Rethinking public debt

13 Jul, 2020 at 13:43 | Posted in Economics | 1 Comment


Public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt ‘cancels’ itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren ‘repay’ the public debt these payments will be made to our children and grandchildren.

Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals — full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity and balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

The real issue … is not whether it is possible to shift a burden (either in the present or in the future) from some people to other people, but whether it is possible by internal borrowing to shift a real burden from the present generation, in the sense of the present economy as a whole, onto a future generation, in the sense of the future economy as a whole … The latter is impossible because a project that uses up resources needs the resources at the time that it uses them up, and not before or after.

204545_600This basic proposition is true of all projects that use up resources … The proposition holds as long as the project​ is financed internally, so that there are no outsiders to take over the current burden by providing the resources and to hand back the burden in the future by asking for the return of the resources.
It is necessary for economists to keep repeating​ this basic proposition because one of their main duties is to keep warning people against the fallacy of composition. To anyone who sees only a part of the economy it does seem possible to borrow from the future because he tends to assume that what is true of the part is true of the whole.

Abba Lerner

The Deficit Myth: a review

12 Jul, 2020 at 12:21 | Posted in Economics | 5 Comments

One common objection to neoclassical economics is that it underweights the importance of history and class. It is therefore paradoxical that Stephanie Kelton’s The Deficit Myth, which claims to challenge orthodox economics, should be guilty of just these vices.

Modern-Monetary-Theory-Let’s start by saying that I wholly agree with the main claims she makes — that a government which enjoys monetary sovereignty can always finance its borrowing. Asking how we will pay for public spending is therefore daft. Instead, the question, as Dr Kelton says, is: can the extra spending be resourced? The constraint on raising health spending for example — if there is one — is a lack of doctors and nurses, not a lack of finance. Where there are resources lying idle, governments should raise spending to employ them. Dr Kelton explain these ideas wonderfully clearly, so I recommend this book to all non-economists interested in government finances.

For this economist, though, it poses a problem. I remember writing a research note for Nomura back in the early 90s arguing that increased government borrowing would not increase gilt yields because the same increased private saving that was the counterpart of government borrowing would easily finance that borrowing. Nominal gilt yields, I said, were determined much more by inflation than by government borrowing. But nobody accused me of originality. And rightly so. I was simply channelling Kalecki, Beveridge, Lerner and Keynes, who famously said back in 1933:

“Look after the unemployment, and the Budget will look after itself.”

For me, Kelton is – albeit very lucidly – reinventing the wheel …

At one stage she claims that MMT “didn’t exist” before the late 90s. But whilst the phrase did not exist, the ideas certainly did. Randall Wray is right to say that “the main principles of functional finance were relatively widely held in the immediate postwar period.”

Chris Dillow

Yours truly thinks that Dillow gets it right here on the question of the originality of MMT.

As has become abundantly clear during the last couple of years, it is obvious that most mainstream economists seem to think that Modern Monetary Theory is something new that some wild heterodox economic cranks have come up with. That is actually very telling about the total lack of knowledge of their own discipline’s history these modern mainstream guys like Summers, Mankiw, and Krugman has.

New? Cranks? Reading one of the founders of neoclassical economics, Knut Wicksell, and what he writes in 1898 on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise) soon makes the delusion go away:

It is possible to go even further. There is no real need for any money at all if a payment between two customers can be accomplished by simply transferring the appropriate sum of money in the books of the bank

A pure credit system has not yet … been completely developed in this form. But here and there it is to be found in the somewhat different guise of the banknote system

We intend therefore​, as a basis for the following discussion, to imagine a state of affairs in which money does not actually circulate at all, neither in the form of coin … nor in the form of notes, but where all domestic payments are effected by means of the Giro system and bookkeeping transfers.

What Modern Monetary Theory (MMT) basically does is exactly what Wicksell tried to do more than a hundred years ago. The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​

In the mainstream economist’s world, we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.

What mainstream economists have in mind when they argue this way, is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. What happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

It is true that MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfill our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

Keynes on microfoundations

11 Jul, 2020 at 20:16 | Posted in Economics | 2 Comments

keynes essays in biographyThe atomic hypothesis which has worked so splendidly in Physics breaks down in Psychics. We are faced at every turn with the problems of Organic Unity, of Discreteness, of Discontinuity – the whole is not equal to the sum of the parts, comparisons of quantity fails us, small changes produce large effects, the assumptions of a uniform and homogeneous continuum are not satisfied. Thus the results of Mathematical Psychics turn out to be derivative, not fundamental, indexes, not measurements, first approximations at the best; and fallible indexes, dubious approximations at that, with much doubt added as to what, if anything, they are indexes or approximations of.


Where ‘New Keynesian’ and New Classical economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they have to put a blind eye on the emergent properties that characterize all open social and economic systems. The interaction between animal spirits, trust, confidence, institutions, etc., cannot be deduced or reduced to a question answerable on the individual level. Macroeconomic structures and phenomena have to be analyzed also on their own terms.


11 Jul, 2020 at 09:45 | Posted in Politics & Society | 1 Comment

The Srebrenica genocide is the worst episode of mass murder within Europe since World War II. In July 1995 more than 7,000 Bosnian Muslims were slain by Bosnian Serb forces.

Today we pay tribute to the victims.

Let us never forget them.

Förbjud religiösa friskolor!

10 Jul, 2020 at 15:12 | Posted in Education & School | 1 Comment

Eleverna på Römosseskolan i Göteborg har delats upp i grupper efter kön och undervisats separat i bland annat idrott, engelska och slöjd. I en rapport som Skolinspektion gjort framkommer att skolan haft könsseparerade lektioner sedan den startades – för 22 år sedan. Först efter en lagändring gav myndigheten förra året skolan kritik för könsuppdelningen – vilken i våras ännu inte åtgärdats.


SVT Nyheter Väst har tidigare berättat om den fristående F-9-skolan Römosseskolan med islamisk profil som ligger i Gårdsten i Göteborg. Skolan har tidigare kritiserats av Skolinspektionen, bland annat för att bön inte upplevs som frivillig.

Under våren fick skolan kritik igen, den här gången för att flickor och pojkar delas upp i grupper efter kön. Nu kan SVT Nyheter Väst berätta att det i Skolinspektionen rapport från i våras framkommer att skolan haft könsuppdelad undervisning sedan den startades – för 22 år sedan.


Att något sådant kan förekomma i Sverige år 2020 är djupt beklämmande — och helt i strid med svensk skollag.

Självklart är det helt oacceptabelt att vissa föräldrars särintressen ställs ovanför svensk lag och barns grundlagsskyddade rättigheter. Svensk skola ska vara en frizon från allehanda försök att förvandla den till lekstuga för normativa mångkulturalister. Att inte slå vakt om skolan som en frizon är att svika alla de som kanske mer än alla andra verkligen behöver att samhället ställer upp och försvarar deras rättigheter som medborgare – oberoende av kön, etnicitet eller föräldrars religiösa uppfattningar.

I Sverige har vi länge okritiskt omhuldat en ospecificerad och odefinierad mångkulturalism. Om vi med mångkulturalism menar att det i vårt samhälle finns flera olika kulturer ställer detta inte till med problem. Då är vi alla mångkulturalister. Men om vi med mångkulturalism menar att det med kulturell tillhörighet och identitet också kommer specifika moraliska, etiska och politiska rättigheter och skyldigheter, talar vi om något helt annat. Då talar vi om normativ multikulturalism. Och att acceptera normativ mångkulturalism, innebär också att tolerera oacceptabel intolerans, eftersom den normativa mångkulturalismen innebär att specifika kulturella gruppers rättigheter kan komma att ges högre dignitet än samhällsmedborgarens allmänmänskliga rättigheter – och därigenom indirekt bli till försvar för dessa gruppers (eventuella) intolerans. I ett normativt mångkulturalistiskt samhälle kan institutioner och regelverk användas för att inskränka människors frihet utifrån oacceptabla och intoleranta kulturella värderingar.

Den normativa mångkulturalismen innebär att individer på ett oacceptabelt sätt reduceras till att vara passiva medlemmar av kultur- eller identitetsbärande grupper. Men tolerans innebär inte att vi måste ha en värderelativistisk inställning till identitet och kultur. De som i vårt samhälle i handling visar att de inte respekterar andra människors rättigheter, kan inte räkna med att vi ska vara toleranta mot dem.

Om vi ska värna om det moderna demokratiska samhällets landvinningar kan samhället inte omhulda en normativ mångkulturalism. I ett modernt demokratiskt samhälle måste ‘rule of law’ gälla – och gälla alla! Självklart måste detta också gälla skolan. Eller snarare — framför allt i skolan!

Mot dem som i vårt samhälle vill tvinga andra att leva efter deras egna religiösa, kulturella eller ideologiska trosföreställningar och tabun, ska samhället vara intolerant. Mot dem som vill tvinga samhället att anpassa lagar och regler till den egna religionens, kulturens eller gruppens tolkningar, ska samhället vara intolerant.

Vi lever numera i ett samhälle där identitet är något som skapas, och inte så mycket som förr, något som ärvs. Detta kan upplevas både som en befrielse och som en börda. Många unga människor upplever idag en ambivalens inför den frihet som avtraditionaliseringen av våra sociala liv inneburit. Detta kommer också i hög grad till uttryck i skolan. Mycket av de orienteringsproblem som unga ger uttryck för hänger samman med den norm- och värdeupplösning som den genomgripande omvandlingen av det moderna samhällslivet lett till. Förr definierades man tydligare av en ärvd social identitet. Idag är bilden ungdomar gör sig av livet att det i mycket större utsträckning handlar om vad de själva som individer vill göra av livet. Varje individ skapar sin egen identitet. Men detta gör också att ryggstödet att luta sig mot inte finns. Det är ”fri” rörelse under eget ansvar och egna våndor och rotlöshet.

När jag växte upp och gick i skolan på 1960- och 70-talen var det fortfarande en hyfsat klar demarkationslinje mellan skolan – som tog hand om våra kognitiva färdigheter – och familjen – som tog hand om det uppväxande släktets socialisationsmässiga och emotiva behov – och samhället i stort.

Skolan ska se till att fullt ut ta vara på varje elevs potential att leva ett annat liv än det de lever i dag. När kontinuitet, stabilitet och traditioner mister sin betydelse och självlegitimerande aura blir detta än viktigare. Skolan måste odla ”hoppets princip”. Utan det framtidsinriktade hoppet om en bättre värld kan inte skolan fullgöra sin uppgift. Därför kan inte heller socialisationsteoretiska explikationer kring frågan ”hur man blivit den man är” vara utgångspunkten. I skolans värld måste den bildningsteoretiska frågan ”hur man i framtiden blir det man har potential att bli” vara den riktgivande utgångspunkten.

Avstånd och avskiljande ger perspektiv. Skolan ska vara en ö i ett hav av samhälleliga rutiner. Att insistera på att skolan ska fortsätta närma sig elevernas upplevelsehorisonter är inte längre gångbart. Vi behöver idag inte mer av nivellering mellan elevernas livsvärld och skolan. Tvärtom. Vi behöver mer respekt för den nödvändiga skillnaden mellan dessa världar. Lärandet i skolan måste erkänna som utgångspunkt skillnaden mellan elevernas livsvärld och skolan själv för att kunna fungera som en framtidsinriktad broslagning.

Skola är inte samhälle eller familj. Skolan ska inte vara en förlängning av elevernas liv utanför skolan. Tvärtom. Den ska vara ett alternativ. Något annat. I sin annorlundahet ska den skapa betingelser för framtid och inte hålla fast elevers upplevelsehorisont i nutid. Skolan ska inte ge självbekräftelse för vad eleverna är, utan hjälpa dem till vad de kan bli.

Skolan ska vara den fasta punkt i unga människors tillvaro dit de kan komma och temporärt dra sig undan familje- och samhällslivets stormar. Skolan ska vara en ö i en värld full av intensiva förändringar. För att kunna lära sig saker krävs koncentration och möjligheter till avskärmning. Inte för att permanent dra sig undan livsvärldens bekymmer och besvär, utan för att – med den styrka, färdigheter och perspektiv som en kunskaps- och medborgarskapsgrundad skola kan ge – bättre kunna tackla de ständiga reala omvandlingar som kännetecknar våra liv.

Skolan kan och ska inte lösa eller ackommodera för alla de problem som en ständigt föränderlig öppen värld skapar. Skolan kan inte kompensera för moderniseringsprocessens alla risker. Familj och föräldrar – liksom samhället i stort – har ett ansvar som inte skolan bara kan förutsättas gå in och ersätta eller kompensera för. Många samhällsforskare beskriver familj, normer och samhällsliv som stadda i upplösning över allt idag. Just därför är det så viktigt att skolan inte i första hand ska fungera som en kompensatorisk samhällsinstitution. Då förlorar den sin själ. Då förlorar den sin aura och förmåga att fungera som energigivande dröm om att allt kan vara annorlunda och att skolan kan bidra till att det också blir annorlunda.

Vi har alla flera olika identiteter. Vi har alla olika aspirationer, bakgrunder och drömmar. Men i skolan ska vi mötas som jämlikar. Olika, men jämlika. När vi går in igenom skolporten är vi alla jämlikar. Att gå in i skolan innebär samtidigt att (temporärt) lämna familj och samhälle och gå in i ett begränsat rum med egna spelregler och mål. För en del av dagen går vi in i en värld där vi gemensamt skapar oss själva som medborgare och kunskapsutövare.

När inte familjen eller samhället står emot måste skolan kunna stå upp och ta tillvara det uppväxande släktets genuina emancipatoriska intressen. En bra skola är en viktig förutsättning för att unga människor ska kunna förverkliga sina drömmar om att i framtiden kunna förbättra sina villkor.

Skolan ska fostra kunskapande medborgare. En skola med religiösa, etniska, eller vinstgivande bevekelsegrunder är ingen bra skola. Skolan ska möta eleverna utifrån vad de kan bli och inte utifrån vad de är. Skolan ska förse elever med kompass i framtidslandskapet så att de kan lära sig manövrera i osäkra farvatten. För att kunna uppfylla hoppets princip måste skolan få vara en ö av god annorlundahet — ofjättrad av allehanda former av normativ mångkulturalism och identitetspolitik.

Paul Krugman — a case of dangerous neglect of methodological reflection

10 Jul, 2020 at 11:36 | Posted in Economics | 20 Comments

rosenbergAlex Rosenberg — chair of the philosophy department at Duke University, renowned economic methodologist and author of Economics — Mathematical Politics or Science of Diminishing Returns? — had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine a couple of years ago. Writes Rosenberg:

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics:

‘Specifically: we have a body of economic theory built around the assumptions of perfectly rational behavior and perfectly functioning markets. Any economist with a grain of sense — which is to say, maybe half the profession? — knows that this is very much an abstraction, to be modified whenever the evidence suggests that it’s going wrong. But nobody has come up with general rules for making such modifications.’

The trouble is that the macroeconomic evidence can’t tell us when and where maximization-and-equilibrium goes wrong, and there seems no immediate prospect for improving the assumptions of perfect rationality and perfect markets from behavioral economics, neuroeconomics, experimental economics, evolutionary economics, game theory, etc.

But these concessions are all the New Classical economists need to defend themselves against Krugman. After all, he seems to admit there is no alternative to maximization and equilibrium.

I think Rosenberg is on to something important here regarding Krugman’s neglect of methodological reflection.

When Krugman responded to my critique of IS-LM this hardly came as a surprise.  As Rosenberg notes, Krugman works with a very simple modeling dichotomy — either models are complex or they are simple. For years now, self-proclaimed “proud neoclassicist” Paul Krugman has in endless harping on the same old IS-LM string told us about the splendor of the Hicksian invention — so, of course, to Krugman simpler models are always preferred.

In an earlier post on his blog, Krugman argues that ‘Keynesian’ macroeconomics more than anything else “made economics the model-oriented field it has become.” In Krugman’s eyes, Keynes was a “pretty klutzy modeler,” and it was only thanks to Samuelson’s famous 45-degree diagram and Hicks’s IS-LM that things got into place. Although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” he still vehemently defends — and always have — the mathematization of economics:

I’ve seen quite a lot of what economics without math and models looks like — and it’s not good.

Sure, ‘New Keynesian’ economists like Krugman — and their forerunners, ‘Keynesian’ economists like Paul Samuelson and (young) John Hicks — certainly have contributed to making economics more mathematical and “model-oriented.”

wrong-tool-by-jerome-awBut if these math-is-the-message-modelers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematically formalized macro models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ these mathematical models do only hold under ceteris paribus conditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems.

Science should help us disclose the causal forces at work behind the apparent facts. But models — mathematical, econometric, or what have you — can never be more than a starting point in that endeavor. There is always the possibility that there are other (non-quantifiable) variables – of vital importance, and although perhaps unobservable and non-additive, not necessarily epistemologically inaccessible – that were not considered for the formalized mathematical model.

The kinds of laws and relations that ‘modern’ economics has established, are laws and relations about mathematically formalized entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real-world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made mathematical-statistical “nomological machines” they are rare, or even non-existent. Unfortunately, that also makes most of contemporary mainstream neoclassical endeavors of mathematical economic modeling rather useless. And that also goes for Krugman and the rest of the ‘New Keynesian’ family.

When it comes to modeling philosophy, Paul Krugman has in an earlier piece defended his position in the following words (my italics):

I don’t mean that setting up and working out microfounded models is a waste of time. On the contrary, trying to embed your ideas in a microfounded model can be a very useful exercise — not because the microfounded model is right, or even better than an ad hoc model, but because it forces you to think harder about your assumptions, and sometimes leads to clearer thinking. In fact, I’ve had that experience several times.

The argument is hardly convincing. If people put that enormous amount of time and energy that they do into constructing macroeconomic models, then they really have to be substantially contributing to our understanding and ability to explain and grasp real macroeconomic processes. If not, they should – after somehow perhaps being able to sharpen our thoughts – be thrown into the waste-paper-basket (something the father of macroeconomics, Keynes, used to do), and not as today, being allowed to overrun our economics journals and giving their authors celestial academic prestige.

Krugman’s explications on this issue are really interesting also because they shed light on a kind of inconsistency in his art of argumentation. During a couple of years, Krugman has in more than one article criticized mainstream economics for using too much (bad) mathematics and axiomatics in their model-building endeavors. But when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models. In his End This Depression Now — just to take one example — Paul Krugman maintains that although he doesn’t buy “the assumptions about rationality and markets that are embodied in many modern theoretical models, my own included,” he still find them useful “as a way of thinking through some issues carefully.”

When it comes to methodology and assumptions, Krugman obviously has a lot in common with the kind of model-building he otherwise criticizes.

The same critique – that when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models that he otherwise criticizes – can be directed against his new post. Krugman has said these things before, but I am still waiting for him to really explain HOW the silly assumptions behind IS-LM help him work with the fundamental issues. If one can only use those assumptions with — as Krugman says, “tongue in cheek” – well, why then use them at all? Wouldn’t it be better to use more adequately realistic assumptions and be able to talk clear without any tongue in cheek?

The final court of appeal for macroeconomic models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic model building is little more than “hand waving” that give us rather a little warrant for making inductive inferences from models to real-world target systems. If substantive questions about the real world are being posed, it is the formalistic-mathematical representations utilized to analyze them that have to match reality, not the other way around. As Keynes has it:

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the natural science, the material to which it is applied is, in too many respects, not homogeneous through time.

If macroeconomic models – no matter what ilk – make assumptions, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypotheses 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 let me — respectfully — summarize: A gadget is just a gadget — and brilliantly silly simple models — IS-LM included — do not help us working with the fundamental issues of modern economies any more than brilliantly silly complicated models — calibrated DSGE and RBC models included. And as Rosenberg rightly notices:

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics.


People who have their heads fuddled with nonsense

10 Jul, 2020 at 11:19 | Posted in Economics | 2 Comments

unemployment-line-great-depression_large_image1The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years… Our main task, therefore, will be to confirm the reader’s instinct that what seems sensible is sensible, and what seems nonsense is nonsense. We shall try to show him that the conclusion, that if new forms of employment are offered more men will be employed, is as obvious as it sounds and contains no hidden snags; that to set unemployed men to work on useful tasks does what it appears to do, namely, increases the national wealth; and that the notion, that we shall, for intricate reasons, ruin ourselves financially if we use this means to increase our well-being, is what it looks like – a bogy.

J. M. Keynes (1929)

Canned Heat

9 Jul, 2020 at 16:53 | Posted in Varia | 1 Comment


MMT basics

7 Jul, 2020 at 09:15 | Posted in Varia | 4 Comments

Monopoly telling us how the world works. | Monopoly, Wallpaper

RCTs and the limits of evidence-based policies

6 Jul, 2020 at 12:45 | Posted in Economics | Leave a comment

There is something paradoxical about Michael Gove’s recent speech calling for government to be “rigorous and fearless in its evaluation of policy and projects.” It’s that his praise for evidence-based policy has come in a year when we’ve seen that policy should sometimes not be based on rigorous evidence …

top5It’s sometimes hard to extrapolate the results of the RCTs lauded by Gove. They “prove”, for example, that parachutes don’t save lives. As Cartwright and Deaton say:

“Demonstrating that a treatment works in one situation is exceedingly weak evidence that it will work in the same way elsewhere; this is the ‘transportation’ problem.”

And where they do yield results, these can be hard to interpret. The average treatment effect hides important heterogeneity of effects on individuals, for example.

There’s also the problem that past evidence is no guide to the future … There are two very important categories of cases where past evidence doesn’t help us predict the future.

One is the problem of radical uncertainty: we can never be 100% confident that past statistical relationships will continue to hold. The other is that of reflexivity. Beliefs can change the world. For example, McLean and Pontiff and Cotter & McGeever have shown that when strong evidence emerges of stock market anomalies, these get competed away. In economic policy, the counterpart to this is Goodhart’s law: “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”

Chris Dillow

As Chris notes in his post, evidence-based theories and policies are highly valued nowadays. Randomization is supposed to control for bias from unknown confounders. The received opinion is that evidence based on randomized experiments, therefore, is the best.

More and more economists have also lately come to advocate randomization as the principal method for ensuring being able to make valid causal inferences.

Yours truly would however rather argue that randomization, just as econometrics, promises more than it can deliver, basically because it requires assumptions that in practice are not possible to maintain. Just as econometrics, randomization is basically a deductive method. Given the assumptions (such as manipulability, transitivity, separability, additivity, linearity, etc.) these methods deliver deductive inferences. The problem, of course, is that we will never completely know when the assumptions are right. And although randomization may contribute to controlling for confounding, it does not guarantee it, since genuine randomness presupposes infinite experimentation and we know all real experimentation is finite. And even if randomization may help to establish average causal effects, it says nothing of individual effects unless homogeneity is added to the list of assumptions. Real target systems are seldom epistemically isomorphic to our axiomatic-deductive models/systems, and even if they were, we still have to argue for the external validity of the conclusions reached from within these epistemically convenient models/systems. Causal evidence generated by randomization procedures may be valid in ‘closed’ models, but what we usually are interested in, is causal evidence in the real target system we happen to live in.

The point of making a randomized experiment is often said to be that it ‘ensures’ that any correlation between a supposed cause and effect indicates a causal relation. This is believed to hold since randomization (allegedly) ensures that a supposed causal variable does not correlate with other variables that may influence the effect.

The problem with that simplistic view on randomization is that the claims made are both exaggerated and false:

• Even if you manage to do the assignment to treatment and control groups ideally random, the sample selection certainly is — except in extremely rare cases — not random. Even if we make a proper randomized assignment, if we apply the results to a biased sample, there is always the risk that the experimental findings will not apply. What works ‘there,’ does not work ‘here.’ Randomization hence does not ‘guarantee ‘ or ‘ensure’ making the right causal claim. Although randomization may help us rule out certain possible causal claims, randomization per se does not guarantee anything!

• Even if both sampling and assignment are made in an ideal random way, performing standard randomized experiments only give you averages. The problem here is that although we may get an estimate of the ‘true’ average causal effect, this may ‘mask’ important heterogeneous effects of a causal nature. Although we get the right answer of the average causal effect being 0, those who are ‘treated’ may have causal effects equal to -100, and those ‘not treated’ may have causal effects equal to 100. Contemplating being treated or not, most people would probably be interested in knowing about this underlying heterogeneity and would not consider the average effect particularly enlightening.

• There is almost always a trade-off between bias and precision. In real-world settings, a little bias often does not overtrump greater precision. And — most importantly — in case we have a population with sizeable heterogeneity, the average treatment effect of the sample may differ substantially from the average treatment effect in the population. If so, the value of any extrapolating inferences made from trial samples to other populations is highly questionable.

• Since most real-world experiments and trials build on performing one single randomization, what would happen if you kept on randomizing forever, does not help you to ‘ensure’ or ‘guarantee’ that you do not make false causal conclusions in the one particular randomized experiment you actually do perform. It is indeed difficult to see why thinking about what you know you will never do, would make you happy about what you actually do.

Randomization is not a panacea. It is not the best method for all questions and circumstances. Proponents of randomization make claims about its ability to deliver causal knowledge that is simply wrong. There are good reasons to be skeptical of the now popular — and ill-informed — view that randomization is the only valid and best method on the market. It is not.

Eve of destruction

5 Jul, 2020 at 22:12 | Posted in Varia | Leave a comment


Think of all the hate there is in Red China!
Then take a look around to Selma, Alabama!
Ah, you may leave here, for four days in space
But when your return, it’s the same old place

Miserere mei

5 Jul, 2020 at 21:43 | Posted in Varia | Leave a comment


Miserere mei, Deus, secundum magnam misericordiam tuam
Et secundum multitudinem miserationum tuarum, dele iniquitatem mean

Pandemic depression antidote (XX)

4 Jul, 2020 at 16:20 | Posted in Varia | Leave a comment


Still makes me as happy as when I first heard it on the radio back in 1966!

Dags för socialdemokratin att göra upp med sin nyliberala åtstramningpolitik

4 Jul, 2020 at 16:00 | Posted in Economics, Politics & Society | 5 Comments

I stället för att använda den möjlighet som Coronakrisen inneburit att göra rent hus med nyliberalismens falska berättelser, har den socialdemokratiska partiledningen valt att försvara den ekonomiska politik som förts sedan 1990-talet …

bigOriginalTrots att nästan alla länder vi brukar jämföra oss med har kunnat göra lika stora eller betydligt större finanspolitiska satsningar i krisen, talas här i landet om att det skulle vara tack vare “ansvarsfull” sparpolitik förut som vi nu kan satsa och rädda jobb …

Trots att ojämlikheten förklarats vara tillväxthämmande och direkt farlig för demokratin. Och trots att Riksbankschefen förklarat att han kan skapa hur många svenska kronor som helst genom en enkel knapptryckning kommer redan varningarna från den socialdemokratiska ledningen och den moderata oppositionen om att vi snart måste börja “spara i ladorna” igen.

Åtstramning alltså, som svar på krisen.

Sofie Eriksson & Markus Kallifatides & Daniel Suhonen

Yours truly och några få andra nationalekonomer — som fortfarande har lite kontakt med verkligheten — har under ett par års tid nu frågat sig varför vi i det här landet har en regering som inte vågar satsa på en offensiv finanspolitik och låna mer. Inte minst mot bakgrund av de historiskt låga räntorna är det ett gyllene tillfälle att satsa på investeringar inom infrastruktur, vård, skola och välfärd.

Vad många politiker och mediala så kallade experter inte verkar (vilja) förstå är att det finns en avgörande skillnad mellan privata och offentliga skulder. Om en individ försöker spara och dra ner på sina skulder, så kan det mycket väl vara rationellt. Men om alla försöker göra det, blir följden att den aggregerade efterfrågan sjunker och arbetslösheten riskerar ökar.

En enskild individ måste alltid betala sina skulder. Men en stat kan alltid betala tillbaka sina gamla skulder med nya skulder. Staten är inte en individ. Statliga skulder är inte som privata skulder. En stats skulder är väsentligen en skuld till den själv, till dess medborgare.

En statsskuld är varken bra eller dålig. Den ska vara ett medel att uppnå två övergripande makroekonomiska mål — full sysselsättning och prisstabilitet. Vad som är ‘heligt’ är inte att ha en balanserad budget eller att hålla nere statsskulden. Om idén om ‘sunda’ statsfinanser leder till ökad arbetslöshet och instabila priser borde det vara självklart att den överges. ‘Sunda’ statsfinanser är osunt.

Tyvärr verkar det som om Magdalena Andersson — i likhet med många andra gamla studenter från Handelshögskolan i Stockholm — har rejäla kunskapsluckor. Kanske borde man sluta lära ut monetaristiskt Chicago-nonsens från 70-talet och istället följa med i teoriutvecklingen. Lite ‘functional finance’ och MMT kanske inte skulle skada även på maktelitens lekskola …

Ett lands statsskuld är sällan en orsak till ekonomisk kris, utan snarare ett symtom på en kris som sannolikt blir värre om inte underskotten i de offentliga finan­serna får öka.

Den ­svenska utlandsskulden är historiskt låg. Den konsoliderade statsskulden ligger idag på lite över 20 procent av BNP och enligt regeringens prognoser från tidigare i år kommer den att vara kring 16 procent om två år. Med tanke på de stora utmaningar som Sverige står inför i coronavirusets kölvatten är fortsatt tal om “ansvar” för statsbudgeten minst sagt oansvarigt. I stället för att ”värna om statsfinanserna” bör en ansvarsfull rege­ringen se till att värna om samhällets framtid. När numera t.o.m. IMF insett att det är kontraproduktivt att föra en ekonomisk politik med syfte att minska statsskulden, är det minst sagt bedrövligt när en regering inte insett att problemet med en statsskuld i en situation med nästintill negativa räntor inte är att den är för stor, utan för liten.

The alleged success of econometrics

4 Jul, 2020 at 12:01 | Posted in Statistics & Econometrics | 4 Comments

Man calculating from ladderEconometricians typically hail the evolution of econometrics as a “big success”. For example, Geweke et al. (2006) argue that “econometrics has come a long way over a relatively short period” … Pagan (1987) describes econometrics as “outstanding success” because the work of econometric theorists has become “part of the process of economic investigation and the training of economists” …

These claims represent no more than self-glorifying rhetoric … The widespread use of econometrics is not indicative of success, just like the widespread use of drugs does not represent social success. Applications of econometric methods in almost every field of economics is not the same as saying that econometrics has enhanced our understanding of the underlying issues in every field of economics. It only shows that econometrics is no longer a means to an end but rather the end itself. The use of econometric models by government agencies has not led to improvement in policy making, as we move from one crisis to another …

The observation that econometric theory has become part of the training of economists and the other observation of excess demand for well-trained econometricians are far away from being measures of success … The alleged success of econometrics has led to the production of economics graduates who may be good at number crunching but do not know much about the various economic problems faced by humanity. It has also led to the brain drain inflicted on the society by the movement of physicists, mathematicians and engineers to economics and finance, particularly those looking for lucrative jobs in the financial sector. At the same time, some good economists have left the field or retired early because they could not cope with the success of econometrics.

Imad Moosa / RWER

Mainstream economists often hold the view that if you are critical of econometrics it can only be because you are a sadly misinformed and misguided person who dislikes and does not understand much of it.

As Moosa’s eminent article shows, this is, however, nothing but a gross misapprehension.

And just as Moosa, Keynes certainly did not misunderstand the crucial issues at stake in his critique of econometrics. Quite the contrary. He knew them all too well — and was not satisfied with the validity and philosophical underpinnings of the assumptions made for applying its methods.

LierKeynes’ critique is still valid and unanswered in the sense that the problems he pointed at are still with us today and ‘unsolved.’ Ignoring them — the most common practice among applied econometricians — is not to solve them.

To apply statistical and mathematical methods to the real-world economy, the econometrician has to make some quite strong assumptions. In a review of Tinbergen’s econometric work — published in The Economic Journal in 1939 — Keynes gave a comprehensive critique of Tinbergen’s work, focusing on the limiting and unreal character of the assumptions that econometric analyses build on:

Completeness: Where Tinbergen attempts to specify and quantify which different factors influence the business cycle, Keynes maintains there has to be a complete list of all the relevant factors to avoid misspecification and spurious causal claims. Usually, this problem is ‘solved’ by econometricians assuming that they somehow have a ‘correct’ model specification. Keynes is, to put it mildly, unconvinced:

istheseptuagintaIt will be remembered that the seventy translators of the Septuagint were shut up in seventy separate rooms with the Hebrew text and brought out with them, when they emerged, seventy identical translations. Would the same miracle be vouchsafed if seventy multiple correlators were shut up with the same statistical material? And anyhow, I suppose, if each had a different economist perched on his a priori, that would make a difference to the outcome.

J M Keynes

Homogeneity: To make inductive inferences possible — and being able to apply econometrics — the system we try to analyze has to have a large degree of ‘homogeneity.’ According to Keynes most social and economic systems — especially from the perspective of real historical time — lack that ‘homogeneity.’ As he had argued already in Treatise on Probability (ch. 22), it wasn’t always possible to take repeated samples from a fixed population when we were analyzing real-world economies. In many cases, there simply are no reasons at all to assume the samples to be homogenous. Lack of ‘homogeneity’ makes the principle of ‘limited independent variety’ non-applicable, and hence makes inductive inferences, strictly seen, impossible since one of its fundamental logical premises are not satisfied. Without “much repetition and uniformity in our experience” there is no justification for placing “great confidence” in our inductions (TP ch. 8).

And then, of course, there is also the ‘reverse’ variability problem of non-excitation: factors that do not change significantly during the period analyzed, can still very well be extremely important causal factors.

Stability: Tinbergen assumes there is a stable spatio-temporal relationship between the variables his econometric models analyze. But as Keynes had argued already in his Treatise on Probability it was not really possible to make inductive generalizations based on correlations in one sample. As later studies of ‘regime shifts’ and ‘structural breaks’ have shown us, it is exceedingly difficult to find and establish the existence of stable econometric parameters for anything but rather short time series.

Measurability: Tinbergen’s model assumes that all relevant factors are measurable. Keynes questions if it is possible to adequately quantify and measure things like expectations and political and psychological factors. And more than anything, he questioned — both on epistemological and ontological grounds — that it was always and everywhere possible to measure real-world uncertainty with the help of probabilistic risk measures. Thinking otherwise can, as Keynes wrote, “only lead to error and delusion.”

Independence: Tinbergen assumes that the variables he treats are independent (still a standard assumption in econometrics). Keynes argues that in such a complex, organic, and evolutionary system as an economy, independence is a deeply unrealistic assumption to make. Building econometric models from that kind of simplistic and unrealistic assumptions risk producing nothing but spurious correlations and causalities. Real-world economies are organic systems for which the statistical methods used in econometrics are ill-suited, or even, strictly seen, inapplicable. Mechanical probabilistic models have little leverage when applied to non-atomic evolving organic systems — such as economies.

originalIt is a great fault of symbolic pseudo-mathematical methods of formalising a system of economic analysis … that they expressly assume strict independence between the factors involved and lose all their cogency and authority if this hypothesis is disallowed; whereas, in ordinary discourse, where we are not blindly manipulating but know all the time what we are doing and what the words mean, we can keep “at the back of our heads” the necessary reserves and qualifications and the adjustments which we shall have to make later on, in a way in which we cannot keep complicated partial differentials “at the back” of several pages of algebra which assume that they all vanish.

Building econometric models can’t be a goal in itself. Good econometric models are means that make it possible for us to infer things about the real-world systems they ‘represent.’ If we can’t show that the mechanisms or causes that we isolate and handle in our econometric models are ‘exportable’ to the real world, they are of limited value to our understanding, explanations or predictions of real-world economic systems.

The kind of fundamental assumption about the character of material laws, on which scientists appear commonly to act, seems to me to be much less simple than the bare principle of uniformity. They appear to assume something much more like what mathematicians call the principle of the superposition of small effects, or, as I prefer to call it, in this connection, the atomic character of natural law. 3The system of the material universe must consist, if this kind of assumption is warranted, of bodies which we may term (without any implication as to their size being conveyed thereby) legal atoms, such that each of them exercises its own separate, independent, and invariable effect, a change of the total state being compounded of a number of separate changes each of which is solely due to a separate portion of the preceding state …

The scientist wishes, in fact, to assume that the occurrence of a phenomenon which has appeared as part of a more complex phenomenon, may be some reason for expecting it to be associated on another occasion with part of the same complex. Yet if different wholes were subject to laws qua wholes and not simply on account of and in proportion to the differences of their parts, knowledge of a part could not lead, it would seem, even to presumptive or probable knowledge as to its association with other parts.

Linearity: To make his models tractable, Tinbergen assumes the relationships between the variables he study to be linear. This is still standard procedure today, but as Keynes writes:

It is a very drastic and usually improbable postulate to suppose that all economic forces are of this character, producing independent changes in the phenomenon under investigation which are directly proportional to the changes in themselves; indeed, it is ridiculous.

To Keynes, it was a ‘fallacy of reification’ to assume that all quantities are additive (an assumption closely linked to independence and linearity).

2014+22keynes%20illo2The unpopularity of the principle of organic unities shows very clearly how great is the danger of the assumption of unproved additive formulas. The fallacy, of which ignorance of organic unity is a particular instance, may perhaps be mathematically represented thus: suppose f(x) is the goodness of x and f(y) is the goodness of y. It is then assumed that the goodness of x and y together is f(x) + f(y) when it is clearly f(x + y) and only in special cases will it be true that f(x + y) = f(x) + f(y). It is plain that it is never legitimate to assume this property in the case of any given function without proof.

J. M. Keynes “Ethics in Relation to Conduct” (1903)

And as even one of the founding fathers of modern econometrics — Trygve Haavelmo — wrote:

What is the use of testing, say, the significance of regression coefficients, when maybe, the whole assumption of the linear regression equation is wrong?

Real-world social systems are usually not governed by stable causal mechanisms or capacities. The kinds of ‘laws’ and relations that econometrics has established, are laws and relations about entities in models that presuppose causal mechanisms and variables — and the relationship between them — being linear, additive, homogenous, stable, invariant and atomistic. But — when causal mechanisms operate in the real world they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. Since statisticians and econometricians — as far as I can see — haven’t been able to convincingly warrant their assumptions of homogeneity, stability, invariance, independence, additivity as being ontologically isomorphic to real-world economic systems, Keynes’ critique is still valid. As long as — as Keynes writes in a letter to Frisch in 1935 — “nothing emerges at the end which has not been introduced expressively or tacitly at the beginning,” I remain doubtful of the scientific aspirations of econometrics.

In his critique of Tinbergen, Keynes points us to the fundamental logical, epistemological, and ontological problems of applying statistical methods to a basically unpredictable, uncertain, complex, unstable, interdependent, and ever-changing social reality. Methods designed to analyze repeated sampling in controlled experiments under fixed conditions are not easily extended to an organic and non-atomistic world where time and history play decisive roles.

Econometric modeling should never be a substitute for thinking. From that perspective, it is really depressing to see how much of Keynes’ critique of the pioneering econometrics in the 1930s-1940s is still relevant today. And that is also a reason why yours truly — as does Moosa — has to keep on criticizing it.

The general line you take is interesting and useful. It is, of course, not exactly comparable with mine. I was raising the logical difficulties. You say in effect that, if one was to take these seriously, one would give up the ghost in the first lap, but that the method, used judiciously as an aid to more theoretical enquiries and as a means of suggesting possibilities and probabilities rather than anything else, taken with enough grains of salt and applied with superlative common sense, won’t do much harm. I should quite agree with that. That is how the method ought to be used.

J. M. Keynes, letter to E.J. Broster, December 19, 1939

Econometric patterns should never be seen as anything else than possible clues to follow. From a critical realist perspective, it is obvious that behind observable data there are real structures and mechanisms operating, things that are  — if we really want to understand, explain and (possibly) predict things in the real world — more important to get hold of than to simply correlate and regress observable variables.

Math cannot establish the truth value of a fact. Never has. Never will.

Paul Romer

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