Economics – a science with amnesia

29 December, 2012 at 12:31 | Posted in Economics | Comments Off on Economics – a science with amnesia

A couple of days ago yours truly had a piece on why mainstream economists have tended to go astray in their tool-sheds and actually thereby have contributed to causing today’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 …

BradfordDelong

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.

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Resisting intuition

28 December, 2012 at 13:40 | Posted in Varia | 6 Comments

One of the main functions of System 2 is to monitor and control thoughts and actions “suggested” by System 1 … For an example, here is a simple puzzle. Do not try to solve it but listen to your intuition:

     A bat and ball cost $1.10.

     The bat costs one dollar more than the ball.

     How much does the ball cost?

THINKING-FAST-AND-SLOW
 
A number came to your mind. The number, of course, is 10: 10 cents. The distinctive mark of this easy puzzle is that it evokes an answer that is intuitive, appealing, and wrong … The right answer is 5 cents.

Annie “Margaret Thatcher” Lööf i välförtjänt utförsbacke

27 December, 2012 at 12:09 | Posted in Politics & Society | 5 Comments

annielööfEnligt en Sifo-under-sökning beställd av Aftonbladet rasar nu förtroendet för center-ledaren Annie Lööf.

Nu har bara var femte väljare stort eller mycket stort förtroende för henne.

För ett år sedan var det nästan en tredjedel

Förvånande? Knappast – för få svenskar tänder på vad fru Lööf argumenterat och motionerat för på senare år:

Inför plattskatt (lägre skatt för höginkomsttagare)
Avskaffa lagen om anställningsskydd
Inskränk strejkrätten
Inför marknadshyror
Sälj ut SvT och SR
Sverige bör gå med i NATO
Bygg ut kärnkraften

Med en sådan politisk agenda är det naturligt att centerns alla väljare snart får plats på Stureplan.

Verkligheten börjar nu komma ikapp vår egen Margaret Thatcher. Det börjar dra ihop sig till ett uppvaknande ur den nyliberala mardröm denna politiska broiler och klyschmakare lyckats dra ner det en gång så stolta centerpartiet i …

Juloratoriet

25 December, 2012 at 14:00 | Posted in Varia | Comments Off on Juloratoriet

Bedövande vackert och nästintill outhärdligt smärtsamt berörande.
Stefan Nilsson har skrivit musiken till filmatiseringen av Göran Tunströms episka mästerverk Juloratoriet.
 

The Angels’ Share

25 December, 2012 at 10:55 | Posted in Varia | 3 Comments

 

Little Drummer Boy

24 December, 2012 at 11:53 | Posted in Varia | Comments Off on Little Drummer Boy

 

Jussi Björling – O Holy Night

23 December, 2012 at 18:45 | Posted in Varia | 1 Comment

 

Why econometrics still hasn’t delivered (wonkish)

23 December, 2012 at 12:04 | Posted in Statistics & Econometrics | 3 Comments

In the article The Scientific Model of Causality renowned econometrician and Nobel laureate James Heckman writes (emphasis added):

 A model is a set of possible counterfactual worlds constructed under some rules. The rules may be laws of physics, the consequences of utility maximization, or the rules governing social interactions … A model is in the mind. As a consequence, causality is in the mind.

Even though this is a standard view among econometricians, it’s – at least from a realist point of view – rather untenable. The reason we as scientists are interested in causality is that it’s a part of the way the world works. We represent the workings of causality in the real world by means of models, but that doesn’t mean that causality isn’t a fact pertaining to relations and structures that exist in the real world. If it was only “in the mind,” most of us couldn’t care less.

icebergsThe reason behind Heckman’s and most other econometricians’ nominalist-positivist view of science and models, is the belief that science can only deal with observable regularity patterns of a more or less lawlike kind. Only data matters and trying to (ontologically) go beyond observed data in search of the underlying real factors and relations that generate the data is not admissable. All has to take place in the econometric mind’s model since the real factors and relations according to the econometric (epistemologically based) methodology are beyond reach since they allegedly are both unobservable and unmeasurable. This also means that instead of treating the model-based findings as interesting clues for digging deepeer into real structures and mechanisms, they are treated as the end points of the investigation. Or as Asad Zaman puts it in Methodological Mistakes and Econometric Consequences:

Instead of taking it as a first step, as a clue to explore, conventional econometric methodology terminates at the discovery of a good fit … Conventional econometric methodology is a failure because it is merely an attempt to find patterns in the data, without any tools to assess whether or not the given pattern reflects some real forces which shape the data.

The critique put forward here is in line with what mathematical statistician David Freedman writes in  Statistical Models and Causal Inference (2010):

In my view, regression models are not a particularly good way of doing empirical work in the social sciences today, because the technique depends on knowledge that we do not have. Investigators who use the technique are not paying adequate attention to the connection – if any – between the models and the phenomena they are studying. Their conclusions may be valid for the computer code they have created, but the claims are hard to transfer from that microcosm to the larger world …

Given the limits to present knowledge, I doubt that models can be rescued by technical fixes. Arguments about the theoretical merit of regression or the asymptotic behavior of specification tests for picking one version of a model over another seem like the arguments about how to build desalination plants with cold fusion and the energy source. The concept may be admirable, the technical details may be fascinating, but thirsty people should look elsewhere …

Causal inference from observational data presents may difficulties, especially when underlying mechanisms are poorly understood. There is a natural desire to substitute intellectual capital for labor, and an equally natural preference for system and rigor over methods that seem more haphazard. These are possible explanations for the current popularity of statistical models.

Indeed, far-reaching claims have been made for the superiority of a quantitative template that depends on modeling – by those who manage to ignore the far-reaching assumptions behind the models. However, the assumptions often turn out to be unsupported by the data. If so, the rigor of advanced quantitative methods is a matter of appearance rather than substance.

Econometrics is  basically a deductive method. Given  the assumptions (such as manipulability, transitivity, Reichenbach probability principles, separability, additivity, linearity etc) it delivers deductive inferences. The problem, of course, is that we will never completely know when the assumptions are right. Real target systems are seldom epistemically isomorphic to 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 statistical/econometric procedures like regression analysis 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.

Most advocates of econometrics and regression analysis want  to have deductively automated answers to  fundamental causal questions. Econometricians think – as David Hendry expressed it in Econometrics – alchemy or science? (1980) –  they “have found their Philosophers’ Stone; it is called regression analysis and is used for transforming data into ‘significant results!'” But as David Freedman poignantly notes in Statistical Models: “Taking assumptions for granted is what makes statistical techniques into philosophers’ stones.” To apply “thin” methods we have to have “thick” background knowledge of  what’s going on in the real world, and not in idealized models. Conclusions  can only be as certain as their premises – and that also applies to the quest for causality in econometrics and regression analysis.

Without requirements of depth, explanations most often do not have practical significance. Only if we search for and find fundamental structural causes, can we hopefully also take effective measures to remedy problems like e.g. unemployment, poverty, discrimination and underdevelopment. A social science must try to establish what relations exist between different phenomena and the systematic forces that operate within the different realms of reality. If econometrics is to progress, it has to abandon its outdated nominalist-positivist view of science and the belief that science can only deal with observable regularity patterns of a more or less law-like kind. Scientific theories ought to do more than just describe event-regularities and patterns – they also have to analyze and describe the mechanisms, structures, and processes that give birth to these patterns and eventual regularities.

Sporadic blogging

22 December, 2012 at 12:35 | Posted in Varia | Comments Off on Sporadic blogging

Christmas is here again – and with five kids in the family, blogging can’t have top priority. Regular blogging will be resumed late next week.

Winter is not my season, so I’m already longing for when the view from my library once again looks like this:
 
clemens

Dutch books and money pumps (wonkish)

22 December, 2012 at 10:43 | Posted in Statistics & Econometrics | 4 Comments

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”.
 
dutch5
 
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’s 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.

Money and finance

21 December, 2012 at 17:44 | Posted in Economics | 9 Comments

 

Oh dear, oh dear, Krugman gets it so wrong, so wrong, on the state of macroeconomics

21 December, 2012 at 11:30 | Posted in Economics, Theory of Science & Methodology | 2 Comments

Back in 1938 Keynes wrote in a letter to Harrod:

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 typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time. The object of a model is to segregate the semi-permanent or relatively constant factors from those which are transitory or fluctuating so as to develop a logical way of thinking about the latter, and of understanding the time sequences to which they give rise in particular cases … Good economists are scarce because the gift for using “vigilant observation” to choose good models, although it does not require a highly specialised intellectual technique, appears to be a very rare one.

I came to think of this passage when I read “sort of  New Keynesian” economist Paul Krugman’s blog yesterday. Krugman  weighs in on the ongoing discussion on the state of macro, arguing that even though he and other “sort of New Keynesian” macroeconomists use the same “equipment” as RBC-New-Classical-freshwater macroeconomists, he resents the allegation that they are a fortiori sharing the the same endeavour. Krugman writes:

The real test came when the financial crisis struck, and pretty much to a man freshwater economists not only argued against fiscal stimulus — which is a defensible position — but insisted that there was no possible way to justify stimulus, that such ideas had been refuted and that “nobody” believed in them anymore  … I’m not saying that the [“New Keynesian”] NK approach is necessarily right; but it’s a serious intellectual effort, undertaken by people who thought they were part of an open professional dialogue. Oh, and there’s a lot of evidence for the price stickiness that is central to NK models; again, maybe it doesn’t mean what the theorists think, but surely that evidence ought to be part of any discussion.

Here we get a view that all macroeconomists more or less share the same (mainstream neoclassical) basic theory and “techniques”, so when we discuss and argue it’s only about which special assumptions we choose to make (sticky wages or not). But people like Hyman Minsky, Michal Kalecki, Sidney Weintraub, Johan Åkerman, Gunnar Myrdal, Paul Davidson, Axel Leijonhufvud – and yours truly – do not share any theory or models with Real Business Cycle theorists and  “sort of New Keynesians” like Greg Mankiw or Paul Krugman.

It’s nice to see that Krugman explicitly acknowledges what I have argued for many years now – “New Keynesian” macroeconomic models are at heart based on the modelling strategy of RBC and DSGE – representative agents, rational expectations, equilibrium and all that. And yes, they do have some minor idiosyncracies like “menu costs,” “price rigidities” and “sticky wages.” But the differencies are not really that fundamental. The basic model assumptions are the same.

Talking of Krugman, this really shouldn’t come as a surprise. In 1996 Krugman was invited to speak to the European Association for Evolutionary Political Economy. So here – right from the horse’s mouth – I quote from the speech (emphasis added):

I like to think that I am more open-minded about alternative approaches to economics than most, but I am basically a maximization-and-equilibrium kind of guy. Indeed, I am quite fanatical about defending the relevance of standard economic models in many situations …

I may have more sympathy for standard economics than most of you. My criticisms are those of someone who loves the field and has seen that affection repaid. I don’t know if that makes me morally better or worse than someone who criticizes from outside, but anyway it makes me different …

To me, it seems that what we know as economics is the study of those phenomena that can be understood as emerging from the interactions among intelligent, self-interested individuals … Personally, I consider myself a proud neoclassicist. By this I clearly don’t mean that I believe in perfect competition all the way. What I mean is that I prefer, when I can, to make sense of the world using models in which individuals maximize and the interaction of these individuals can be summarized by some concept of equilibrium. The reason I like that kind of model is not that I believe it to be literally true, but that I am intensely aware of the power of maximization-and-equilibrium to organize one’s thinking … 

If anything, this shows what a gross misnomer “New Keynesianism” is. The macroeconomic modelling strategy of people like Greg Mankiw and Paul Krugman has a lot to do with Robert Lucas and Thomas Sargent – and very little, or next to nothing, to do with the founder of macroeconomics, John Maynard Keynes. “New Keynesian” macroeconomic models build on Real Business Cycle foundations,  regularly assuming representative actors, rational expectations, market clearing and equilibrium. But if 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.

For those of us who have not forgotten the history of our discipline, and not bought the freshwater nursery tale of Lucas et consortes that Keynes was not “serious thinking,” we can easily see that there exists a macroeconomic tradition inspired by Keynes – a tradition that has absolutely nothing to do with any New Synthesis or “New Keynesianism” to do. Its ultimate building-block is the perception of genuine uncertainty and that people often “simply do not know.” Real actors can’t know everything and their acts and decisions are not simply possible to sum or aggregate without the economist risking to succumb to “the fallacy of composition”.

Instead of basing macroeconomics on unreal and unwarranted generalizations of microeconomic behaviour and relations, it is far better to accept the ontological fact that the future to a large extent is uncertain, and rather conduct macroeconomics on this fact of reality.

The real macroeconomic challenge is to accept uncertainty and still try to explain why economic transactions take place – instead of simply conjuring the problem away by assuming uncertainty to be reducible to stochastic risk. That is scientific cheating. And it has been going on for too long now.

The Keynes-inspired building-blocks are there. But it is admittedly a long way to go before the whole construction is in place. But the sooner we are intellectually honest and ready to admit that “modern” neoclassical macroeconomics – “New Keynesian” or not – has come to way’s end – the sooner we can redirect are aspirations and knowledge in more fruitful endeavours.

Building models based on an “equipment” that assumes the equivalent of portraying people as being green and coming from Mars is not a sound foundation. There has to be better ways to optimize are time and scientific endeavours than spending hours and hours working through or constructing irrelevant “New Keynesian” RBC and DSGE macroeconomic models. I would rather recommend macroeconomists reallocating their time and endeavours into constructing better, real and relevant macroeconomic models – models that really help us to explain and understand reality.

Macroeconomics wars and rational expectations

20 December, 2012 at 14:36 | Posted in Economics | 3 Comments

In the latest issue of Real-World Economics Review (December 2012) yours truly has a paper on the Rational Expectations Hypothesis – Rational expectations – a fallacious foundation for macroeconomics in a non-ergodic world. Similar critique of REH is put forward in a recent book by Roman Frydman and Michael Goldberg:

Beyond_Mechanical_MarketsThe belief in the scientific stature of fully predetermined models, and in the adequacy of the Rational Expectations Hypothesis to portray how rational individuals think about the future, extends well beyond asset markets. Some economists go as far as to argue that the logical consistency that obtains when this hypothesis is imposed in fully predetermined models is a precondition of the ability of economic analysis to portray rationality and truth.

For example, in a well-known article published in The New York Times Magazine in September 2009, Paul Krugman (2009, p. 36) argued that Chicago-school free-market theorists “mistook beauty . . . for truth.” One of the leading Chicago economists, John Cochrane (2009, p. 4), responded that “logical consistency and plausible foundations are indeed ‘beautiful’ but to me they are also basic preconditions for ‘truth.’” Of course, what Cochrane meant by plausible foundations were fully predetermined Rational Expectations models. But, given the fundamental flaws of fully predetermined models, focusing on their logical consistency or inconsistency, let alone that of the Rational Expectations Hypothesis itself, can hardly be considered relevant to a discussion of the basic preconditions for truth in economic analysis, whatever “truth” might mean.

There is an irony in the debate between Krugman and Cochrane. Although the New Keynesian and behavioral models, which Krugman favors, differ in terms of their specific assumptions, they are every bit as mechanical as those of the Chicago orthodoxy. Moreover, these approaches presume that the Rational Expectations Hypothesis provides the standard by which to define rationality and irrationality.

In fact, the Rational Expectations Hypothesis requires no assumptions about the intelligence of market participants whatsoever … Rather than imputing superhuman cognitive and computational abilities to individuals, the hypothesis presumes just the opposite: market participants forgo using whatever cognitive abilities they do have. The Rational Expectations Hypothesis supposes that individuals do not engage actively and creatively in revising the way they think about the future. Instead, they are presumed to adhere steadfastly to a single mechanical forecasting strategy at all times and in all circumstances. Thus, contrary to widespread belief, in the context of real-world markets, the Rational Expectations Hypothesis has no connection to how even minimally reasonable profit-seeking individuals forecast the future in real-world markets. When new relationships begin driving asset prices, they supposedly look the other way, and thus either abjure profit-seeking behavior altogether or forgo profit opportunities that are in plain sight.

Roman Frydman & Michael Goldberg: Beyond Mechanical Markets

Centern – ett parti för nyliberala byfånar på Stureplan

19 December, 2012 at 11:22 | Posted in Politics & Society | 3 Comments

Annie LššfI dag presenterade Centern ett förslag till nytt partiprogram. Det är utarbetat av en arbetsgrupp och kommer att behandlas av både partiets styrelse och stämma.

Programmet är välskrivet, engagerande och försöker vara ideologiskt renlärigt. Centerpartiet kallar sig liberalt men frågan är om inte libertarianskt vore en bättre beteckning.

Ett exempel är familjepolitiken:

“Politiken bör varken avgöra hur många människor man får leva tillsammans med, gifta sig med eller vem som ska ärva ens tillgångar.”

Konkret vill man alltså införa månggifte och ta bort den laglott som gör att barn har rätt att ärva hälften av sina föräldrars egendom.

Centerpartiet öppnar även för att ta bort skolplikten, avskaffa anställningsskyddet, införa fri invandring och för att Sverige och EU ska styras federalt. Som USA.

Programmet rör sig i en politisk idévärld där skatt i grunden är stöld och staten existerar eftersom medborgarna avstått makt i utbyte mot beskydd.

En gång i tiden inskränkte sig Centerpartiets ideologi till vilken gata som skulle lagas eller hur man skulle få högre subventioner för mjölken. Nu har det slagit över åt andra hållet.

Förslaget till partiprogram är politisk teori på hög nivå, de stora filosoferna talar mellan raderna, men som praktisk politik är det helt verklighetsfrämmande.

Går man till de politiska ungdomsförbunden hittar man ofta liknande program, välskrivna, engagerande och ideologiskt renläriga.

Sen växer ungdomsklubbisterna upp och lär sig att politiken faktiskt inte fungerar som i studiecirklarna från ABF eller Medborgarskolan.

Utom i Centerpartiet, där blir de partiordförande.

Anders Lindberg (Aftonbladet)

Markov’s Inequality

18 December, 2012 at 20:02 | Posted in Statistics & Econometrics | 2 Comments

One of the most beautiful results of probability theory is Markov’s inequality (after the Russian mathematician Andrei Markov (1856-1922)):

If X is a non-negative stochastic variable (X ≥ 0) with a finite expectation value E(X), then for every a > 0

P{X ≥ a} ≤ E(X)/a

If the production of cars in a factory during a week is assumed to be a stochastic variable with an expectation value (mean) of 50 units, we can – based on nothing else but the inequality – conclude that the probability that the production for a week would be greater than 100 units can not exceed 50% [P(X≥100)≤(50/100)=0.5 = 50%]

I still feel a humble awe at this immensely powerful result. Without knowing anything else but an expected value (mean) of a probability distribution we can deduce upper limits for probabilities. The result hits me as equally suprising today as thirty years ago when I first run into it as a student of mathematical statistics.

[For a derivation of the inequality, see e.g. Sheldon Ross, Introduction to Probability and Statistics for Engineers and Scientists, Academic Press, 2009, s 129]

Ronald Coase – at 101 still making more sense than his neoclassical colleagues

18 December, 2012 at 10:37 | Posted in Economics | 4 Comments

coaseIn the 20th century, economics consolidated as a profession; economists could afford to write exclusively for one another. At the same time, the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economization and giving up the real-world economy as its subject matter.

But because it is no longer firmly grounded in systematic empirical investigation of the working of the economy, it is hardly up to the task … Today, a modern market economy with its ever-finer division of labor depends on a constantly expanding network of trade. It requires an intricate web of social institutions to coordinate the working of markets and firms across various boundaries. At a time when the modern economy is becoming increasingly institutions-intensive, the reduction of economics to price theory is troubling enough. It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics on the working of the economy.

Ronald Coase, Saving Economics from the Economists

Paul Samuelson and the logic of the fiscal cliff

17 December, 2012 at 14:58 | Posted in Economics | 2 Comments


[The interview was given to Mark Blaug in 1995. In transcript: “I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked, [it] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [and then] in every short period of time. If Prime Minister Gladstone came back to life he would say “oh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.”]

Samuelson’s statement makes me come to think of the following passage in Keynes‘s General Theory:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is com­monly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authori­ty, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

I wonder why …

How much whipping can democracy take?

16 December, 2012 at 18:26 | Posted in Economics, Politics & Society | 2 Comments

The 17-nation eurozone has contracted for forteen straight months. And now it’s not only getting worse in the periphery countries, but also in France and Germany. Unemployment is on the rise everywhere within the eurozone. These are very alarming facts and should be taken seriously.

Richard Koo warns  us that the problems – created to a large extent by the euro – may not only endanger our economies, but also our democracy itself:

The question is how long democracy can survive with governments and EU institutions forcing the patient to undergo treatment for the wrong disease. Eurozone social security programs have made great strides since the prewar era, and as a result a recession will not lead to an immediate collapse of democratic government.

However, the term “democratic deficit” is appearing more frequently in Western newspapers, as more governments are implementing policies without going through proper democratic channels. The complete inability of leaders in the countries already experiencing double dips to present a plan for addressing the situation also casts a shadow over the outlook for democracy.

In Germany’s Weimar Republic, the unemployment rate was at 28% when the government pushed through austerity measures in the midst of a balance sheet recession, causing democratic structures to collapse.

In that sense I am deeply concerned about eurozone unemployment, which now stands at 24.8% in Spain (June, Eurostat) and 23.1% in Greece (May, National Statistical Service of Greece). Even more worrying, policymakers have been unable to present the public with a single persuasive scenario showing a way out of the current predicament.

The Weimar Republic collapsed in 1933 after Chancellor Heinrich Brüning’s insistence on fiscal consolidation triggered an economic implosion. It is extremely unfortunate that the countries of Europe are repeating his mistake some eighty years later.

The one difference is that this time it is the lack of understanding of balance sheet recessions at the ECB, the EU, and the German government that is pushing the eurozone (ex Germany) in the wrong direction.

How much whipping can democracy take? How many more are going to get seriously hurt and ruined before we end this madness and put the euro where it belongs – in the dustbin of history!

Snart kommer änglarna att landa

15 December, 2012 at 20:41 | Posted in Varia | Comments Off on Snart kommer änglarna att landa

Ibland räcker orden bara inte till. Idag är en sådan dag. När mörkret breder ut sig och oskyldiga människors livslåga släcks i vansinnesdåd drabbas vi alla. Så håll om dina nära och kära. Ta vara på den stund vi fått på jorden.
 

The fiscal cliff explained

15 December, 2012 at 17:59 | Posted in Economics, Politics & Society | 1 Comment

 

REH – assuming we know what in fact we never know

15 December, 2012 at 10:27 | Posted in Economics, Statistics & Econometrics, Theory of Science & Methodology | 2 Comments

With over a million copies of its papers downloaded per year, Real-World Economics Review is now probably the world’s most read economics journal. The latest issue – no. 62 – is out today. And yours truly has a paper in it – Rational expectations – a fallacious foundation for macroeconomics in a non-ergodic world:


The financial crisis of 2007-08 hit most laymen and economists with surprise. What was it that went wrong with mainstream neoclassical macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable?
 
reh
 
As I have tried to show in this essay, one important reason ultimately goes back to how these models handle data. In REH-based modern neoclassical macroeconomics – Dynamic Stochastic General Equilibrium (DSGE), New Synthesis, New Classical, “New Keynesian” – variables are treated as if drawn from a known “data-generating process” that unfolds over time and on which one therefore have access to heaps of historical time-series. If one does not assume the “data-generating process” to be known – if there is no “true” model – the whole edifice collapses.

Building on REH, modern macroeconomics obviously did not anticipate the enormity of the problems that unregulated “efficient” financial markets created. Why? Because it builds on the myth of us knowing the “data-generating process” and that we can describe the variables of our evolving economies as drawn from an urn containing stochastic probability functions with known means and variances …

In the end this is what it all boils down to. We all know that many activities, relations, processes and events are of the Keynesian uncertainty type. The data do not – as REH models assume – unequivocally single out one decision as the only “rational” one. Neither the economist, nor the deciding individual, can fully pre-specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works.

Some macroeconomists, however, still want to be able to use their hammer. So they decide to pretend that the world looks like a nail, and pretend that uncertainty can be reduced to risk. So they construct their mathematical models on that assumption. The result: financial crises and economic havoc.

How much better – how much bigger chance that we do not lull us into the comforting thought that we know everything and that everything is measurable and we have everything under control – if instead we would just admit that we often “simply do not know,” and that we have to live with that uncertainty as well as it goes. Fooling people into believing that one can cope with an unknown economic future in a way similar to playing at the roulette wheels, is a sure recipe for only one thing – economic catastrophy. The unknown knowns – the things we fool ourselves to believe we know – often have more dangerous repercussions than the “Black Swans” of Knightian unknown unknowns, something quantitative risk management – based on the hypotheses of market efficiency and rational expectations – has given ample evidence of during the latest financial crisis.

R2 and the crow’s triangular flight

14 December, 2012 at 15:30 | Posted in Statistics & Econometrics | Comments Off on R2 and the crow’s triangular flight

In many statistical and econometric studies R2 is used to measure goodness of fit – or more technically, the fraction of variance ”explained” by a regression.

But it’s actually a rather weird measure. As eminent mathematical statistician David Freedman writes:

The math is fine, but the concept is a little peculiar … Let’s take an example. Sacramento is about 78 miles from San Francisco, as the crow flies. Or, the crow could fly 60 miles East and 50 miles North, passing near Stockton at the turn. If we take the 60 and 50 as exact, Pythagoras tells us that the squared hypotenuse in the triangle is

602 + 502 = 3600 + 2500 = 6100 miles2.

With “explained” as in “explained variance”, the geography lesson can be cruelly summarized. The area – squared distance – between San Francisco and Sacramen-to is 6100 miles2, of which 3600 is explained by East …

The theory of explained variance boils down to Pythagoras’ theorem on the crow’s triangular flight. Explainig the area between San Francisco and Sacra-mento by East is zany, and explained variance may not be much better.

The Hours

13 December, 2012 at 18:53 | Posted in Varia | Comments Off on The Hours

 

An MMT perspective on the Fiscal Cliff

13 December, 2012 at 14:39 | Posted in Economics | Comments Off on An MMT perspective on the Fiscal Cliff

 

Lägg ner SvT

13 December, 2012 at 08:35 | Posted in Politics & Society | 8 Comments

Ett nytt år är snart här, så vad vore då bättre än att ge Sveriges Televisions ledning några funderingar om det egna public service-företagets framtid.

tvTid är en bristvara i tv. Om man likväl – som så ofta nu för tiden – använder dyrbar sändnings-tid till struntsaker och menlös ”underhåll-ning” måste det finnas ett skäl. Televisionen är – fortfarande – för en stor del av befolkningen den viktigaste källan till information och världsbild. Att fylla ut programtablåerna med trivialiteter blir därför ett effektivt medel att – istället för att fungera som ett effektivt instrument för åsiktsbildning och reflektion – tränga undan viktig information som medborgarna skulle behöver för att kunna utöva och utveckla sina demokratiska förmågor.

Televisionen skapar via sin personfixering och banaliserande fokusering på allehanda ”affärer” en dålig grogrund för verklig kunskapsspridning. Istället för seriös opinionsbildning får vi demagogiska program där snabbtänkta tyckmyckentrutar med lätt kunskapsbagage får breda ut sig om allt och inget, men speciellt om sådant som de ingenting vet. Brådska är legio och utrymme för tanke litet, så det gäller att snabbt servera den färdigtuggade kultursnabbmaten. Och alltyckarna är alltid lika redo att haspla ur sig något klatschigt och käckt svar på programledarnas alltid lika omöjliga frågor.

Eller så har vi nyhets- och debattprogram där kompetenta och duktiga forskare och sakkunniga för dyra pengar flygs in från landets alla håll för att under tjugo sekunder försöka göra sin röst hörd när en narcissistiskt självbespeglande och obildad programledare ständigt avbryter och tar ordet ur munnen på dem. Vi förväntas samtidigt kunna lyssna på vad debattörer säger och läsa mer eller mindre intelligensbefriade sms-meddelanden som löper i bildrutans nederkant. Programmakarna är uppenbarligen mer rädda för att någon till äventyrs ska tröttna på de ständigt avbrutna försöken att få prata till punkt än för informationsinfarkt.

Att bara föra ett lugnt och bildat samtal duger minsann inte i vår tids tv-sända gladiatorspel. Finns inga meningsmotsättningar snickras de snabbt ihop så att ett fiktivt meningsutbyte kan äga rum inför tv-kamerorna. Och trots att de ofta inte får säga något ställer ”experterna” vecka efter vecka upp i Debatt och de andra tyckarprogrammen. Tydligen är man beredd till vilka förödmjukelser som helst bara för att få synas och mingla på tv-parnassens estrad.

Tv-tittande har blivit ett av vår tids populäraste legala sedativ. Från arbetslivets stress och otrygghet kommer vi hem till den konstlade tryggheten i tv:s ställföreträdande av våra liv. När vi inte själva orkar leva våra liv kopplar vi upp oss på tv:n. Där får vi i karikerad form ett återsken av det liv vi kunnat leva. För att inte gå under i enstöringens andliga vanmakt anpassar vi oss. Antingen hänger du förbehållslöst med eller så blir du oeftergivligt avhängd. Ve den som inte kan delta i dagen–efter–snacket om kvällen–före–avsnittet av innesåpan! Därför sitter vi där, dag efter dag, av rädsla för att kanske gå miste om något. Vi vet inte vad, men något måste det vara och den som inte tittar riskerar alltid att gå miste om det.

I tv-rutan odlas framgångsmyten och förverkligas våra önskedrömmar. Tv sanktionerar kravet på smörja genom knäsättandet av den totala harmonin. ”Ge folk vad folk vill ha”. Det vill säga låt folk få den tv som tv själv frambesvurit. Konformismens credo – ständig upprepning – reproducerar ständigt samma krimskrams.

Tv-underhållning har blivit en förlängning av arbetet där verklighetens efterbildningar ska ge oss ny ork. Såpornas falskhet är till för att vi som åskådare ska kunna värja oss från vår egen. Vår förtvivlan blir i såpornas värld ett löfte om en – trots allt – fortsatt framtid. Verklig tragik upplöses i ett intet. Mänsklig kontakt blir ytlig beröring. Djup blir glättig yta. Television har blivit vår tids känsloindustri, där djupa mänskliga emotioner omvandlas till varor som via etern kan köpas och säljas. Allt ska hämningslöst levas ut. Att följden av att ständigt matas med falska känslor blir en utarmning av våra själsliv och svårigheter att känna igen äkta känslor oroar inte medieindustrin och dess apologeter.

Människor och mänsklighet reduceras till ett maskeradspel av stereotyp förljugenhet där endast överdriften är sann. Världen och verkligheten måste till varje pris filtreras genom såpornas sammanhangslösa ordning. På så vis skapas illusionen att verkligheten är en förlängning av det artificiella liv som utspelas på tv-skärmen. I tv-såporna förverkligas postmodernisternas avskaffande av individen i form av de pseudoindivider som flimrar förbi på rutan. I såporna är varje person utbytbar och kan till och med vid behov återvända från de döda.

Såporna är ett sätt att fly undan vardagen med syntetiska dagdrömmar där förespeglad tillfredsställelse ska kompensera verklig försakelse. Med såporna har kulturen avsvurit sig sin autonomi för att – som Adorno och Horkheimer uttrycker det – ”stolt inordna sig bland konsumtionsartiklarna.” De är ett av de synliga tecknen på bildningens barbariska förfall i den globala kulturmarknadens kolonisering av vår livsvärld.

Tv behöver inte längre utges för att vara kultur. Att den inte är något annat än geschäft används i själva verket som legitimitet för den hänsynslöst nivellerande smörja som tillhandahålls dess tittare.

Såporna är ytans non plus ultra. Deras uniformitet och schematiserade klichéer utmynnar i en odifferentierad smörja vars enda fördel är fullständig utbytbarhet. Skapa din egen såpa –zappa mellan kanalerna och du får en mer ätbar gröt än den såpornas manusförfattare själva kokar ihop!

Såporna har blivit ett system av icke-kultur, ”ett stiliserat barbari” som bara i liten utsträckning skiljer sig från reklamfilm. I själva verket är det väl så att många upplever den kommersiella televisionens reklamavbrott som en befriande andhämtning från alla de fördummande lek- och frågeprogram, såpor och andra sopor som vi förorenar mediet med.

Att våga kritisera televisionen bannlyses som förhävelse från den som tror sig bättre än andra. Televisionens apologeter ser på sin produkt som folkets kultur befriad från onödig och skrymmande estetik och etik. Kritisk distans är bara kultursnobberi. Vad som ovillkorligen måste motarbetas är den tänkande människan. Att utveckla egen tankeverksamhet är farligt. Mångfald får bli enfald. Och skapande och kritiskt tänkande ersättas av passivt och avhumaniserande konsumerande.

Men drömma kan man ju alltid. Själv hoppades jag i många år att vi i framtiden skulle kunna återskapa åtminstone två bra public-service-kanaler som sänder kvalitetsprogram utan att fjäska för publikens smak med voyeuristiska och exhibitionistiska hemma-hos-program och intelligensbefriade lek- och frågeprogram. Och som inte i fåfäng konkurrens med oräkneliga kommersiella kanaler skulle sända samma fördummande smörja i ourskiljbar förpackning. För jag trodde att även om televisionens utveckling i den nyliberala eran mest påmint om den gamla sagan om Frankenstein som skapade det vidunder han sedan själv dukade under för, var det aldrig för sent att erkänna sitt misstag och vända om.

Jag har slutat hoppas och inser numera att SvT:s ledning inte är vuxen den uppgiften.

SvT har förbrukat sitt förtroendekapital och uppenbart misshushållat med de resurser det fått sig tilldelat för att ge svenska folket en bra public-service-tv. Slutsatsen skriver sig själv. Lägg ner SvT och bygg upp en ny offentligt finansierad television som tar sitt samhällsuppdrag på allvar! Låt oss få en offentligt finansierad tv som lämnar de kommersialiserade dokusåporna, lek- och hemrenoveringsprogrammen till den reklamfinansierade televisionen och i stället satsar på vettiga program för en publik som vill ha ett verkligt alternativ till de kommersiella kanalerna.

Scholarly conduct …

13 December, 2012 at 08:17 | Posted in Politics & Society | 1 Comment

 

Probability puzzle solved

12 December, 2012 at 16:43 | Posted in Statistics & Econometrics | Comments Off on Probability puzzle solved

 

(h/t barnilsson)

Inequality and macroeconomic dynamics

12 December, 2012 at 10:53 | Posted in Economics | Comments Off on Inequality and macroeconomic dynamics

 

Lönediskriminering – en nyttig statistiklektion

12 December, 2012 at 10:51 | Posted in Education & School | 3 Comments

Pontus Bäckström har några intressanta reflektioner kring den svåra konsten att dra kausala slutsatser utifrån observationsdata (i det här fallet lönestatistik) på sin blogg:

I förra veckan läste jag en artikel på pendeltåget som fångade mitt nyfikna intresse. Artikeln handlade om hur löneskillnaderna ökar mellan män och kvinnor i Stockholms län:

Artikeln avslutas med att konstatera att skillnaderna inte kan förklaras av utbildningslängd i och med att kvinnorna i Stockholms län har högre utbildningsnivå än männen.

Det tycks uppenbart att detta sätter fingret på ett reellt jämställdhetsproblem, men jag undrar om det är det jämställdhetsproblem som journalisten tänker sig? Istället för att endast vara ett fall av lönediskriminering så kan detta nog också vara ett fall av snedrekrytering till den högre utbildningen.

Det den som tog fram statistiken nämligen också borde ha kollat upp direkt i undersökningen var att, utöver att endast kontrollera för kvinnors respektive mäns utbildningslängd, även kontrollera för vilken utbildning respektive kön har läst. Tyvärr är det ju nämligen som så att en hel radda långa universitetsutbildningar inte leder till höga löner och tyvärr är också kvinnor – i många fall – starkt överrepresenterade på dessa utbildningar. Solklara exempel på detta är olika lärarutbildningar och inte minst olika sjuksköterskeutbildningar med tillästa specialistutbildningar som aldrig tycks löna sig för individen.

The documentary on the debt crisis you just have to watch

11 December, 2012 at 17:00 | Posted in Economics | 4 Comments

In this absolutely marvelous new Swedish Television documentary (with English subtitles) on the economic crisis and the responsibility of neoclassical economics in bringing it on, the self-proclaimed emperor of social sciences (and especially its Chicago brand) is shown to be more naked than ever before.

Nobel laureate Robert Lucas answers a question (wind to 19:40) if the level of debt was a problem, by telling us that the high level of debt is not an interesting problem, since,  for a country as a whole, debt and credit always “cancel out.” Unbelievable stupidity even to come from a Chicago economist. Fortunately Dirk Bezemer and Steve Keen are also interviewed and help us sort things out and give a more sensible view on the increasing indebtedness of modern economies.

Added: In case you didn’t know – to get the English subtitles you have to start the video and then left-click on Captions (the left-most  button at the right bottom of the video).

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