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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Teaching economics — a £9,000 lobotomy


all too relevant – change is going to be slow…

Originally posted on LARS P. SYLL:

In their battle to open up economics, [students] have one hell of a fight on their hands, for the same reason that it has proved so hard to democratise so many aspects of the post-crash order: the forces of conservatism are just too powerful. To see how fiercely the academics fight back, take a look at the University of Manchester.

Since last autumn, members of the university’s Post-Crash Economics Society have been campaigning for reform of their narrow syllabus. They’ve put on their own lectures from non-mainstream, heterodox economists, even organising evening classes on bubbles, panics and crashes. Trickle-downYou might think academics would be delighted to see such undergraduate engagement, or that economists would be swift to respond to the market.

Not a bit of it. Manchester’s economics faculty recently announced that it wouldn’t renew the contract of the temporary lecturer of the bubbles course, and that students who wanted…

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Is the Speculative or the Precautionary Demand for Money More Important in Real World Capital Markets?

Originally posted on Fixing the Economists:


In Keynes’ General Theory is is famously stated that the demand for money relies on three distinct functions. These are: the transactions demand for money; the precautionary demand for money; and the speculative demand for money. Or, more formally:

M = Mt + Mp + Ms

In that work Keynes — as he regularly did in his monetary theories — laid rather a lot of emphasis on the speculative demand for money and not a great deal of emphasis on the precautionary demand for money. In chapter 13 of his General Theory he wrote,

It may illustrate the argument to point out that, if the liquidity-preferences due to the transactions-motive and the precautionary-motive are assumed to absorb a quantity of cash which is not very sensitive to changes in the rate of interest as such and apart from its reactions on the level of income, so that the total quantity…

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