Monthly Archives: May 2017

What Is Equilibrium?

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The new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute, surveying the literature on stock-flow consistent models has a discussion on the concept of equilibrium:

In the short run, “equilibrium” is reached through price adjustments in financial markets, while output adjustments guarantee that overall saving is equal to investment. However, such “equilibrium” is not a state of rest, since the expectations that drive expenditure and portfolio decisions may not be fulfilled, and/or the end-of-period level for at least one stock in the economy is not at its target level, so that such discrepancies influence decisions in the next period.

In theoretical SFC models, the long-run equilibrium is defined as the state where the stock-flow ratios are stable. In other words, the stocks and the flows grow at the same rate. The system converges towards that equilibrium with a sequence of short-run equilibria, and thus follows the Kaleckian dictum that “the long-run trend is but a slowly changing component of a chain of short-run situations; it has no independent entity” (Kalecki 1971: 165). The adjustment takes place because stocks and stock-flow ratios are relevant for the decisions of the agents of the economy. If stocks did not feed back into flows, the model may generate ever-increasing (or decreasing) stock-flow ratios: a result that might be stock-flow consistent, but at the same time unendurable. The convergence towards the long-run equilibrium also depends on more conventional hypotheses regarding the parameters of the model.

So equilibrium is a state where stock-flow ratios are stable.

Of course equilibrium just means that and doesn’t automatically translate to full employment, for example. One can imagine stock-flow ratios such as public debt/gdp, private debt/gdp may converge to some level such as 80%, 50% respectively but with unemployment at, say, 5%.

Also, it’s worth mentioning—especially in open economies—there is in general no automatic/market mechanism which guarantees that stock-flow norms are converging to some stable ratios.

Let me offer an alternative viewpoint for the short run.

In the short run, there’s really no concept of equilibrium because there is no heavenly Walrasian auctioneer in most markets. As pointed out by Nicholas Kaldor, there are dealers who are both buyers and sellers simultaneously. Dealers quote bid/ask prices and the quantities they are willing to buy or sell. Since there is a mismatch in demand and supply of “outside buyers” and “outside sellers”, dealers accumulate inventories or stocks. Dealers make a business out of the bid-ask spread. In non-financial markets, the terminology is slightly different. You won’t find a board with bid/ask prices at a car dealer, but the concept is similar. Here even the producer has inventories in the goods market. In the services market, whatever is demanded is supplied (or put in queue or refused if capacity is reached).

So there’s no equilibrium to be reached in the short-run. It’s always in disequilibrium. Sometimes neoclassical authors make it look like accounting identities are violated in disequilibrium and satisfied in equilibrium arranged by the Walrasian auctioneer. But in SFC models, it’s illogical to have such a thing. Accounting identities must always be respected. At all times, between all time periods, even infinitesimally small.

In real life, especially because of complications of the open economy, there is no such thing as an equilibrium or a tendency to move toward any equilibrium via market forces.

Still, the concept of equilibrium is useful even in SFC models. One can start with a state with a stable stock-flow ratios and then study what happens if some parameter or some exogenous variable is changed or a set of them are changed simultaneously. The dynamics may or may not reach equilibrium in the long run but we can study what happens in the traverse.

Noam Chomsky On His New Book, Neoliberalism And More In An Interview With Amy Goodman

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Recently, Amy Goodman of Democracy Now interviewed Noam Chomsky with an audience at Cambridge, Massachusetts. Chomsky has a new book, Requiem For The American Dream: The 10 Principles Of Concentration Of Wealth & Power.

The ten principles are:

  1. Reducing democracy
  2. Shaping ideology
  3. Redesigning the economy
  4. Shift the burden on the poor and the middle classes
  5. Attack the solidarity of the people
  6. Let special interests run the regulators
  7. Engineer election results
  8. Use fear and power of the state to keep the rabble in line
  9. Manufacture consent
  10. Marginalize the population

I loved the line about neoliberalism:

So, the neoliberal programs were basically taking off right around 1980. It escalated—started a little with the late Carter, escalated under Reagan, went on more under Clinton and so on. 2007 was the peak of supposed success. This is right before the crash. A lot of euphoria among economists, political analysts about the great achievements of neoclassical economics, of the great moderation, you know, the neoliberal programs, a dismantling of regulations—all these great successes, 2007. What was happening to American working people at that time? In 2007, wages, real wages, were lower than they had been in 1979 when the experiment took off. In fact, for the majority of the population, it’s a period of stagnation or decline. Benefits have declined.

You can read more on the same from the transcript in the website or see the video.

Jeremy Spoke In Class Today

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King Jeremy the wicked 🤩

Jeremy Corbyn spoke today in central London about the Manchester attack and Labour’s plan for addressing terrorism.

In this brilliant speech, Corbyn talks about how the West’s foreign policy is responsible for terrorism. Corbyn said:

Many experts, including professionals in our intelligence and security services have pointed to the connections between wars our government has supported or fought in other countries, such as Libya, and terrorism here at home.

That assessment in no way reduces the guilt of those who attack our children. Those terrorists will forever be reviled and implacably held to account for their actions.

But an informed understanding of the causes of terrorism is an essential part of an effective response that will protect the security of our people, that fights rather than fuels terrorism.

Protecting this country requires us to be both strong against terrorism and strong against the causes of terrorism. The blame is with the terrorists, but if we are to protect our people we must be honest about what threatens our security.

The transcript is on Labour’s website. You can see the full video on Jeremy Corbyn’s Facebook page.

Among the world leaders, Jeremy Corbyn is one of the few to say this. Nobody is ready to admit that the West’s intervention in the Middle East has led to so many problems for the world and has been counterproductive to say the least.

If you’ve missed my previous post, you can check for a link of a discussion featuring Edward Snowden, Glenn Greenwald and Noam Chomsky on this. Another great writing is by John Schwarz of The Intercept, on the denial about the United States’ government’s role in the world, written earlier this year.

A good analysis of Manchester is by Max Blumenthal for Alternet, here. In that he shows how the Libyan intervention led to a rise in jihadism which had close connection to the Manchester suicide bombing.

Of course, none of this doesn’t mean that this is the only factor responsible for global terrorism. But via deceit, western governments and the media has prevented this main reason from being discussed. It’s good that Jeremy Corbyn has pushed this in public debates.

Some Interesting Links On Politics

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John Pilger recently wrote an excellent article, Getting Julian Assange: An Untold Story, about Julian Assange on his website. The article was endorsed by Assange himself on Twitter. It tells the story about how Julian Assange has been made a political prisoner. The article was written in response to the closing of an investigation against him by Sweden. Although this is positive, the United Kingdom police has declared that it will still arrest Assange if he steps out of the Ecuadorian embassy in London.

Chelsea Manning was released from prison on May 17, after Barack Obama reduced her punishment. Glenn Greenwald put up a fantastic article on The Intercept telling us how she is one of the biggest heroes of our generation. Greenwald says:

Ever since Chelsea Manning was revealed as the whistleblower responsible for one of the most important journalistic archives in history, her heroism has been manifest. She was the classic leaker of conscience, someone who went at the age of 20 to fight in the Iraq War believing it was noble, only to discover the dark reality not only of that war but of the U.S. government’s actions in the world generally: war crimes, indiscriminate slaughter, complicity with high-level official corruption, and systematic deceit of the public.

The recent terrorist attack in Manchester has again raised the question about what the root causes of terrorism are. There was a conversation last year between Edward Snowden, Noam Chomsky and Glenn Greenwald on this. The discussion—although titled, A Discussion On Privacy—has an interesting digression on terrorism. The YouTube video with the link to that part of the discussion is here. It’s far from the lazy explanation usually given, i.e., religion.

Link

Stock-Flow Consistent Models: A Survey

There’s a new paper by Gennaro Zezza and Michalis Nikiforos for the Levy Institute.

Abstract:

The stock-flow consistent (SFC) modeling approach, grounded in the pioneering work of Wynne Godley and James Tobin in the 1970s, has been adopted by a growing number of researchers in macroeconomics, especially after the publication of Godley and Lavoie (2007), which provided a general framework for the analysis of whole economic systems, and the recognition that macroeconomic models integrating real markets with flow-of-funds analysis had been particularly successful in predicting the Great Recession of 2007–9. We introduce the general features of the SFC approach for a closed economy, showing how the core model has been extended to address issues such as financialization and income distribution. We next discuss the implications of the approach for models of open economies and compare the methodologies adopted in developing SFC empirical models for whole countries. We review the contributions where the SFC approach is being adopted as the macroeconomic closure of microeconomic agent-based models, and how the SFC approach is at the core of new research in ecological macroeconomics. Finally, we discuss the appropriateness of the name “stock-flow consistent” for the class of models we survey.

[The title is the link]