The Current State of Macroeconomics

1) Against Friedman: Why Assumptions Matter by Unlearningecon @ Unlearning Economics

In my opinion, Friedman’s essay is incoherent even on its own terms. He does not define the word ‘assumption,’ and nor does he define the word ‘prediction.’ The incoherence of the essay can be seen in Friedman’s own examples of marginalist theories of the firm. Friedman uses his new found, supposedly evidence-driven methodology as grounds for rejecting early evidence against these theories. He is able to do this because he has not defined ‘prediction,’ and so can use it in whatever way suits his preordained conclusions. But Friedman does not even offer any testable predictions for marginalist theories of the firm. In fact, he doesn’t offer any testable predictions at all.

Friedman’s essay has economists occupying a strange methodological purgatory, where they seem unreceptive to both internal critiques of their theories, and their testable predictions. This follows directly from Friedman’s ambiguous position. My position, on the other hand, is that the use and abuse of assumptions is always something of a judgment call. Part of learning how to develop, inform and reject theories is having an eye for when your model, or another’s, has done the scientific equivalent of jumping the shark. Obviously, I believe this is the case with large areas of economics, but discussing that is beyond the scope of this post. Ultimately, economists have to change their stance on assumptions if heterodox schools have any chance of persuading them.

Woj’s Thoughts - This essay by Friedman, “The Methodology of Positive Economics,” marked the beginning of my PhD program and helped shape my views about mainstream economics. Despite our (Unlearning Econ and mine) very different backgrounds, as usual, I came to a very similar conclusion:

Friedman sets out on the difficult task of developing a positive economics with normative implications. While his efforts to prove that a hypothesis must not be judged solely by the realistic nature of its assumptions were valiant, this strength of his paper has been largely overlooked. Instead, Friedman’s normative views regarding determination of a theory’s validity, choosing among competing valid hypotheses and application to specific circumstances have indoctrinated economists with a means to defend orthodox, mainstream economics from all criticism.

2) The State of the Economic Union by Dan Kervick @ New Economic Perspectives

The Most Urgent Problems We Face

2. Working People and Capital Moving in Opposite Directions

• Corporate profits are up 36% since January 2008, and up 200% since January 2001.
• The share of national income going to working people has fallen 6.2% since January 2008, and 11.2 % since January 2001.
• For the bottom fifth of wage earners, the number of annual hours worked increased by 22% between 1979 and 2007, but real hourly wages increased by only 7.7%.  For the period between 2000 and 2007, real wages in this group actually fell by 3.2%

3. An Unstable Financial Economy

• Although household debt has declined since the peak of the recession, it remains very high by historic standards.  Total household credit market liabilities as a share of GDP are now over 81%.  This compares to 43% in 1970, 49% in 1980, 60% in 1990, and 67% in 2000.
• The financial sector remains dangerously large, and growing, with an 8.4% share of GDP – bigger than it was just before the recession.  The US financial industry now accounts for 30% of all domestic corporate profits.
• The total outstanding debt of the domestic financial sector is over 87%, down from 107% at the beginning of 2007, but still much higher than in January 2000 (80%), January 1990 (44%) and January 1980 (19%).

4. Socioeconomic Inequality

• The after tax income of the top 1% of households, adjusted for inflation, has risen by about 130% since 1967.  The income of the next 20% has risen by 28%.  The incomes of all other income groups have fallen.
• The richest 1% of Americans control 34.6% of Americans’ net worth.  The bottom 90% control 26.9% of net worth.

Woj’s Thoughts - Dan lays out seven different problems that currently plague America, of which three are listed above. These specific selections were chosen because I personally found them most compelling, as presented, not to imply they’re the most important. Dan also presents five immediate actions the federal government could take to address these issues. I don’t necessarily support all of the proposals but they represent a good starting point for debating how to best turn the economy around.