Inequity and Hierarchy

“When we feel a lack of personal control, we compensate by looking for order or predictability in our environment.  So we desire and perceive governments and gods to be particularly powerful.  Those who suffer inequity often even defend the social system responsible, rather than accept that life has been unjust.” 

Based on Friesen and Kay as reported in NYT 22 June 2013

Case in point, the popularity of Putin in Russia and popular working class support for the Republicans who are anti-labor in US.

Recession in Europe.

The European Central Bank is  hopelessly confused and not doing its job.  Germany lost WW II, but is now wreaking havoc  on the rest of Europe worse than a Panzer division.  Here is their lame excuse as reported by the New York Times.

     "But despite his pledge at that time to do ‘'whatever it takes'’ to save the euro, Mr. Draghi does not appear willing to risk an outcry in Germany by throwing out the rule book altogether. And he must contend with the European Central Bank’s 23-member Governing Council, which includes the heads of all 17 national central banks in the euro zone.

“There are 17 governors of 17 member states with completely opposing views,” said Zsolt Darvas, a research fellow at Bruegel, a research organization in Brussels. “There are major disagreements. Probably they try to err less by being more cautious rather than being more aggressive.”

In addition, Mr. Darvas said, the European Union lacks a central treasury that would stand ready to provide financial backup if central bank investments went wrong, as the United States Treasury implicitly backs the Fed."

    This is myth and superstition at its worst.  A central bank can't go broke as it can always create more money if the previous creations don't work.. Try, try again until you get it right. If these bankers had a family out of work and unable to buy the necessities of life, it would not cling to this outmoded policy.

Culture and the Economy

It is not possible to understand the economy without understanding the culture that lies behind it. Below are some key facts:

1. The traditonal pension plan is disappearing. In 1980, 39 percent of private-sector workers had a guaranteed income for retirement. Today it is 15 percent.
2. Many retirees banked on their homes for retiremen funds. But, a decline of around one-third in housing prices has altered that. Around 20 percent of homeowners owe more on their mortgages than their home is worth.
3. The personal savings rate averaged around 10 percent in the 1970s-1980s. But, by 2007, the rate dropped to negative.
4. About three-quarters of people file for Social Security as soon as they are eligible at 62. Early retirement means that people after 62 have no work income out of which more savings could be set aside. Yet, these are the years when income is the greatest making savings easier.
We have a culture of living it up now, and the devel take the hindmost. No wonder that we have a lot of grouchy seniors who want to blame government taxes and spending for their troubles.

Nobel Prize 2010

Peter Diamond and two others were awarded the Nobel Prize for finding that “Most real-world transactions involve various forms of impediments to trade or ‘frictions.’” I thought we already knew that. The Swedish Academy notes that “The question of why unemployment exists and what can and should be done about it is one of the most central issues in economics. Labor markets do not appear to ‘clear’: there are jobless workers who search for work (unemployment) and firms that look for workers (vacancies). It has proven a challenge to formulate a fully specified equilibrium model that generates both unemployment and vacancies.”
The millions of unemployed today must be very grateful that this model has been created! Frictional unemployment is certainly not the problem of today. Diamond is applauded for showing that with friction the only equilibrium is the monopoly price. A surprising finding according to the Academy. This is the conventional plaything of conventional economics--all our problems are due to inefficiencies. Diamond “found” that some workers create externalities for other workers by searching too hard--shame on them!
The Academy notes that optimal search behavior involves a reservation wage, at which a worker is indifferent between accepting a job and remaining unemployed. “The reservation wage is thus set so as to equate the value of unemployment, whose immediate return is any unemployment benefit the worker receives, to the resent discounted value of future wage incomes from the job, which involves the likelihood of keeping the job, the interest rate by which the future earnings are discounted, and any expected wage movements on the job.” I’m sure the unemployed will be glad to learn that this is what they are doing. Why is it that many models turn out to blame the worker for their problems and/or the government being too generous with unemployment benefits?
I would give a prize to anyone with insight into labor markets with fluctuating demand for consumer goods. To do this would require economists to get out of their armchairs and talk to people, both labor and management. Have these people ever visited a state unemployment office with its lines of people looking for work or long lines at any employer advertising hires. Then they might truly discover (not deduce) how expectations work and vicious cycles of lower consumer demand leading to laying off workers, to further decline in income and consumer demand. It is time to study institutions and behavior and quit worrying about blackboard mechanical equilibrium models. These models don’t “find” anything, but are just inevitable deductions from the framework used to create them.

Krugman, Institutional Economist

Congratulations to Paul Krugman, another institutional economist to win the Nobel Prize. Why do I say he is an institutionalist? Because his theory is built around economies of scale, that is a key concept in institutional economics.
Standard theory is not comfortable with economies of scale as it conflicts with equilibrium concepts so cherished by the old school. The advantages of countries with econ of scale over smaller economies has no equilibrium, but just evolves.
The information for the public sent out by the Nobel committee tries to soft-pedal the lack of equilibrium by referring to "the basic mechanism specified by Krugman ..." The mechanical metaphor is not apt. At one point the notice states, "Real wages and the supply of goods will then continue to increase even more in that country (the one with econ. of scale), thereby giving rise to further migration, and so on." "and so on" is not an equilibrium concept. You need an evolutionary theory, and that is what institutional economics provides.
Thank you, Paul, there is hope for economics.