Wednesday, 28 May 2014

Spinning from the CORE

What have the CORE steering group and the ISIPE student letter got in common? The short answer: nothing.

If you scan the list of supporters (last scan, 5th October 2014) you find that not a single steering group member has publicly supported the ISIPE call for 'a more open, diverse and pluralist economics'. Some of us have received private messages of support, but it would be fantastic if someone like Diane Coyle (chair of the steering group and acting chairman of the BBC trust) or Eric Pentecost (chair of the Royal Economic Society's CHUDE committee) were to sign the letter.

Especially when 'CORE in the news' includes ISIPE press coverage with the phrase 'we try to link to all the mentions of the CORE project in the media'. Anyone would think this was the 'citation cartel' and 'invisible college' that Victoria Chick referred to at the Post-Crash Manchester fringe event.

Outside of CORE, a growing body of voices are stating publicly that the CORE curriculum is too narrow. Kate Raworth wrote on her blog that:

'CORE’s twenty modules are works in progress...but to be honest I don’t feel it bodes well... it’s only when we reach Module 17 that we learn about ‘The economy of the Earth’... and in the outline of the whole curriculum there doesn’t appear to be any room to discuss whether or not unlimited economic growth is theoretically, technically or socially possible".

Hugh Goodacre wrote in the FT that:

'Far from introducing a wider range of viewpoints, [CORE] excludes any method or theory other than the same old simplistic platitudes about equilibrium and disequilibrium and all the rest of it. It aims to justify to first-year students the fact that their further curriculum will centre overwhelmingly on mathematical models constructed on that basis, and far from welcoming student discussion in its formulation, consultation on the course by students and dissenting staff was rigorously denied'

Ha-Joon Chang and Jonathan Aldred, writing in support of the student campaign in the Observer, point out that 'in Cambridge, like every other elite university, the undergraduate economics curriculum has remained almost the same'.

These comments suggest little has changed since this survey of undergraduate economics programmes published in 2012. The original INET UK Economics Curriculum Committee, led by Lord Skidelsky, found that courses in microeconomics emphasised theory and mathematics; macro courses relied heavily on New Classical thought; and only two out of twelve universities discussed economics from a qualitative perspective such as history of economic thought, economic history and philosophy of economics.

Why are there still so many dissenting voices? It has been suggested in a Reuters Blog that students 'underestimate the scale of the intellectual scandal'. Looking at the press coverage, it seems the campaign also underestimates the scale of the intellectual spin. As Imre Lakatos might put it, the CORE has a  'protective belt' or positive heuristic which is more flexible and 'forges ahead with almost complete disregard of 'refutations' (Lakatos, 1980: p51).

Wednesday, 9 April 2014

Campaigning for the long-run at the Post-Crash fringe

The fantastic Post-Crash Manchester held a fringe event to the Royal Economic Society (RES) conference. What better than a discussion between Victoria Chick and Diane Coyle? We heard their very different views on pluralism, on the openness of the RES and other institutional barriers to change.

For Diane Coyle, the problems are a 'gap' between between research and the curriculum, and a 'gap' in public understanding. While she accepts that some economists in the US might simply 'add a little bit of financial friction in DSGE models' she thinks it is a mistake to say that UK economics is monolithic.  Her vision of a pluralist curriculum was one motivated by questions and evidence, where history matters, economies are dynamic and we do not have a grand, unified theory that works in all contexts.

For Victoria Chick, the 'castle had been captured' by a scientific model, a 'mechanical elephant' that replaced dialogue between schools. Yet discussing the source of our differences, like the Sufi elephant in the parable, is much more informative. Economists used to agree to differ, and tell their own stories, but we learn less that way and 'the last thing we want to do is bicker and be indecisive'. Victoria said the same principles apply today between heterodox and mainstream economists.

In the workshop sessions, we had already swapped stories about barriers to change. Economics students at LSE take the very good LSE 100 course which asks big questions such as 'how should we manage climate change?' using 'different approaches to evidence, explanation and theory' from across the social sciences, but there are no credits awarded. At Glasgow, a six-week Post-Keynesian course by Alberto Paloni was being supported by undergraduate teachers. At Manchester, the heterodox economist who taught their 'Bubble, Panics and Crashes' course was on a temporary contract and 'let go' when the course was dropped. These are real barriers, with long-term impacts on those involved.

The audience questions about institutional barriers brought very different responses. Diane had already suggested that 'you only get one chance at this' because under the research excellence framework (REF) funding goes towards research, not teaching: she did not know how students could change the REF. Diane also disagreed that the direction of change at Manchester was too narrow, and thought that the RES was 'absolutely open to debate'. Victoria, on the other hand, found these institutional factors to be 'very problematic' with the general impression that the RES did not want to create space for discussion, a 'citation cartel' in economics and an 'invisible college'.

Diana had asked the meeting to 'appreciate efforts to reach out and help when it is there', yet I was left with the sense that other schools are being used but not recognised. If promotion depends on citation levels, yet you were not cited during the era of the 'mechanical elephant', you have already left the profession. Addressing this goes beyond research ethics, much as the RES could learn from the AEA. It requires recognition of key contributions despite their publication in heterodox journals. That requires discussion, humility and intellectual honesty. The system for promoting academics needs to be more flexible, and to reward and encourage innovative research and teaching.  For many in the room, these are campaigns that have, and will continue to take, a lifetime.

Saturday, 4 January 2014

Avoiding bubbles with pooled funds

There's a simple formula which shows how a speculative bubble can grow. With present value (P) and a positive rate of return (r) to time (t) the value of the annuity (A) rises exponentially:

With a negative return the bubble tends towards zero. Since balance sheets have both assets and liabilities, there are four possible bubbles and anti-bubbles:

Financial Crisis Observatory (2013)

There are much richer mathematical possibilities to represent a return series, such as braid groups; the problem here is not so much the representation as the fact that there are bubbles. The uncertainty could be managed by simply pooling the tail risks, for assets and liabilities. The short-term characteristics are less susceptible to expectations, measurement errors and variance in the rate of return. Only as the future unravels do the long-term characteristics reveal themselves. The pooling of tail risks is a common insurance strategy and, when there is market failure, unravelling these long-term characteristics falls on governments and central banks.

Imagine, instead, if financial asset and liabilities were split into short-term and long-term annuities: the short-term being held privately, and the long-term being owned by a pooled or government fund. With an increase in the general level of risk, such as unmitigated climate change, the value of the long-term pooled fund would fall. With effective mitigation, the value of the long-term pooled fund would rise. If time (n) represents the length of the short-term annuity, the value of the long-term pooled fund to time (t) is approximately:

That gives the government or pooled fund a present value to assess risk mitigation projects. If the assets are firms or buildings at risk from climate change, the impact on the long-term value is what matters. Here, there is certainly scope for better maths and better estimates of the risks. Within this pooled fund we already have the tail risks for climate change, and assets that are absent from the national accounts: oceans, forests, air and water.

Whether or not private markets function at these longer maturities is highly unlikely. Poverty and high-risks are indistinguishable, because both are a preference for cash today. Long-term estimates for natural assets are heavily contested, such as the industry figures for carbon. There is no obvious private incentive to mitigate tail risks, except perhaps in a well-regulated and mandatory insurance market. Mitigation projects would convert an uncertain stream of insurance cash flows into a fixed sum: the higher value of the long-term annuity less the project cost. However, few (if any) firms and households insure events beyond next year, let alone beyond their lifetime.

So while pooling tail risks would seem to avoid the excesses of asset and liability bubbles, the quadruple problems of poverty, under-insurance, valuation errors and the government as an 'insurer of last resort' remain. There is no incentive for private interests to deal with tail risks. No-one will join a pooled fund today when they think they have the winning lottery ticket tomorrow. The politics will fail as long as the majority believe they are one step ahead of environmental and financial risks.

Financial Crisis Observatory. (2013). Financial Bubble Experiment. Available at:

Saturday, 7 December 2013

How to start a crypto-bank run

First published 7th December 2013
Updated 7th December 2017

A friend who is a crypto-currency evangelist gave me a Bitcoin a few years ago, which I jokingly accepted as a 'store of value'. When I heard, in 2013, that China was banning direct trade in Bitcoins, I suggested my friend cashed in on the basis it was a bubble*. He didn't. For a while I rolled the crypto-dice: my gains were enough to pay for a decent family Xmas that year but there was a run on Bitcoin after the China ban and, since then, some of the crypto-currency I was gifted has been seized by the US Secret Service.

I find it difficult to believe there is a 'natural price' or that 'par' will emerge from this chaos: I think insiders will profit and outsiders will lose. To exchange Bitcoin for cash I paid FOUR sets of fees: a percentage to the trading platform; a fixed spread to the settlement platform; an exchange rate fee from USD to GBP; and a transfer fee to a 'recognised' UK holder of GBP: total fees were over 10%.

Crypto-currencies have seen the most unexpected people jump into bed together: drug dealers, geeks, crypto-anarchists and libertarians. On the left, their anger is directed at private interests; on the right, it is directed at government.  But crypto-currencies look like Wildcat banking to me, with an unregulated network of international crypto-exchanges that will collectively run out of liquidity during a crash. Derivative exchanges also come and go. Until the next liquidity crunch, like any Ponzi scheme, crypto-currencies will lure new buyers with their illusion of profits. 

Without anyone to uphold 'par', the most obvious lesson is to have stronger regulation of the exchanges. This 2017 tweet sums it up perfectly:


* This post on Bitcoins makes a good point about their self-reinforcing nature. The basic foodstuff of crypto-banks is the Bitcoin. If derivatives are settled in Bitcoin, and crypto-banks and firms are bought and sold in Bitcoins, their scarcity drives up the price and perpetuates the bubble.

Wednesday, 20 November 2013

Are there policy alternatives to Ireland's austerity?

This is a response to the PKSG presentation by Stephen Kinsella on 19th November 2013.

In essence, the stock-flow-consistent approach is ‘to a very large extent an exercise in accountancy – or perhaps logic is a more congenial word’ (Godley, 1983). The paper by Stephen Kinsella extends this approach with a five sector model, estimated using OLS. Applying different spending and tax shocks, he concludes that Ireland's austerity could have been less severe.

Leading into the crisis, Ireland was running small government and current account surpluses. As expected under the 'New Cambridge hypothesis', the private sector ran a deficit. Unfortunately, this was due to investment in property rather than production. Remarkably, the assets and liabilities of the banking sector doubled between 2005 and 2008. 

Then, the Irish economy saw major shifts in the composition and direction of capital flows after 2008. Households became net savers, the foreign sector moved deposits our of Ireland and shifted to investment in equity. These effects are dwarfed, however, by government which, in the form of an IMF bridging loan, bailed out the financial sector (purple and red):

The 'run on deposits' followed the sale of Merrill Lynch to the Bank of America, on the same weekend in 2008 that Lehman Brothers collapsed. If the Federal Reserve had not prevented the collapse of AIG and Merrill had been left to fail, the story would be different: Bank of America is still being pursued by AIG for alleged fraud at Merrill. With the subsequent deleveraging, Irish banks are reporting costs higher than income and Merill looks the most fragile:

So while the paper recommends less austerity, the banking sector remains a risk for the Irish government. Yet fiscal policy is hemmed in by budget rules from the European Commission. The Treat of Maastricht requires that the government runs a deficit of no more than -3%, while the European Commission Alert Mechanism Report asks for a current account balance between -4% and +6%. Ireland has missed these targets every year since 2006:

The trajectory, above, suggests some uncertainty that Ireland will reach the green (private sector surplus) or red (private sector deficit) triangles (government deficit less than 3%, and a current account balance between -4% and +6%).

While the SFC model in the paper fits the data very well, like any SFC model it might be further disaggregated: in particular the treatment of shadow banking (ie: leverage); the derivatives book and the effects of currency and duration mismatch. Of course, such data are not readily available. Household spending might also be impacted by wealth, with realised and unrealised capital gains affecting behaviour to varying degrees: Minsky's hedging, speculative and Ponzi modes of financing. Ireland's low corporation taxes also encourage profit retention via foreign investment.

There are other policy alternatives for Ireland: having symmetrical rules for government budgets at the EU;allowing fiscal transfers from 'core' to 'periphery'; and similar mechanisms such that surplus countries pay towards adjustment costs. So as well as the risks from a weak household sector under austerity, there is a risk that foreign capital will dry up or reverse due to tax treaties or tax harmonization being imposed at the EU level. Not that there are many calls for this in Ireland. As Stephen put it succinctly: 'turkeys don't vote for Christmas'.

Wynne Godley (1983), Personal correspondence with J.K. Galbraith

Tuesday, 12 November 2013

India's 'liquidity call'

What is the Reserve Bank of India up to?  On Perry Mehrlings MOOC on the 'Economics of Money and Banking', the students are (quite rightly) asking why interest rates were rising. So while the Fed, ECB, Band of Japan and Bank of England continue with their 'liquidity put' to the international banking system, the Reserve Bank of India is doing the opposite: a 'liquidity call'. I'm hopeful that Perry might weave a few 'liquidity calls' into his own discussions of high interest rate economies.

As the next graph shows, it's not as if inflation was rising prior to the rate hikes in February 2012. Rather, the hike was a response to the fall in the Rupee that began, in earnest, around August 2011 when inflation was actually falling:

There are indications that the Reserve Bank of India was fixating on inflation targeting in a speech by Dr. Subir Gokarn, a Deputy Governor in June 2011: 'ultimately, inflation outcomes will determine the monetary stance' (Gokarn, 2011, p. 2). As soon as the 'liquidity call' was made, there were profits to those who could second guess the timing and impact.

Another speech in February of that year set the scene for foreign investors. The Reserve Bank of India saw 'gross capital flows contribut(ing) immensely to diffusion of technology and international knowledge flows' (Gopinath, 2011, p. 1) and was keen to avoid 'the "original sin" of excessive foreign currency borrowings by domestic entities' (Gopinath, 2011, p. 6). In other words, India was clamping down on domestic entities borrowing abroad, opening up to foreign institutional investment and seeing the way forward as 'continuing liberalisation' (Gopinath, 2011, p. 14).

The problem is that inflation did not fall. Rather, asset prices rose. The Indian stock market 'hit a record high, propelled by an increased inflow of foreign capital' (BBC, 2013). The rather stubborn inflation suggests  that firms are able to mark up their prices and pass on their financing costs to consumers' along with higher commodity costs. That sounds more like a supply problem.

One of the business school cases we teach is that India needs more investment, not chasing asset prices but investing in the supply chain. Gopanith is right that the world benefits from the flow of international knowledge and technology, but must this must go hand-in-hand with financial flows?  The 'cold chain' case that we teach was researched at the India Development Foundation in Mumbai and the Indian Institute of Technology in Delhi: domestically-produced knowledge. These researchers find that 'international trade could be a powerful engine of agribusiness growth in the future.... India could be a sourcing hub for products such as rice, organic produce and food products such as ready to eat meals' (Khan, 2005, p. 13) if only there were investment in logistics, transport and refrigeration. As it stands 'around 35 percent to 40 percent of the total production of fresh fruits and vegetables, is wasted in India, which is about the total production of the Great Britain' (Joshi et al, 2013, p. 1263).

This is a problems with under-investment.  Joshi et al. suggest several solutions: an industrial policy that supports industry players to upgrade infrastructure; the domestic use of refrigerated shipping containers; a reduction in excise duty on processed food; better internet and mobile connections; and greater assurance about the safety and quality of food.

By raising interest rates, the central bank is stifling real investment at a critical moment for India.

BBC (2013),Indian stock market hits record high. Available at
Gokarn, S. (2011), Striking the Balance between Growth and Inflation in India, CII and Brookings Institution, Washington DC. Available at
Gopinath, S. (2011), Approach to Capital Account Management - Shifting Contours, Annual Conference of the Foreign Exchange Dealers’ Association of India (FEDAI), Thimpu. Available at:
Joshi, R., Banwet, D.K. and Shankar, R. (2009), Indian cold chain: modeling the inhibitors, British Food Journal, 111 (11),  pp. 1260 - 1283. Available at
Khan, A.U. (2005), The domestic food market: is India ready for food processing?, Conference
Proceedings, Pune: India. Available at:

Monday, 4 November 2013

Mathematics for New Economic Thinking

Last week, INET and the Fields Institute brought together economists and mathematicians in Toronto. The results were certainly interesting... with several economists paying their homage to Wynne Godley, including Stephanie Kelton, Marc Lavoie, Peter Skott and Randall Wray. It was interesting to see these economists play the same stage. Some speakers felt that bad economics had tainted mathematics: fewer believed the reverse.

I am drawn to Wynne Godley’s models: at least, those versions influenced by Minsky. Naively, perhaps, I was hoping that a new paradigm would emerge from the ashes of the 2008 crisis. Far from it... put two economists together and you get more than two theories... like politics, economics is messy and confrontational. At this conference, the data were sometimes assumed and the theories were more often debated.

There were some contrarians. Perry Mehrling made an eloquent plea for better data on the stocks and flows, something that would surely reinvigorate deductive and descriptive economics. Alan Kirman called for models that explain crises and inequality, rather than such awkward complications being exogenous. The questions were direct: what if the far right interpret MMT as a reason for states to abandon the Euro or, even, their credible commitment? As I write this, I wonder about the symmetry to Perry’s liquidity put at the Fed: countries, like India, where the central bank has placed a liquidity call and speculators are making ‘carry trade’ profits.

There was even a model that confirmed Keynes’ insight that 'there is no limit to the amount of bank-money which the banks can safely create, provided that they move forward in step' (John Maynard Keynes, 1930) . Sometimes, this emphasis on banking left me wondering if the model had lost sight of the instability… with banking assets taking precedence in crises and equity holders absorbing the losses. Stability is not destabilizing, if you have a central bank behind you.

Of the more empirical papers, Didier Sornette gave an excellent presentation that showed few bubbles are preceded by volatility. The relatively simple maths suggested that leasehold assets have a safety valve built-in. Yet the politics are very different if the leaseholder is the Duke of Westminster, or the Chinese government. Either way, if you were to 'deflate the bubble’ by playing with the terms of the lease would you simply turn a financial bubble into political turmoil?

Sadly, not every presenter showed their love of math as simply as Edward Frenkel had the week before. Some of the pleas seemed unnecessary... why would I want to calculate inflation using dynamic field theory? My love, and hatred, of math is because numbers are also social... we irrationally fear Friday 13th, and in the UK we stick doggedly to the penny long after it has any monetary value.

As Matheus Grasselli told me, so eloquently, the Plano Real was essentially social and synthetic, but was able to calm hyperinflation in Brazil by giving an alternative unit of account. Sometimes the simplest maths can improve lives.