NOTE: Before proceeding with Keynes (see P9: Theory of Employment), I would like to clarify the issue of exogeneity and endogeneity, which he understands, but most of his followers failed to understand. Meanwhile, I am engaged in teaching microeconomics, and I plan to do a critique of Varian’s Intermediate Microeconomics. This post starts at the beginning of Chapter 1 of this book.

Varian: Intermediate Microeconomics. Chapter 1:

Varian starts out by constructing a model for understanding the prices of apartments. We create a model by simplifying the world that we see, to highlight those ASPECTS that WE THINK ARE EXTREMELY IMPORTANT. At the same time, we SUPPRESS elements that we think do not matter. This decision, what we choose to model, and what we choose to ignore, is of extreme importance, but completely hidden from view. For example, suppose we believe (as I do) that human welfare is strongly dependent on communities in which humans live. Then in studying housing, I would keep the impacts of housing choices on communities as a crucial variable which we must model. Then I would be looking at groups of people living together in nearby houses as a community. However, these issues would be completely ignored by people who believe in individualism, where everyone leads isolated  and lonely lives independently of any community. There is a strong element of subjectivity and hidden social norms in the process of modeling, carried out under the pretense of objectivity.

We will think of the apartments as being located in two large rings surrounding the University. The adjacent apartments are in the inner ring, while the rest are located in the outer ring. We will focus exclusively on the market for apartments in the inner ring. The outer ring should be interpreted as where people can go who don’t find one of the closer apartments. We’ll suppose that there are many apartments available in the outer ring, and their price is fixed at some known level. We’ll be concerned solely with the determination of the price of the inner-ring apartments and who gets to live there.

There are two rings – why? The outer ring accommodates those people who cannot find an apartment within the market we will study.  This is a PARTIAL EQUILIBRIUM model – that is we study one aspect in isolation, without worrying about what happens outside this model .

An economist would describe the distinction between the prices of the two kinds of apartments in this model by saying that the price of the outer-ring apartments is an exogenous variable, while the price of the inner-ring apartments is an endogenous variable. This means that the price of the outer-ring apartments is taken as determined by factors not discussed in this particular model, while the price of the inner-ring apartments is determined by forces described in the model.

“the price of outer ring apartments is determined by factors not discussed in this model.” This is an OSTRICH definition of exogeneity. It means that we can make variable exogenous by not discussing them.  An exogenous variable MUST NOT BE INFLUENCED by endogenous variables. This is not mentioned in the definition above, because exogeneity concepts are not well understood by most economists. To ensure that a variable is exogenous, it is necessary to prove that there are no feedback loops:


But what determines this price? What determines who will live in the inner-ring apartments and who will live farther out? What can be said about the desirability of different economic mechanisms for allocating apartments? What concepts can we use to judge the merit of different assignments of apartments to individuals? These are all questions that we want our model to address

Note that judgement of merit automatically involves NORMATIVE judgments. Also, the mechanisms under discussion are based on social norms which legitimize certain concepts of private property, implicitly, in background, and without discussion. These norms are then taken as objective facts. The questions that the model is used to study is PARTLY a consequence of how we choose to model, and partly determined by the model. This will be seen more clearly later, when we look at alternative ways to model the same economic situation described by Varian. Now Varian introduces what might be called the fundamental methodological commitment made by modern economic theory:

The optimization principle: People try to choose the best patterns of consumption that they can afford.

(This) is almost tautological. If people are free to choose their actions, it is reasonable to assume that they try to choose things they want rather than things they don’t want. Of course there are exceptions to this general principle, but they typically lie outside the domain of economic behavior.

Far from being tautological as Varian states, this is simply not true. It might have been true if consumption was a central or main concern of life. However, if our main interest lies elsewhere, then we would do SATISFICING – that is, consume whatever is sufficient for our needs, instead of MAXIMIZING consumption. By satisficing, we can fulfill our needs and save time and money for pursuit of higher goals of life. If consumption the highest goal of life (and a market economy creates this illusion and orientation) than the above optimization principle MIGHT hold. In real life, behavioral economists and psychologists have tested this theory, and found that it fails – people do not try to choose the best patterns of consumption that they can afford. Advertising OFTEN misleads people into buying products that they do not want, that they cannot afford, and that they do not use. One study in Australia showed that every year people purchase more than a million dollars worth of goods that they never use – even once!. So obviously, it is not true that people optimize their consumption patterns.

The second principle introduced by Varian is also part of the core methodological commitments of modern economic theory:

The equilibrium principle: Prices adjust until the amount that people demand of something is equal to the amount that is supplied.

The second notion is a bit more problematic. It is at least conceivable that at any given time peoples’ demands and supplies are not compatible, and hence something must be changing. These changes may take a long time to work themselves out, and, even worse, they may induce other changes that might “destabilize” the whole system. This kind of thing can happen . . . but it usually doesn’t. In the case of apartments, we typically see a fairly stable rental price from month to month. It is this equilibrium price that we are interested in, not in how the market gets to this equilibrium or how it might change over long periods of time.

This principle is completely wrong. In recesssions, it is a common experience that more than 1000 people applied for a few positions available. Obviously this shows an excess supply of labor, so the price should be adjusted downward.  However, in many historical episodes all over the globe, even though this pattern persisted for more than a decade, there was no downward adjustment in the real wage for labor  – they remained more or less stable and flat. Similarly, in many markets, one observes excess supply and also excess demand, but one does not see any adjustment in prices. That is why STICKY price models have become popular in some parts of economics. Basically it was this observation – that wages did not adjust downwards even though there was excess supply of labor – that led Keynes to the creation of Keynesian economics. The MAIN PURPOSE of Keynesian economics was to explain WHY supply and demand theory does not work in the labor market.

The second part of Varian’s explanation for why we study equilibrium is even worse: “It is this equilibrium price that we are interested in, not in how the market gets to this equilibrium or how it might change over long periods of time” Who decided that this is what we are interested in? In the Global Financial Crisis, we were interested in finding out why the prices of homes collapsed suddenly, in violation of equilibrium theory. Economists who are not interested in this, will never be able to answer this question. That is why the Queen of England went to the London School of Economics to ask “Why did no one see this coming?” In fact, in most markets, equilibrium is never achieved. Even when there are forces which drive to equilibrium, these forces vary in strength due to different, complex circumstances. When these forces are very weak, or non-existent, as Keynes claimed about the labor market, equilibrium might never happen. When these forces are very strong, equilibrium can emerge quickly. In the middle, there forces driving towards equilibrium and other forces which counter them. To understand such markets, it becomes essential to study dis-equilibrium process. The simplest such model which students may have seen is the Cobweb model of price adjustment. Even the simplest such models show that convergence may fail to occur, and equilibria can be UNSTABLE. This means that if you are exactly at equilibrium, you will stay there, but if you are slightly away from it, then market forces will push you further away from it. So to understand real economies, we must go beyond equilibria. Unfortunately, as Varian writes, economists are ONLY interested in the equilibrium price, so they completely fail to understand the real world, and in particular the global financial crisis, where disequilibrium is the rule, rather than the exception.

By 2020, the largest pools of pension fund assets are projected to remain concentrated in the US and Europe. In North America, pension fund assets reached $19.3 trillion in 2012 and PwC estimates that by 2020, pension fund assets will rise by 5.7 percent a year to achieve over $30 trillion of the $56.5 trillion in total global assets, more than 50 percent of the global total.

Indeed, according to the PwC report, Asset Management 2020: A Brave New World, demographic changes, accelerating urbanization, technological innovations and shifts in economic power are reshaping the asset management environment where pension funds have been playing and  will play an outstanding role in the global saving and investment process.  Three key factors seems to stimulate the global growth in assets: i) changes in government-incentivized or government-mandated retirement plans that will turn out to increase the use of defined contribution (DC) individual plans; ii) faster growth of high-net-worth-individuals in South America, Asia, Africa and Middle East regions up to 2020; iii) the expansion of new sovereign wealth funds.

However, in spite of the pension funds’ power to centralize huge amount of “savings from workers”, in this scenario of financial globalization, workers do not seem to have strong defense against the impacts of the current global scenario on the savings of workers and the flows of workers’ income.

In a context of uncertainty, the pension funds’ portfolio management is based, as Keynes warned, on precarious conventions.  Pension funds are part of a set of interrelated balance sheets and cash flows between the income-producing system (hedge, speculative and Ponzi firms) and the financial structure that affect the valuation of the stock of capital assets, the evolution of credit and the pace of investment. Current pension funds’ performance ultimately relies on the endogenous nature of financial instability.  Throughout the business cycle, when profits decline, as they inevitably do, credit and external sources of funding generally become restricted and the price of assets also fall. This scenario affects the performance of these institutional investors and reduces the value of the stock of workers’ savings in pension funds.

As a matter of fact, the connection between pension funds and speculative finance is one of the contemporary features of the management of the working savings. Continued low interest rates would impact the future profitability of pension funds, particularly in those portfolios where income-fixed assets predominate.

Among other current challenges to the management of pension funds is the evolution of austerity programs. In many countries, austerity programs have also relied on changes in retirement plans. Soon after the global crisis of 2007-2008, many European countries  announced austerity measures that included  changes in retirement age and pension payments. As a result, loss of retirement rights has turned out to become part of the new set of public policies.

Indeed, many governments, under global investors’ pressure, should meet budgetary targets and pursue further structural reforms- also related to age and amount of pension within retirement plans.  In truth, the current era of financialization and austerity – and its impacts on retirement plans and job creation – is certainly affecting day-to-day life of workers and the future of pensions. In other words, it is affecting the flows of workers’ income and the savings of workers.


Joan Robinson (1903- 1983) studied microeconomic issues, such as pricing, consumer demand, producer supply, competition and monopolistic strategies. Her first major book was The Economics of Imperfect Competition, published in 1933. In the same year, Edward Chamberlin published The Theory of Monopolistic Competition.

Robinson restates the Marshallian contribution to price theory so as to examine the outcomes of imperfect competition. In her understanding, perfect competition is considered to be a very special case where buyers should have the same preferences and each buyer should deal with only one firm at any one time. If these conditions are fulfilled, an increase in the price of one firm would lead to a complete cessation of its sales if the prices of other firms remained the same.

Considering the markets where imperfect competition dominates, Robinson starts the analysis with a single firm in an industry. She clarifies that physical differentiation is not a necessary condition for market imperfection because two commodities may be alike in every respect except the names of the firms producing them. However, the market in which they are sold will be imperfect if different buyers have different scales of preference as between the two firms.

Imperfect competition in the markets affects the slope of the demand curve of an individual firm and of the industry. The first prerequisite of perfect competition is a product clearly demarcated from others, that is to say, the characterization of a perfect market depends on the clear demarcation of the commodity that is sold and bought. In particular, she examines how price discrimination and market segmentations policies influence the slope of the curve of the individual firm and the market equilibrium. Competition will be less perfect the lower is the elasticity of the total demand curve. Indeed, the form of the demand curve represents the degree of competition between the product of this industry and other products.


Besides, in a context of imperfect competition, the firm’s supply curve could express increasing, decreasing, or constant costs. As a result, the equalization of the marginal cost curve and the price as a condition of equilibrium is considered as the main problem in those imperfect markets.  According to Robinson, competition will be less perfect the higher is the ratio of the output of one firm to the output of the industry. If competition is imperfect, an increase in the output of one firm by one unit of its good would change the output of the industry and this may lead to a relevant change in the price of this good.

Robinson addresses that it is empirically true that a high level of normal profits will often be found where competition is imperfect.           The normal level of profits will be different according to the industry and the scales of production in the same industry because  the level of normal profits will depend upon the conditions of supply of the firm. An old-established firm enjoys a “good will” which turns out not only to enable the firm to influence the price of the commodity but also to set increasing costs of entry to new rivals. Powerful firms which use methods of “unfair competition” to strangle rivals are unlikely to sell in perfect markets. In these powerful firms, managerial decisions, including price discrimination and market segmentation, for instance, are practices oriented to increase market share and profits.

Joan Robinson’s microeconomic approach is still relevant to show the failures of a theory of value and distribution based on the assumptions of either perfect competition or perfect monopoly. In truth, her analysis of the monopolistic trends in contemporary capitalism sheds light on how powerful firms fix prices and strengthen  their power in the markets.

Part 2 of Lecture on Spirituality and Development: Friday, 27th Jan 2017 by Dr. Asad Zaman, VC PIDE — for Students of Religion & Development Paper, Center of Development Studies, University of Cambridge. Link for part 1: Spirituality . 50m Video lecture:


  1. The meaning of development has varied dramatically across time, space, cultures.
    1. When Britannia ruled the Waves:
      Development definition suited Britain: Sea-Power, Coal Mines, Industry, Climate, Race
      No entry for “democracy” in Encyclopedia Brittanica, 1930
    2. Post-War Rise of USA
      Initial Definition: Democracy, GNP per capita – both criteria serve to ensure leadership of USA.
    3. Later, some Oil Economies had Higher GNP/Capita than USA
      So REDEFINE Development to include Income Distribution, so as to keep US on top
    4. Later, Switzerland, Japan and some other Scandinavian countries had Higher Wealth + Lower Gini. How to measure development to ensure USA is on top? Answer: Redefine Development to include Infrastructure
    5. Conclusion: Definition of Development Changes to suit the powerful. Criteria are chosen to ensure that the powerful are on top.
  2. Read More

Friday, 26th Jan 2017: Lecture by Dr. Asad Zaman, VC PIDE to students at University of Cambridge, Center of Development Studies for Religion & Development paper. 40 minute video recording of lecture on you-tube

Part 1: “What Is Spirituality?”:  Modern Secular thought takes spirituality and religion to be diseases which affect weak minds not properly trained in the scientific method. Part I of this lecture explain why this view, which is based on positivist ideas, is seriously mistaken. OUTLINE of this lecture is given below

Separate Lecture Part 2:” What is Development” focusing on how spirituality affects how we think about development and how to achieve it.

  1. Standard Modern Answer
    1. Spirituality is a literary term, used to spice up poetry and novels.
    2. It is like Phlogiston, Unicorns, Ghosts, Souls, God
    3. It is one among many medieval beliefs, like flat Earth, which have been proven wrong.
  1. Why don’t we understand spirituality?
    1. Because we have been trained to think like Logical Positivists, EVEN though this philosophy has been proven wrong! Key wrong positivist beliefs:
    2. Unobservables do not matter for science
    3. Science explains the observable patterns. It may postulate things like atoms, gravity, but this is just for convenience. Existence of gravity is not part of scientific assertion.
    4. Kant: Thing-In-Itself is not knowable, not relevant for science. Wittgenstein: Wherof one cannot speak, thereof one must be silent. ALSO, The human body is best picture of the human soul (That is, observables matter, unobservables don’t)
    5. SCIENCE is the ONLY source of valid knowledge.

Read More


Throughout 2016, many countries around the world keep on competing for market share in high-wage, innovation-based industries. Indeed, these countries have turned to “innovation mercantilism” by imposing protectionist policies to expand domestic production and exports of high-tech goods and services.

In this setting, innovation mercantilist policies are being oriented to high-value tech sectors such as life sciences, renewable energy, computers and electronics, and Internet services. There are new “beggar-thy-neighbor” strategies adopted by nation-states, such as forcing companies to transfer the rights to their technology or forcing them to relocate their production, research and development (R&D), or data-storage activities. These strategies aim at   both replacing imports with domestic production or promoting exports.

At this respect, the 2016 Information Technology and Innovation Foundation annual report shows that:

  • China introduced a new cybersecurity law so as to impose local data-storage requirements, and forced intellectual property and source code disclosures.  This country also introduced new cloud-computing restrictions so as to exclude and prevent foreign firms from operating in the Chinese market.
  • Germany introduced forced local data-storage requirements as part of a new telecommunications data law.
  • Indonesia introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a patent law amendment in order to force local production and technology transfers.
  • Russia introduced forced local data-storage requirements and encryption-key disclosure as part of a new telecommunications data law. The country also introduced new government procurement rules in order to ban the purchase of foreign software.
  • Turkey introduced a new data-protection law that, as a matter of fact, forced local data storage.
  • Vietnam introduced forced local data-storage requirements for Internet-based content providers. The country also introduced a new network-security law that forces disclose encryption keys and source codes a condition of market access.

New protectionist trends have also been observed in the United States. As of January 23, 2017, the new American president Donald Trump’s decided to remove the U.S. from the Trans-Pacific Partnership, or T.P.P. This decision signalizes that the United States are not willing to be permanently tied to East Asia, mainly a rising China, by free-trade strategies. Instead, it is believed that American workers would be protected against competition from low-wage countries, such as Vietnam and Malaysia, also parties to the trade deal.

As America looks inward to increase investment in manufacturing, to reduce the dependence on East Asia imports and to stimulate job creation, among other  domestic challenges, the outcomes of the revision of free-trade strategies will certainly carry out relevant geopolitical implications.


Much of the comments on the global financial and economic crisis have focused on the proximate causes and governance issues related to risk management, monetary policy and weak regulation. New political alignments allowed a process of global financial deregulations in the early 1970s. The political ascendancy of financial capital and extensive capital market liberalization, employment goals were abandoned in the economic policy agenda. Indeed,   price stabilization and “fiscal prudence” turned out to be the primary objectives of the economic policy. As a result, prior to the 2008 global crisis, inflation was low and close to official inflation target rates in the advanced economies. However, credit bubbles threaten the macroeconomic stability.

After the Global Crisis, academic economists and policy makers have actively participated in the debate on monetary policy in the United States and European Union. In the face of the outcomes of the crisis, central banks have dealt with a triple challenge

  • how to contain the crisis
  • how to prevent a recessionary downturn
  • how to avoid enhancing financial instability in the form of inflationary pressures or asset  and credit bubbles.

The Federal Reserve (Fed) and the European Central Bank (ECB) have faced major global financial challenges together. However, within their respective zones, they coped with their institutional set-up and governance guidelines.

After the bail-outs, their main concern is whether nominal interest rates really have a lower bound around zero per cent. After the crisis, central banks responded to the large fall in aggregate demand and the under- utilized productive resources by adjusting  the policy interest rates to, or very close to, zero. Indeed, these central banks have focused on lender-of-last-resort program extensions. The main question is: to what extent central banks can deal with huge levels of leverage, structural flaws of financial innovations (securitization, structured finance, and derivatives above all) and  lack of transparency in terms of  risk management?.

Central banks have shown that they can innovate and coordinate with other central banks on short notice when unprecedented situations of financial crisis arise. However, central banks cannot prevent financial crisis.  Considering the menace of deepening the recession, the outcome of the central banks’ management of  nominal interest rates is that  real interest rates may be (and may continue to be) negative.  Despite the evolution of nominal and real interests, big banks have restricted new lending operations because of credit and market risks. Indeed, big banks have enlarged the amount of cash in order to cope with their own losses more easily in the future.

In the 1930s, John Maynard Keynes said the liquidity trap was a period in which cash and bonds became perfect substitutes and, after the nominal interest rate has fallen to a very low level, liquidity-preference may become virtually absolute. In other words, it is difficult for central banks to reduce their policy interest rates much below zero as cash can be held as an alternative to negative interest rate bearing assets. Most people would prefer cash to holding a debt which yields. In this event the monetary authority would have lost effective control over the rate of interest.

The modern Keynesian literature emphasizes that, even if increasing the current money supply has no effect, monetary policy is far from ineffective at zero interest rates. What is important, however, is not the current money supply but managing expectations about the future nominal and real interest rates. Thus, recent research indicates that monetary policy is far from being ineffective at zero bound levels, but it worked mainly through expectations.

Therefore, the question is how very low or negative interest rates translate into improved growth rates (Hannoum, 2015).  It is worth remembering that central banks consider that the monetary stimulus could stimulate short-term growth through five main channels:

  • by boosting credit to the real economy
  • by lifting asset prices
  • by forcing investors towards riskier ones
  • by lowering the exchange rate
  • by attempting to avoid deflationary pressures.

Up to now, the monetary policy of prolonged very low or negative interest rates relies on the uncertain effectiveness of these transmission channels. However, potential serious consequences for central banks could emerge. here is the threaten that  monetary policy could become subordinated to the demands of the financial markets and to the public debt burdens.


Hannoun, H (2015) “Ultra-low or negative interest rates: What they mean for financial stability and growth”, BIS Speech at Eurofi High-Level Seminar, Riga