Walrasian economic theory — little better than nonsense

5 February, 2016 at 13:15 | Posted in Economics | Leave a comment

You enquire whether or not Walras was supposing that exchanges actually take place at the prices originally proposed when the prices are not equilibrium prices. The footnote which you quote convinces me that he assuredly supposed that they did not take place except at the equilibrium prices … All the same, I shall hope to convince you some day that Walras’ theory and all the others along those lines are little better than nonsense!

Letter from J. M. Keynes to N. Georgescu-Roegen, December 9, 1934

Logistic regression (student stuff)

5 February, 2016 at 13:08 | Posted in Statistics & Econometrics | Leave a comment

 

And in the video below (in Swedish) yours truly shows how to perform a logit regression using Gretl.

Pedagogik — ett ämne i kris

4 February, 2016 at 20:50 | Posted in Economics, Varia | Leave a comment

Den antiintellektuella avgrunden är nära när den postmoderna sanningsrelativismen infekterar det offentliga samtalet på alla nivåer, inklusive den akademiska världen.

truth_exit_signI Sverige tycks den pedagogiska disciplinen vara värst smittad. En docent i pedagogik fick för några år sedan Skolverkets uppgift att skriva en rapport om fysikundervisningen i den svenska skolan, samt komma med förslag på hur den skulle attrahera fler flickor.

Ur rapporten:

”Föreställningen om det vetenskapliga tänkandets självklara överhöghet rimmar illa med jämställdhets- och demokratiidealen. […] Vissa sätt att tänka och resonera premieras mera än andra i naturvetenskapliga sammanhang. […] Om man inte uppmärksammar detta riskerar man att göra missvisande bedömningar. Till exempel genom att oreflekterat utgå från att ett vetenskapligt tänkande är mer rationellt och därför borde ersätta ett vardagstänkande” …

Pedagogen skriver vidare i rapporten: ”En genusmedveten och genuskänslig fysik förutsätter en relationell infallsvinkel på fysiken samt att en hel del av det traditionella vetenskapliga kunskapsinnehållet i fysiken plockas bort.”

Det vetenskapliga kunskapsinnehållet i fysiken ska alltså ”plockas bort” för att ”underlätta” för flickor. Inte nog med att detta är en förfärlig kunskapssyn, det är dessutom kränkande att betrakta flickor som oförmögna eller sämre på att ta till sig kunskap i fysik.

Författaren till rapporten heter Moira von Wright och är numera professor i pedagogik och rektor för Södertörns högskola. När nu en sådan kunskapsteoretisk grundsyn slagit rot i våra högre lärosäten har vi ett problem …

Martin Ingvar  Christer Sturmark  Åsa Wikforss

Efter att ha läst artikeln “En pedagogisk relation mellan människa och häst. På väg mot en pedagogisk filosofisk utforskning av mellanrummet” i Pedagogisk Forskning i Sverige är man dock föga förvånad över sakernas tillstånd inom svensk pedagogisk “vetenskap”:

Med en posthumanistisk ansats belyser och reflekterar jag över hur både människa och häst överskrider sina varanden och hur det öppnar upp ett mellanrum med dimensioner av subjektivitet, kroppslighet och ömsesidighet.

elite-daily-sleeping-studentOch så säger man att pedagogikämnet är i kris. Undrar varför …

There ain’t no cure

4 February, 2016 at 09:33 | Posted in Varia | Leave a comment

 

Top 10 economics blog posts

3 February, 2016 at 18:27 | Posted in Economics | Leave a comment

top-10-retail-news-thumb-610xauto-79997-600x240

  1. Dumb and dumber in modern macroeconomics
  2. Why Paul Krugman is no real Keynesian
  3. Dani Rodrik’s blind spot
  4. Robert Lucas, rational expectations, and the understanding of business cycles
  5. The blatant absence of empirical fit of macroeconomic models
  6. Non-ergodic economics, expected utility and the Kelly criterion
  7. Greg Mankiw makes a fool of himself — again
  8. Is macroeconomics for real?
  9. Please say after me – Sonnenschein-Mantel-Debreu
  10. James Heckman — the ultimate take down of teflon-coated defenders of rational expectations

 

Prayer (personal)

3 February, 2016 at 13:27 | Posted in Politics & Society | Leave a comment

This one is for you — all you brothers and sisters, struggling to survive in civil wars, or forced to flee your homes, risking your lives on your way to my country — Sweden — or other countries in Europe.

May God be with you.

‘New Keynesianism’ — an unpleasant macroeconomic fairy-tale

3 February, 2016 at 12:38 | Posted in Economics | 2 Comments

The so-called new-Keynesian (or NK) model, has emerged and become a workhorse for policy and welfare analysis … The model starts from the RBC model without capital, and, in its basic incarnation, adds only two imperfections. It introduces monopolistic competition in the goods market. The reason is clear: If the economy is going to have price setters, they better have some monopoly power. It then introduces discrete nominal price setting, using a formulation introduced by Calvo, and which turns out to be the most analytically convenient.

(0) PaperBackFrontCover-FFF•e.inddThe model is simple, analytically convenient, and has largely replaced the IS-LM model as the basic model of fluctuations in graduate courses (although not yet in undergraduate textbooks). Like the IS-LM model, it reduces a complex reality to a few simple equations. Unlike the IS-LM model, it is formally rather than informally derived from optimization by firms and consumers … The costs are that, while tractable, the first two equations of the model are patently false … The aggregate demand equation ignores the existence of investment, and relies on an intertemporal substitution effect in response to the interest rate, which is hard to detect in the data on consumers. The inflation equation implies a purely forward looking behavior of inflation, which again appears strongly at odds with the data …

One striking (and unpleasant) characteristic of the basic New Keynesian model is that there is no unemployment! Movements take place along a labor supply curve, either at the intensive margin (with workers varying hours) or at the extensive margin (with workers deciding whether or not to participate). One has a sense, however, that this may give a misleading description of fluctuations, in positive terms, and, even more so, in normative terms: The welfare cost of fluctuations is often thought to fall disproportionately on the unemployed.

Olivier Blanchard

Wren-Lewis on the New Classical Counter Revolution

2 February, 2016 at 18:19 | Posted in Economics | 5 Comments

Simon Wren-Lewis argues in a new paper — Unravelling the New Classical Counter Revolution — that it is essential to understand the success of the New Classical Counter Revolution (NCCR), if we are going to be able to position Keynes’s  General Theory today. Writes Wren-Lewis:

One other undoubted appeal that the NCCR had was that it allowed macroeconomics to be brought back under the microeconomics umbrella. New Keynesian economists can talk about how business cycles involve an externality (price rigidity reflecting the cost of adjusting individual prices also has an impact on overall demand), and this market failure requires state intervention. This is language their micro colleagues can relate to …

The theoretical insights that New Classical economists brought to the table were impressive: besides rational expectations, there was a rationalisation of permanent income and the life-cycle models using intertemporal optimisation, time inconsistency and more …

A new revolution, that replaces current methods with older ways of doing macroeconomics, seems unlikely and I would argue is also undesirable. The discipline does not need to advance one revolution at a time …

To understand modern academic macroeconomics, it is no longer essential that you start with The General Theory. It is far more important that you read Lucas and Sargent (1979), which is a central text in what is generally known as the New Classical Counter Revolution (NCCR). That gave birth to DSGE models and the microfoundations programme, which are central to mainstream macroeconomics today …

Hmm …

There’s something that just does not sit very well with this picture of modern macroeconomics.

‘Read Lucas and Sargent (1979)’. Yes, why not. One who has read it is Wren-Lewis’s ‘New Keynesian’ buddy Paul Krugman. And this is what he has to say on that reading experience:

Lucas and his school … went even further down the equilibrium rabbit hole, notably with real business cycle theory. And here is where the kind of willful obscurantism Romer is after became the norm. I wrote last year about the remarkable failure of RBC theorists ever to offer an intuitive explanation of how their models work, which I at least hinted was willful:

“But the RBC theorists never seem to go there; it’s right into calibration and statistical moments, with never a break for intuition. And because they never do the simple version, they don’t realize (or at any rate don’t admit to themselves) how fundamentally silly the whole thing sounds, how much it’s at odds with lived experience.”

Paul Krugman

Yours truly, of course, totally agrees with Paul on Lucas’ rabbit hole freshwater school.

And so does Truman F. Bewley:

Lucas and Rapping (1969) claim that cyclical increases in unemployment occur when workers quit their jobs because wages or salaries fall below expectations …

According to this explanation, when wages are unusually low, people become unemployed in order to enjoy free time, substituting leisure for income at a time when they lose the least income …

According to the theory, quits into unemployment increase during recessions, whereas historically quits decrease sharply and roughly half of unremployed workers become jobless because they are laid off … During the recession I studied, people were even afraid to change jobs because new ones might prove unstable and lead to unemployment …

If wages and salaries hardly ever fall, the intertemporal substitution theory is widely applicable only if the unemployed prefer jobless leisure to continued employment at their old pay. However, the attitude and circumstances of the unemployed are not consistent with their having made this choice …

In real business cycle theory, unemployment is interpreted as leisure optimally selected by workers, as in the Lucas-Rapping model. It has proved difficult to construct business cycle models consistent with this assumption and with real wage fluctuations as small as they are in reality, relative to fluctuations in employment.

This is, of course, only what you would expect of New Classical Chicago economists.

So, what’s the problem?

The problem is that sadly enough this extraterrestial view of unemployment is actually shared by Wren-Lewis and other so called ‘New Keynesians’ — a school whose microfounded dynamic stochastic general equilibrium models cannot even incorporate such a basic fact of reality as involuntary unemployment!

Of course, working with microfunded representative agent models, this should come as no surprise. If one representative agent is employed, all representative agents are. The kind of unemployment that occurs is voluntary, since it is only adjustments of the hours of work that these optimizing agents make to maximize their utility.

In the basic DSGE models used by most ‘New Keynesians’, the labour market is always cleared – responding to a changing interest rate, expected life time incomes, or real wages, the representative agent maximizes the utility function by varying her labour supply, money holding and consumption over time. Most importantly – if the real wage somehow deviates from its “equilibrium value,” the representative agent adjust her labour supply, so that when the real wage is higher than its “equilibrium value,” labour supply is increased, and when the real wage is below its “equilibrium value,” labour supply is decreased.

In this model world, unemployment is always an optimal choice to changes in the labour market conditions. Hence, unemployment is totally voluntary. To be unemployed is something one optimally chooses to be.

To Wren-Lewis is seems as though the ‘New Keynesian’ acceptance of rational expectations, representative agents and microfounded DSGE models is something more or less self-evidently good. Not all economists (yours truly included) share that view:

While one can understand that some of the elements in DSGE models seem to appeal to Keynesians at first sight, after closer examination, these models are in fundamental contradiction to Post-Keynesian and even traditional Keynesian thinking. The DSGE model is a model in which output is determined in the labour market as in New Classical models and in which aggregate demand plays only a very secondary role, even in the short run.

12-02-03-ostwärts-dullien-01In addition, given the fundamental philosophical problems presented for the use of DSGE models for policy simulation, namely the fact that a number of parameters used have completely implausible magnitudes and that the degree of freedom for different parameters is so large that DSGE models with fundamentally different parametrization (and therefore different policy conclusions) equally well produce time series which fit the real-world data, it is also very hard to understand why DSGE models have reached such a prominence in economic science in general.

Sebastian Dullien

Neither New Classical nor ‘New Keynesian’ microfounded DSGE macro models have helped us foresee, understand or craft solutions to the problems of today’s economies.

Wren-Lewis ultimately falls back on the same kind of models that he criticize, and it would sure be interesting to once hear him explain how silly assumptions like ‘hyperrationality’ and ‘representative agents’ help him work out the fundamentals of a truly Keynesian macroeconomic analysis.

In a recent paper on modern macroeconomics, another of Wren-Lewis’s ‘New Keynesian’ buddies, macroeconomist Greg Mankiw, wrote:

The real world of macroeconomic policymaking can be disheartening for those of us who have spent most of our careers in academia. The sad truth is that the macroeconomic research of the past three decades has had only minor impact on the practical analysis of monetary or fiscal policy. The explanation is not that economists in the policy arena are ignorant of recent developments. Quite the contrary: The staff of the Federal Reserve includes some of the best young Ph.D.’s, and the Council of Economic Advisers under both Democratic and Republican administrations draws talent from the nation’s top research universities. The fact that modern macroeconomic research is not widely used in practical policymaking is prima facie evidence that it is of little use for this purpose. The research may have been successful as a matter of science, but it has not contributed significantly to macroeconomic engineering.

So, then what is the raison d’être of macroeconomics, if it has nothing to say about the real world and the economic problems out there?

If macoeconomic models – no matter of what ilk – assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Macroeconomic theorists – regardless of being ‘New Monetarist’, ‘New Classical’ or ‘New Keynesian’ – ought to do some ontological reflection and heed Keynes’ warnings on using thought-models in economics:

The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can, for the probable interactions of the factors amongst themselves. This is the nature of economic thinking. Any other way of applying our formal principles of thought (without which, however, we shall be lost in the wood) will lead us into error.

 

So, these are some of my arguments for why I think that Simon Wren-Lewis ought to be even more critical of the present state of macroeconomics than he is. If macroeconomic models – no matter of what ilk –  build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Trying to represent real-world target systems with models flagrantly at odds with reality is futile. And if those models are New Classical or ‘New Keynesian’ makes very little difference.

kSimon Wren-Lewis [writes]:

“It is hard to get academic macroeconomists trained since the 1980s to address [large scale Keynesian models] , because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems … But DSGE models as a guide for policy are also fatally flawed because they are too simple. The unique property that DSGE models have is internal consistency … Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.”

Nope! Not too simple. Just wrong!

I disagree with Simon. NK models are not too simple. They are simply wrong. There are no ‘frictions’. There is no Calvo Fairy. There are simply persistent nominal beliefs.

Period.

Roger Farmer

Yes indeed. There really is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.

Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists like Wren-Lewis, Mankiw, and Krugman, there still are some real Keynesian macroeconomists to read. One of them — Axel Leijonhufvud — writes:

For many years now, the main alternative to Real Business Cycle Theory has been a somewhat loose cluster of models given the label of New Keynesian theory. New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy. The “New Keynesian” label refers back to the “rigid wages” brand of Keynesian theory of 40 or 50 years ago. Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it …

I conclude that dynamic stochastic general equilibrium theory has shown itself an intellectually bankrupt enterprise. But this does not mean that we should revert to the old Keynesian theory that preceded it (or adopt the New Keynesian theory that has tried to compete with it). What we need to learn from Keynes … are about how to view our responsibilities and how to approach our subject.

No matter how brilliantly silly ‘New Keynesian’ DSGE models Wren-Lewis and his buddies come up with, they do not help us working with the fundamental issues of modern economies. Using that kind of models only confirms Robert Gordon‘s  dictum that today

rigor competes with relevance in macroeconomic and monetary theory, and in some lines of development macro and monetary theorists, like many of their colleagues in micro theory, seem to consider relevance to be more or less irrelevant.

Georgescu-Roegen on why ‘most of the time all of us talk some nonsense’

2 February, 2016 at 15:24 | Posted in Economics | Leave a comment

grPositivism does not seem to realize at all that the concept of verifiability — or that the position that ‘the meaning of a proposition is the method of its verification’ — is covered by a dialectical penumbra in spite of the apparent rigor of the sentences used in the argument …

I hope the reader will not take offense at the unavoidable conclusion that most of the time all of us talk some nonsense, that is, express our thoughts in dialectical terms with no clear-cut meaning …

The position that dialectical concepts should be barred from science because they would infest it with muddled thinking, is, therefore, a flight of fancy — unfortunately, not an innocuous one. For it has bred another kind of muddle that now plagues large sectors of social sciences: arithmomania. To cite a few cases from economics alone. The complex notion of economic developmet has been reduced to a number, the income per capita. The dialectical spectrum of human wants … has long since been covered under the colorless numerical concept of ‘utility’ for which, moreover, nobody has yet been able to provide an actual procedure of measurement.

In the postwar period, it has become increasingly clear that economic growth has not only brought greater prosperity. The other side of growth, in the form of pollution, contamination and wastage of resources, has emerged as perhaps the greatest challenge of our time.

Against the neoclassical theory’s view on the economy as a balanced and harmonious system, where growth and the environment go hand in hand, ecological economists object that it can rather be characterized as an unstable system that at an accelerating pace consumes energy and matter, and thereby pose a threat against the very basis for its survival.

The Romanian-American economist Nicholas Georgescu-Roegen (1906-1994) argued in his epochal The Entropy Law and the Economic Process (1971) that the economy was actually a giant thermodynamic system in which entropy increases inexorably and our material basis disappears. If we choose to continue to produce with the techniques we have developed, then our society and earth will disappear faster than if we introduce small-scale production, resource-saving technologies and limited consumption.

Following Georgescu-Roegen, ecological economists have argued that industrial society inevitably leads to increased environmental pollution, energy crisis and an unsustainable growth.

After a radio debate with one of the members of the prize committee  twenty years ago, yours truly asked why Georgescu-Roegen hadn’t got the prize. The answer was – mirabile dictu – that he “never founded a school.” Talk about nonsense! I was surprised, to say the least, and wondered if he possibly had heard of the environmental movement. Well, he had – but it was “the wrong kind of school.” Can it be stated much clearer than this what it’s all about? If you haven’t worked within the neoclassical paradigm – then you are excluded a priori from being eligible for the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel!

Deductivism — the original sin in economics

2 February, 2016 at 10:27 | Posted in Economics | 2 Comments

quine

Mathematics, especially through the work of David Hilbert, became increasingly viewed as a discipline properly concerned with providing a pool of frameworks for possible realities …

This emergence of the axiomatic method removed at a stroke various hitherto insurmountable constraints facing those who would mathematise the discipline of economics. Researchers involved with mathematical projects in economics could, for the time being at least, postpone the day of interpreting their preferred axioms and assumptions. There was no longer any need to seek the blessing of mathematicians and physicists or of other economists who might insist that the relevance of metaphors and analogies be established at the outset. In particular it was no longer regarded as necessary, or even relevant, to economic model construction to consider the nature of social reality, at least for the time being …

The result was that in due course deductivism in economics, through morphing into mathematical deductivism on the back of developments within the discipline of mathematics, came to acquire a new lease of life, with practitioners (once more) potentially oblivious to any inconsistency between the ontological presuppositions of adopting a mathematical modelling emphasis and the nature of social reality. The consequent rise of mathematical deductivism has culminated in the situation we find today.

Tony Lawson

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