterproductive. Before going into these points, I would just like to comment on the latest statement by Bank of France chief and ECB governor, Mr Noyer, this Monday in Montreal.

ECB Noyer: Liquidity Regime Off-Balance Sheet Equivalent To QE

Although he…

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Back to 1998. A decade of declining real wages (USA)


Taken from the Levy Institute – something we’ve all known for a long time. Declining real wages, especially affected by the increasing skill set visible in the workforce:

Originally posted on Real-World Economics Review Blog:

Earning less than your your older siblings and nephews and nieces is getting increasingly likely, though less so for women and blacks. This is not mainly a sectoral composition effect.

From the Levy institute:

Workers’ wages are the most important component of household money income. Representing about 83 percent of total household income, they are the driving force behind changes in income growth and inequality. Consequently, changes in wages play an important role in determining trends in income inequality, household spending, and the overall welfare of households. In the last 20 years, while nominal wages have shown a consistent and upward trend (Figure 1), real wages have progressed much more slowly … after a long period (beginning in 1973) of stagnant real wages, in the late 1990s low unemployment rates, increases in the minimum wage, and improvements in labor productivity contributed to a boost in wages, which translated into 12.4…

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