New Review of My Book

A nice review of my book by Marc Morgan has appeared in American Affairs. Morgan works with Thomas Piketty at the World Inequality Lab at the Paris School of Economics. He is doing interesting work on profit accounting and determination.

I would also note that Morgan attended the same secondary school (high school) as me in Dublin. Apparently, Christian Brothers College, Monkstown — although not a very prominent school in any meaningful sense — is creating a lot of heterodox economists. Or, perhaps, the children of my generation found the free market nostrums they were handed by the pre-2008 politicians so nauseating that they decided to critically study economics. Who knows?

Morgan’s review is excellent and although I could pick over details, I won’t bother. I will note one thing, however. Morgan’s review is extremely extensive but, when it comes to the theoretical architecture I lay out in the book, seems to focus heavily on profits and distribution. This probably reflects Morgan’s own research priorities and there is nothing wrong with that.

That said, however, I thought that this section of the book — while important — was almost wholly derivative and widely known by people well read in heterodox and especially Kaleckian economics. Perhaps my explanation was more lucid — I should be happy if it were — but it was not any more original.

The section of the book on finance and investment, on the other hand, I thought was the most original part of the theoretical section of the book. While there is a case to be made that the theory of finance is not wholly original, resting as it does on modern finance theory, Keynes’ theory and GLS Shackle’s theory, I nevertheless think that it is an oirginal synthesis.

In spite of this, no one has yet assessed it in any detail.

Anyway, the review is fantastic and I recommend it to all.

The Reformation in Economics: Back to the Future

 

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How Far Can We Push This Thing? Some Optimistic Reflections on the Potential For Economic Experimentation

Readers are probably aware that there is quite a lot of discussion of Modern Monetary Theory (MMT) and the potential for fiscal experimentation batting around at the moment. Others have weighed in on this already, and I have little to add.

It is striking, however, that most of the push-back — where there is push-back — is not focused on trying to discredit the idea that we should engage in fiscal experimentation. Indeed, the notion that we should engage in fiscal experimentation seems to be, if not mainstream, at the very least part of the discussion.

Yet, vulgar strawman-style arguments against MMT aside, no one seriously disputes the fact that if too much fiscal expansion is undertaken the economy will eventually hit a hard inflation barrier, past which any increase in spending will generate inflation rather than real output expansion. Interestingly, no one seems to have tried to come up with a new framework for estimating where this inflation barrier might be and whether it is too risky to overshoot it.

So, I’ve decided to fill that gap. Linked below is a paper where I use a new capacity utilisation-based framework to provide hard, yet optimistic numbers of how far we might push the economy in the spirit of fiscal experimentation.

I find that we could probably safely increase the current US fiscal deficit by around 5% of GDP structurally — that is, from the current level of around 3.8% of GDP to around 8.8%. This would give rise to annual real GDP growth of around 6% and a once-off shot of inflation that would drive the annual growth in CPI to around 4.9%. As I say in the paper, this would then lower the private debt-to-GDP ratio from around 200% of GDP to around 190% in the first year and this decline would continue every year that the new 5% rate of inflation was maintained.

I argue that, based on a new framework I’ve developed for measuring the likelihood of sustained, runaway inflation that I call the Worker Bargaining Index (WBI), it is highly unlikely that a sustained inflation will result.

That said, after undertaking such an experiment, we would be wise to watch whether sustained, overly high nominal wage growth results and if so take action. Given the current institutional arrangement, tight monetary policy would probably be the best response but it would also be possible to tighten the fiscal stance.

So long as nominal wage growth merely kept pace with the new 4.9% rate of inflation and did not greatly outstrip it, the economy will certainly be safe from a wage-price spiral. We probably want to see some real wage growth, however. At the very least we should want to see real wage growth keeping pace with productivity growth. And given the redistribution from labour to capital in the past few decades, we may want to even see real wages outpace productivity growth, for a few years at least.

It should only be if there is clear evidence that wage growth is getting out of control that we should consider slamming on the brakes. If we start to see wage and inflation growth feed upon each other that should be our signal to act.

Here is a link to the paper:

How Far Can We Push This Thing?

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Some Reviews of My Book

I have come across two academic reviews of my book which can be found here and here. There is also a nice popular review in the Irish Times that can be found here.

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2017 Presentation on Ireland

My 2017 presentation on Ireland and the Eurozone has been uploaded to YouTube. See the previous post for the link to the full conference, which includes the Q&A.

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Presentation on the Irish Economy

On Monday of this week I gave a presentation on the current state of the Irish economy at a conference on the future of Europe at the LBJ School of Public Affairs. My presentation begins around the 33 minute mark and is followed by some Q&A. It can be accessed here:

Presentation on the Irish economy

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Book Launch in Parliament Earlier This Year

On Tuesday 16th of March 2017 Robert Skidelsky and I launched my book The Reformation in Economics in the Clement Attlee room in the House of Lords. It has taken some time to upload these videos of Robert’s and my comments. Most of the speeches were captured but I have included my own text below (I did not end up sticking to the written comments verbatim).

On a separate note, Brian Romanchuk has written a short review of the book here.

Hi everybody,

 

Thanks very much for coming. I’m pleased to see that you’ve shown some interest in the book.

I won’t beat around the bush. I’ll get right to it.

What is the key question that the book seeks to address? It is this.

To what extent is economic theory an ideology and to what extent can it be thought of as a neutral tool which can be used to explore and possibly improve reality?

What I mean by ‘ideology’ is not a political ideology – I’m not concerned with whether you lean Tory or Labour. Nor do I mean a worldview or Weltanschauung – such as Marxism, libertarianism or communitarianism.

What I mean by ‘ideology’ is a mode of thinking that does not seek to attain Truth – but rather seeks to attain Power. A mode of thinking that seeks to justify a certain social or economic order.

The argument that I make in the book is that a good deal of contemporary mainstream or ‘marginalist’ economics is in fact ideology in this sense.

BUT – and I hope you will have some sympathy for this claim – I also argue that there are aspects of economics that are not ideology. That is, there are aspects of economics that do in fact aim at revealing truth – rather than imposing power.

These are the aspects of economics that seek to explain the facts of the world as we see them – and, in the best instances, give us structural explanations why these facts line up in the way that they do.

If we are going to be serious, however, I think that we need to ask firmly: which is which? Which aspects of economics seek Truth and which seek Power? And in order to do this we must inevitably start with some robust epistemological questioning of economic theory.

Until now I think that economists have been somewhat cagey about discussing epistemological issues. To be frank I think that this reluctance is due to the fact that the epistemological foundations of modern economics are a little embarrassing. The “assumptions don’t matter” approach of the marginalists tends to crop up in conversation like an uninvited dinner guest or a weird uncle.

On the other hand, those that have criticised economics for being “too unrealistic” or based on flimsy assertions often seem to find it difficult to lay down clear criteria of evaluation.

This is where I hope that my book fits in. In it I have attempted to do a bit of everything at once. First, I have held what seem to me to be the major tenets of contemporary marginalist economics up to epistemological criticism. I have then – drawing on an old Prussian named Kant – laid out clear methodological and epistemological criteria to judge suitable theoretical replacements. And finally, I have constructed the skeleton of what I think could develop into a suitable alternative.

All that sounds rather grand – perhaps even tipping into the grandiose. But the book is in no way a creation ex nihilo. I have drawn on decades of excellent work by economists that have unfortunately been shunned by the marginalists.

Nor is the book an attempt at a Grand Unified Theory of everything. This is not a Book of Scripture. We have enough of those.

In fact one of the driving forces of the book is the feeling, wisdom, knowledge – call it what you will – that we can’t know everything.

We cannot, in fact, produce large-scale models of economy like the physicists do. It simply doesn’t work. Economies are too complex. They are not written in the elegant, concise prose of the Book of Nature.

If the DSGE modellers are attempting to draw up a detailed map of the economy I am merely trying to provide some directions. I call this method – following Mr Kant – the construction of ‘schema’. These schema work to try to orient us in the world of economic events and provide a firm footing.

I’ll run through the specifics of the book quickly.

Apart from this new approach to economic method the book deals with theories of money and banking; it deals with theories of profits, prices and income distribution; and it deals with theories of finance and investment – that last one I believe makes up the core of economic theory properly understood.

I hear that there is already a myth floating around out there that this is a highly abstract theoretical book with no bearing on the real world. Overuse of words like ‘epistemology’ in what I’ve just said aside, I want to dispel this myth.

Many of the aspects of theory that I discuss in the book are directly tied to key contemporary policy debates that we hear today. This is not a coincidence. I wrote it that way. I tried to avoid the more irrelevant aspects of economic theory and stick to the good stuff.

To run through a few practical examples, the chapter on money and banking has direct bearing on the quantitative easing programs that have been run by the worlds’ central banks recently – and may help to understand why these did or didn’t work as they were supposed to.

There is also a chapter on free trade that takes what seems to me a more realistic approach to the economics of trade.

I’ll briefly conclude by asking: what would economics look like after a reformation? To my mind it would be a lot more pluralistic. There would be an awful lot more debate – and by ‘debate’ I mean debate over deeply held general principles and not over whether the bell looks nicer than the whistle.

I think it would be a lot less dogmatic and people would be more willing to ask challenging questions. I think that economists would be a lot more humble with regards to what they could say with confidence. Basically I think it would look a lot more like the economics of 70 or 80 years ago.

And for that it would be a lot more exciting, a lot more engaging, and a lot more interesting. I also think that economists would develop a healthy allergic reaction to doctrinal method, gatekeepers and taboos.

I’ll leave it there.

Please enjoy drinks and conversation. If anyone has any questions about the book I’d be more than happy to answer them. Thank you for coming and have a good time.

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To What Extent Is Economics an Ideology and to What Extent Is It a Useful Theory?

By Philip Pilkington, a macroeconomist working in asset management and author of the new book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory. The views expressed in this interview are not those of his employer

Ever since the Enlightenment many societies have moved away from justifying their existence and formulating their aims through recourse to religious language. Gone are the days of the ‘Great Chain of Being’ which justified the natural and social orders all the way from the plants and trees through the commoners, via the nobility and the King all the way up to God the creator. What replaced these ideologies were ideas about ‘Progress’ – how the good society was attained through Progress and what such Progress would look like. Progress, it was said, was to be grounded in the scientific method; what had worked so well to uncover natural processes could also be applied to engineer society.

It was in the 19th century, however, when the ideologies of Progress really began to blossom and flower. One was economics, of which we will have more to say about below. Another was phrenology. Phrenology was a science that claimed that a person’s character – including his capacities and his dispositions – were contained within his skull and could be determined by studying his skull carefully. Today few take this seriously – although many still recognise that phrenology was an early progenitor to so-called ‘neuroscience’. But throughout the 19thcentury these ideas were enormously popular – one popular English work sold more than 300,000 copies!

What made phrenology so popular was what also made economics so popular at the time: it gave a rationale for a society based on Progress and also provided a blueprint for how this could be achieved. The phrenological doctrine, being so vague in its pronouncements, was highly malleable and could be used to justify whatever those in power needed justifying. So, for example, in 19th century England phrenology was used to justify laissez faire economic policies by emphasising unequal natural capacities amongst the population while in early 20thcentury Belgian Rwanda it was used to justify the supposed superiority of the Tutsis over the Hutus.

In my book The Reformation in Economics I take the position that modern economics is more similar to phrenology than it is to, say, physics. This is not at all surprising as it grew up in the same era and out of remarkably similar ideas. But what is surprising is that this is not widely noticed today. What is most tragic, however, is that there is much in economics that can and should be salvaged. While these positive aspects of economics probably do not deserve the title of ‘science’ they at least provide us with a rational toolkit that can be used to improve political and economic governance in our societies.

The Ideology at the Heart of Modern Economics

The curious thing about modern economics is its almost complete insularity. Its proponents appear to have very little notion of how it applies to the real world. This is not the case in normal sciences. Take physics, for example. It is extremely clear how, say, the inverse squares law applies to experienced reality. In the case of gravitation, for example, the inverse squares law makes experimentally testable predictions about the force exerted by, say, the gravitational pull between the sun and the earth.

Modern economics – by which I mean neoclassical or marginalist economics which relies on the notion of utility-maximisation as its central pillar – completely lacks this capacity to map itself onto the real world. As philosophers of science like Hans Albert have pointed out, the theory of utility-maximisation rules out such mapping a priori, thus rendering the theory completely untestable. Since the theory is untestable it cannot be falsified and this allows economists to simply assume that it is true.

Once the theory is assumed to be true it can then be applied everywhere and anywhere in an entirely uncritical manner. Anything can then be interpreted in terms of utility-maximisation. This is most obvious in popular publications like Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. Such books read in an almost identical way to the fashionable books of 19th century phrenology. The economists address everything from parenting to crime to the Ku Klux Klan by filtering it through the non-experimental theory of utility-maximisation – a theory that has not and cannot be verified and so the author and reader alike take it entirely on trust.

Such systems of ideas are ideological to the core. They are cooked up independently of the evidence and are then imposed upon the material of experienced reality. We are encouraged to ‘read’ the world through the interpretive lens of economics – and when we ask for evidence that this lens uncovers factually accurate information we are confounded with circular arguments from the economists.

Large-scale public policy is also filtered through this lens. This is done by constraining the study of macroeconomics – that is, GDP growth, unemployment, inflation and so on – by tying it to the theories of utility-maximisation. All macroeconomics today must be ‘microfounded’. This means that it must have microeconomic – read: ‘utility-maximising’ – foundations. In reality, as I show in the book, these foundations are anything by ‘micro’. Rather, what is done is that the entire economy is seen to be dominated by a single uber-utility-maximiser and all the conclusions flow from there.

This may seem like odd stuff but it is built into the theory as a sort of foundational delusion. The arbitrary, non-empirical theory of utility-maximisation assumes primacy to all considerations of actual statistical facts, intuitions about human motivations and even basic assumptions about what should constitute a properly moral view of man. What we end up with is not just a crushing, anti-inquiry ideology but also a lumbering failure of a system of ideas that has no hope in extracting relevant information about the real world.

What Is To Be Done?

Is economics then to be thought of as a failure? Must we scrap economics and try to find other ways to describe and address our economic and political problems? In this regard, my book claims to lay out a new path – albeit one that has been intuitively followed by some economists, most notably those in the heterodox camp. This new path is based on two key interrelated premises.

The first is that we have little insight into what actually motivates human beings. For this reason theories that rest on assumptions about human motivation – like utility-maximisation – must be thrown out and the study of the economy must be undertaken by examining large economic aggregates. In short, micro must be tossed off the throne and the crown must be handed to macro. The second premise is that we must not be overly concerned with highly precise ‘models’ of the economy. Instead we must take what I have come to call a ‘schematic’ approach. A schematic approach involves building tools that can be integrated into how we understand the world around us without assuming that these tools provide us with an exact description of this world. This schematic toolkit – which I begin to lay out in the later chapters of the book – can then be used to approach the study of actual economies.

These may seem like rather simple rules. But when applied to economic theory they generate rather radical results. At the same time they greatly constrain the amount of wisdom that we can assume economists to have; given these premises no book like Freakonomics should ever be taken seriously and should probably even be written in the first place. In that sense, they may appear to militate against Enlightenment optimism. This may well be so, but I would argue that they are arrived at through rational Enlightenment-style inquiry and so should be taken seriously even by proponents of Enlightenment Progress. After all, phrenology eventually fell in the face of rationalistic criticism.

In the book some of the issues around uncertainty and free will are also explored. Implicit in some of the book’s central criticisms is that societies are not to be understood in a deterministic manner. Unlike billiard balls, social forces are not subject to deterministic laws. In one sense this is unfortunate as it means that our understandings of social and economic processes must always be of a contingent and not-too-precise nature. But on the other hand it is optimistic in the sense that it attributes an agency to human beings to create the world around them that mainstream marginalist economics stripped away by imposing the limited utility-maximiser framework on everyone from Mother Theresa to Hitler.

This also creates an opening for a proper discussion of ethics and morality. Although this is not dealt with directly in the book – it would surely require another ten volumes – the framework does reopen awkward questions surrounding morality and ethics. Some self-professed social scientists, nervous that these questions have been passed to us from the world religions, would prefer to do away with any moral and ethical questions. But this was always a fantasy – even the most hardened anti-ethicist, unless they are serving life for serial-killing, has a system by which they determine right from wrong.

All that I have said here is rather abstract. But a good portion of the book is not and I do not want to give that impression. It contains chapters that deal with inflation, profits, income distribution, income determination, financial markets, interest rates, investment and employment. It is not simply a book of methodology but rather one that tries to also provide the basic building blocks of a theory that can be applied to understand really-existing economies. In this sense, I hope that it is again more optimistic than many mainstream economics books that leave the reader without any capacity to apply the supposed ideas that they have absorbed by reading them beyond mere chest-puffing at dinner parties and moral condemnations of the social safety net.

 

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