Jan Garbarek revisited

26 Jun, 2012 at 16:34 | Posted in Varia | Comments Off on Jan Garbarek revisited

This week I’ve had more than 300 unique visitors on my Jan Garbarek post. For the benefit of those who still haven’t found their way to it – here it is again!

Die Arroganz der Macht (IV)

26 Jun, 2012 at 14:11 | Posted in Politics & Society | Comments Off on Die Arroganz der Macht (IV)

 

Die Arroganz der Macht (III)

26 Jun, 2012 at 14:05 | Posted in Politics & Society | Comments Off on Die Arroganz der Macht (III)

 

Die Arroganz der Macht (II)

26 Jun, 2012 at 14:01 | Posted in Politics & Society | Comments Off on Die Arroganz der Macht (II)

 

Die Arroganz der Macht (I)

26 Jun, 2012 at 13:46 | Posted in Politics & Society | Comments Off on Die Arroganz der Macht (I)

 

Economics – a discipline that has forgotten much of what it once knew

25 Jun, 2012 at 21:01 | Posted in Economics | Comments Off on Economics – a discipline that has forgotten much of what it once knew

A couple of days ago I had a piece on why mainstream economists have tended to go astray in their “shed of tools” and actually thereby contributed to causing todays’s economic crisis rather than to solving it.

J Bradford DeLong – professor of economics at Berkeley – writes on a related theme on Project Syndicate:

It is the scale of the catastrophe that astonishes me. But what astonishes me even more is the apparent failure of academic economics to take steps to prepare itself for the future. “We need to change our hiring patterns,” I expected to hear economics departments around the world say in the wake of the crisis.

The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases. We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists. We need more monetary historians and historians of economic thought and fewer model-builders …

Yet that is not what economics departments are saying nowadays.

Perhaps I am missing what is really going on. Perhaps economics departments are reorienting themselves after the Great Recession in a way similar to how they reoriented themselves in a monetarist direction after the inflation of the 1970’s. But if I am missing some big change that is taking place, I would like somebody to show it to me.

Perhaps academic economics departments will lose mindshare and influence to others – from business schools and public-policy programs to political science, psychology, and sociology departments. As university chancellors and students demand relevance and utility, perhaps these colleagues will take over teaching how the economy works and leave academic economists in a rump discipline that merely teaches the theory of logical choice.

Or perhaps economics will remain a discipline that forgets most of what it once knew and allows itself to be continually distracted, confused, and in denial. If that were that to happen, we would all be worse off.

Dutch books, money pumps and Bayesianism

25 Jun, 2012 at 15:52 | Posted in Economics, Theory of Science & Methodology | Comments Off on Dutch books, money pumps and Bayesianism

Neoclassical economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules (preferably the ones axiomatized by Ramsey (1931), de Finetti (1937) or Savage (1954)) – that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately – via some “Dutch book” or “money pump” argument – susceptible to being ruined by some clever “bookie”.

Bayesianism reduces questions of rationality to questions of internal consistency (coherence) of beliefs, but – even granted this questionable reductionism – do rational agents really have to be Bayesian? As I have been arguing elsewhere (e. g. here and here) there is no strong warrant for believing so, but in this post I want to make a point on the informational requirement that the economic ilk of Bayesianism presupposes.

In many of the situations that are relevant to economics one could argue that there is simply not enough of adequate and relevant information to ground beliefs of a probabilistic kind, and that in those situations it is not really possible, in any relevant way, to represent an individual’s beliefs in a single probability measure.

Say you have come to learn (based on own experience and tons of data) that the probability of you becoming unemployed in Sweden is 10%. Having moved to another country (where you have no own experience and no data) you have no information on unemployment and a fortiori nothing to help you construct any probability estimate on. A Bayesian would, however, argue that you would have to assign probabilities to the mutually exclusive alternative outcomes and that these have to add up to 1, if you are rational. That is, in this case – and based on symmetry – a rational individual would have to assign probability 10% to becoming unemployed and 90% of becoming employed.

That feels intuitively wrong though, and I guess most people would agree. Bayesianism cannot distinguish between symmetry-based probabilities from information and symmetry-based probabilities from an absence of information. In these kinds of situations most of us would rather say that it is simply irrational to be a Bayesian and better instead to admit that we “simply do not know” or that we feel ambiguous and undecided. Arbitrary an ungrounded probability claims are more irrational than being undecided in face of genuine uncertainty, so if there is not sufficient information to ground a probability distribution it is better to acknowledge that simpliciter, rather than pretending to possess a certitude that we simply do not possess.

I think this critique of Bayesianism is in accordance with the views of John Maynard Keynes’ A Treatise on Probability (1921) and General Theory (1937). According to Keynes we live in a world permeated by unmeasurable uncertainty – not quantifiable stochastic risk – which often forces us to make decisions based on anything but rational expectations. Sometimes we “simply do not know.” Keynes would not have accepted the view of Bayesian economists, according to whom expectations “tend to be distributed, for the same information set, about the prediction of the theory.” Keynes, rather, thinks that we base our expectations on the confidence or “weight” we put on different events and alternatives. To Keynes expectations are a question of weighing probabilities by “degrees of belief”, beliefs that have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents modeled by Bayesian economists.

Teaching macroeconomics in the aftermath of the crisis

24 Jun, 2012 at 18:11 | Posted in Economics, Theory of Science & Methodology | Comments Off on Teaching macroeconomics in the aftermath of the crisis

Simon Wren-Lewis has a piece on his blog on how teaching macroeconomics after the crisis looks:

I was asked the other day how macroeconomics teaching at Oxford had changed as a result of the Great Recession of 2008-9. My answer, which was not much, seemed a little surprising at first …

So why was my answer not much? Because although the crisis has added material, nothing has really been thrown away as a consequence of what has happened. We have not, either individually or collectively, decided that the Great Recession implies that some chunk of what we used to teach is clearly wrong and should be jettisoned as a result. Speaking for myself and my second year undergraduate lectures, quite the opposite is the case. As Paul Krugman has pointed out many times, recent developments have in many ways been a vindication of the basic Keynesian model that lies at the heart of any undergraduate macro course.

Indeed, I would go even further. The mess we are currently in is due in part to policy makers ignoring this basic macroeconomic analysis.

To be honest, this citation really gets me rather gobsmacked. First of all because I find its rather self-congratulatory and complacent attitude unwarranted. But also – re Krugman – because it, at least to my reading,  seems to be in bad accordance with what Krugman has repeatedly said after the finance crisis, e. g. in his speach at the Eastern Economic  Association: Read more

On the poverty of the neoclassical “representative actor”

24 Jun, 2012 at 10:40 | Posted in Economics, Theory of Science & Methodology | Comments Off on On the poverty of the neoclassical “representative actor”

The purported strength of new-classical and new-Keynesian macroeconomics is that they have firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing “forward-loooking” individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations – without ever presenting neither ontological nor epistemological justifications for this claim – has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if – after having swallowed the sour grapes of the Sonnenschein-Mantel-Debreu-theorem – these economists want to resurrect the omniscient walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world (how that could even be conceivable is beyond my imagination, given that the ongoing debate on microfoundations, if anything, shows that not even we, the economists, can come to agreement on a common model).

Following the greatest economic depression since the 1930s, the grand old man of modern economic growth theory, Nobel laureate Robert Solow, on July 20, 2010, gave a prepared statement on “Building a Science of Economics for the Real World” for a hearing in the U. S. Congress. According to Solow modern macroeconomics has not only failed at solving present economic and financial problems, but is “bound” to fail. Building dynamically stochastic general equilibrium models (DSGE) on “assuming the economy populated by a representative agent” – consisting of “one single combination worker-owner-consumer-everything-else who plans ahead carefully and lives forever” – do not pass “the smell test: does this really make sense?” One cannot but concur in Solow’s surmise that a thoughtful person “faced with the thought that economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on.”

Already in 2008 Solow had – in “The State of Macroeconomics” (Journal of Economic Perspectives 2008:243-249) – told us of what he thought of microfounded “modern macro”:

[When modern macroeconomists] speak of macroeconomics as being firmly grounded in economic theory, we know what they mean … They mean a macroeconomics that is deduced from a model in which a single immortal consumer-worker-owner maximizes a perfectly conventional time-additive utility function over an infinite horizon, under perfect foresight or rational expectations, and in an institutional and technological environment that favors universal price-taking behavior …

No one would be driven to accept this story because of its obvious “rightness”. After all, a modern economy is populated by consumers, workers, pensioners, owners, managers, investors, entrepreneurs, bankers, and others, with different and sometimes conflicting desires, information, expectations, capacities, beliefs, and rules of behavior … To ignore all this in principle does not seem to qualify as mere abstraction – that is setting aside inessential details. It seems more like the arbitrary suppression of clues merely because they are inconvenient for cherished preconceptions …

Friends have reminded me that much effort of ‘modern macro’ goes into the incorporation of important deviations from the Panglossian assumptions … [But] a story loses legitimacy and credibility when it is spliced to a simple, extreme, and on the face of it, irrelevant special case. This is the core of my objection: adding some realistic frictions does not make it any more plausible than an observed economy is acting out the desires of a single, consistent, forward-looking intelligence …

It seems to me, therefore, that the claim that ‘modern macro’ somehow has the special virtue of following the principles of economic theory is tendentious and misleading … The other possible defense of modern macro is that, however special it may seem, it is justified empirically. This strikes me as a delusion …

So I am left with a puzzle, or even a challenge. What accounts for the ability of ‘modern macro’ to win hearts and minds among bright and enterprising academic economists? … There has always been a purist streak in economics that wants everything to follow neatly from greed, rationality, and equilibrium, with no ifs, ands, or buts … The theory is neat, learnable, not terribly difficult, but just technical enough to feel like ‘science’. Moreover it is practically guaranteed to give laissez-faire-type advice, which happens to fit nicely with the general turn to the political right that began in the 1970s and may or may not be coming to an end.

Why have other ways of doing macro (purportedly) died out and the microfoundations approach become so dominant?
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Why neoclassical “Walt Disney-economics” still gets me totally gobsmacked

23 Jun, 2012 at 20:05 | Posted in Economics | 4 Comments

Price rigidities of all kinds are common in real economies. The nodal point in the macroeconomic debate between different “schools” today, however, is not their existence, but rather that even if they did not exist, our economies would not turn into the kind of Panglossian full employment equilibrium fiction world that neoclassical macroeconomists seems to take more or less for granted.

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 between model and reality, most neoclassical macroeconomic modelbuilding is little more than “hand waving” that give us rather 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 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 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.

People calling themselves macroeconomists ought to be rather embarrassed by the fact that the kind of microfounded dynamic stochastic general equilibrium models they use, cannot incorporate such a basic fact of reality as involuntary unemployment!
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Unemployment, Ricardian equivalence and accounting identities

23 Jun, 2012 at 16:10 | Posted in Economics | 2 Comments

A couple of days ago yours truly had a discussion on explanations of unemployment with a young economist here on the blog. He was complaining that I hadn’t realized that “the macroeconomy is, whether you like it or not, a closed system” and that “my spending is your income, and your spending is my income”. Basically, to him it was all “pure accounting”.

For those – young Cambridge economists or not – still having problems with understanding the nuts and bolts of what’s wrong with Ricardian equivalence and the traditional neoclassical explanation of unemployment, perhaps this little lecture from Oxford might help:

Q: If consumers spend less and save more, does this mean investment must increase?

A: Absolutely not. Someone increasing their saving does not automatically imply that some firm will decide to buy more capital goods.

Q: But surely savings equals investment by identity in the national accounts.

A: Indeed. Total output = total income = total expenditure = Y. In the most simple model of a closed economy without government, income (Y) = consumption (C) + saving (S), but also expenditure (Y) = consumption (C) + investment (I). So S=I by definition. But here investment includes what is called ‘stockbuilding’ or ‘inventory accumulation’, which includes goods that firms wanted to sell but could not. To make this clear, lets split measured investment (I) into these two components: I=DK (buying new capital goods) +DS (stockbuilding). So if people consume less (C falls), but investment in new capital (DK) stays the same, measured investment rises because firms accumulate inventories of the goods that consumers did not buy (DS rises).

Q: But this situation cannot continue, as firms may be losing money.

A: Exactly. They will cut back on their output, incomes will fall, consumption may fall further, and savings will also fall, cutting back on the initial increase that we started with.

Q: When will this process stop?

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Hyman Minsky and the “coyote moment”

23 Jun, 2012 at 11:45 | Posted in Economics | Comments Off on Hyman Minsky and the “coyote moment”

As a young research stipendiate in the U.S. at the beginning of the 1980s yours truly had the great pleasure and privelege of having Hyman Minsky as teacher. He was a great inspiration at the time. He still is.
 

Neoclassical economics has caused today’s crisis

22 Jun, 2012 at 21:03 | Posted in Economics | Comments Off on Neoclassical economics has caused today’s crisis

Oxford professor John Kay has a very interesting article on why economists have tended to go astray in their – as my old mentor Erik Dahmén used to say – “shed of tools”. Essential reading for all those who want to understand why orthodox – neoclassical – economists actively have contributed to causing todays’s economic crisis rather than to solving it.

Perhaps this becomes less perplexing to grasp when one considers what one of its main proponents today – Robert Lucas – maintained already in 1983:

My thesis in this lecture is that macroeconomics in this original sense has succeeded: its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

And this comes from an economist who has built his whole career on the assumption that people are hyper rational “robot imitations” with rational expectations and next to perfect ability to process information. Mirabile dictu!

Euro crisis as a neoliberal shock therapy

22 Jun, 2012 at 10:46 | Posted in Economics | Comments Off on Euro crisis as a neoliberal shock therapy

 

Blomstertid

22 Jun, 2012 at 10:23 | Posted in Varia | Comments Off on Blomstertid

 

Why the euro is doomed

21 Jun, 2012 at 00:53 | Posted in Economics | Comments Off on Why the euro is doomed

Tim Worstall  knows why:
 

 

The euro is doomed to fall apart: no, not because I’m some nasty man in UKIP but because the basic idea was such a terrible one. Our chart above shows just how terrible it was. It would, in economic terms, have been better to have a new currency for all countries beginning with the letter M than for the eurozone. Or for all countries that have the 5th parallel North passing through them.

Yes, of course, we all know, the euro is the bright new dawn, the vital step in stopping Germany from invading France. Again. No one seems to have noticed it that they managed it last time and having experienced the place seem to have no desire at all to go back. So this might not be a problem that needs a solution.

However, let’s look behind the political posturing and ask ourselves whether, in economic terms, the euro was a sensible idea. The structure we need to help us decide is Robert Mundell’s concept of an Optimum Currency Area. We should look at things like language barriers, labour mobility, capital, the similarity between economies, their reaction to external shocks – essentially what has been worked out for us in that chart.

And, as you can see, it’s a blitheringly stupid idea to try and push countries into the same currency just because they happen to be next door to each other. People would have been better off if we’d insisted that the c. 1800 Ottoman Empire had the same currency again: Tunisia, Turkey, Israel and Greece. Which is a real indication of how dumb it was to try and get Greece and Germany into the same currency.

So a very silly thing done by those Very Serious People who have decided they’d like to rule us.
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The euro – “a pole of stability for the global economy”?

20 Jun, 2012 at 23:51 | Posted in Economics | Comments Off on The euro – “a pole of stability for the global economy”?

Only four years ago European Union Commissioner for Economic and Monetary Affairs – Joaquín Almunia  – blissfully declared that the euro was “a resounding success”:

It is ten years since the decision was taken to go ahead with a single currency for Europe, the euro. On 1 January 2009, the euro will be ten years old. Like the process of European integration as a whole, Economic and Monetary Union was a simultaneously visionary yet pragmatic project. A major step towards fulfilling the ideal of an ‘ever closer union’ among the peoples of Europe, it was achieved through close coordination and convergence of economic policies, and careful technical preparations among the EU countries.

Ten years on, it is a historic achievement of which all Europeans can be proud. Not only is such a currency union unprecedented in history; we can declare it a resounding success. Within the space of a decade it has clearly become the second most important currency in the world; it has brought economic stability; it has promoted economic and financial integration, and generated trade and growth among its members; and its framework for sound and sustainable public finances helps ensure that future generations can continue to benefit from the social systems that Europe is justly famous for. At the same time, the internal functioning of EMU and its external representation could be strengthened.

Now most people know better. Especially in Greece, where the unemployment rate is close to 25% and 50% for youth. The euro is a resounding failure. And some of us told you four years ago.

Tribal knowledge and economics

20 Jun, 2012 at 14:54 | Posted in Varia | Comments Off on Tribal knowledge and economics

In fact, it is increasingly clear to me that the vast majority of people in the world, including the vast majority of smart people and educated people and well-informed people, subscribe to tribal “knowledge” over actual knowledge.

Whatever. I can’t jump on that boat. It would be nice to have an army at my back, but I can never betray science. My ideas may be wrong, or I may misapprehend the evidence, and that’s fine – I try never to be too certain that I’m right. But I just can’t bring myself to misrepresent my honest intellectual thought on a science-related topic just to appease the folks who are supposed to be on my “team”.

I mean, come on, people. Why do you think “conservative economics” went off the rails in the first place? Was it because it was conservative, and conservatism is bad and liberalism is good? Many people are probably nodding their heads. Well, maybe that’s why. But my money is on another explanation. I think that when economists who were conservative became “conservative economists” – when they let  their normative ideas guide their positive ideas – they allowed themselves to stop going by the evidence. And that diluted the quality of their theories, which is why there is such ample low-hanging fruit for liberal criticism of economics in this day and age.

I’m not going to do that. I like having a gang, but science has got to come first. If that gets me some angry comments, so be it. As Feynman said: “If we take everything into account, not only what the ancients knew, but all of what we know today that they didn’t know, then I think we must frankly admit that we do not know. But in admitting this, we have probably found the open channel.”

Noah Smith

Svenskarna vill ha en statlig skola

20 Jun, 2012 at 09:16 | Posted in Education & School | Comments Off on Svenskarna vill ha en statlig skola

Enligt en undersökning som Novus genomfört på uppdrag av Lärarnas Riksförbund vill en majoritet (56 %) av den svenska befolkningen att skolan ska förstatligas. Miljöpartiets, Vänsterpartiets, Moderaternas, Folkpartiets och Socialdemokraternas väljare anser att skolan bör förstatligas. Trots detta är det bara Folkpartiet som driver frågan i riksdagen.

Enligt Saco:s livslöneberäkningar av hur olika utbildningsval lönar sig sett över hela livet, visar det sig att det är en ren förlustaffär att utbilda sig till lärare. För samtliga lärarutbildningar gäller att de ger en negativ avkastning – de har alltså sämre livslön än de som börjar jobba direkt efter gymnasiet istället för att skaffa sig en högskoleexamen.

Allra sämst löneutveckling har lärare i grundskolans tidigare år. När de går i pension har de tjänat nästan tio procent mindre än klasskamraterna som började arbeta direkt efter gymnasiestudierna.

Höjda lärarlöner är inte en tillräcklig förutsättning för att vi åter ska få en svensk skola av världsklass. Men det är en nödvändig förutsättning! Omfattande skolforskning har övertygande visat att det kommunala huvudmannaskapet är en av de viktigaste orsakerna bakom lärarlönernas och den svenska skolans kräftgång de senaste decennierna.

De politisk partierna måste droppa sina ideologiska skygglappar och inse att en och annan helig ko måste slaktas om vi ska få rätt på svensk skola. Folkpartiet insåg redan för nästan tio år sedan att när skolfakta sparkar så får man vara så god att ändra kurs – även om det eventuellt skulle stå i strid med ideologin. När ska övriga allianspartier och socialdemokratin våga ta det steget?

Den ensamma människan

20 Jun, 2012 at 09:05 | Posted in Varia | Comments Off on Den ensamma människan

Jag tror på den ensamma människan,
på henne som vandrar ensam,
som inte hundlikt löper till vittring,
som inte varglikt flyr för mänskovittring:
På en gång människa och anti-människa.

Hur nå gemenskap?
Fly den övre och yttre vägen:
Det som är boskap i andra är boskap också i dig.
Gå den undre och inre vägen:
Det som är botten i dig är botten också i andra.

Svårt att vänja sig vid sig själv.
Svårt att vänja sig av med sig själv.

Den som gör det skall ändå aldrig bli övergiven.
Den som gör det skall ändå alltid förbli solidarisk.
Det opraktiska är det enda praktiska
i längden.

Gunnar Ekelöf

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