Does free trade really make us richer?

30 September, 2013 at 23:09 | Posted in Economics | Comments Off on Does free trade really make us richer?


Robert Lucas on debt — unbelievable stupidity even to come from Chicago

30 September, 2013 at 18:33 | Posted in Economics | 5 Comments

Interviewed in this television documentary on the the economic crisis, Nobel laureate Robert Lucas answered a question (wind to 19:40 in the programme) 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 were also interviewed and could sort things out and give a more sensible view on the increasing indebtedness of modern economies.

Alfred Marshall on mathematics in economics

30 September, 2013 at 17:36 | Posted in Economics | Comments Off on Alfred Marshall on mathematics in economics

Balliol Croft, Cambridge
27. ii. 06
My dear Bowley,

I have not been able to lay my hands on any notes as to Mathematico-economics that would be of any use to you: and I have very indistinct memories of what I used to think on the subject. I never read mathematics now: in fact I have forgotten even how to integrate a good many things.

marshallBut I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.

I believe in Newton’s Principia Methods, because they carry so much of the ordinary mind with them. Mathematics used in a Fellowship thesis by a man who is not a mathematician by nature — and I have come across a good deal of that — seems to me an unmixed evil. And I think you should do all you can to prevent people from using Mathematics in cases in which the English language is as short as the Mathematical …

Your emptyhandedly,

Alfred Marshall

[h/t Jan Milch]


30 September, 2013 at 09:19 | Posted in Varia | Comments Off on LOL


Esbjörn Svensson — Round Midnight

29 September, 2013 at 19:13 | Posted in Varia | Comments Off on Esbjörn Svensson — Round Midnight

It breaks my heart every time I play your music and I’m reminded you’re no longer with us.
Thank goodness your music lives on, Esbjörn.


29 September, 2013 at 17:30 | Posted in Varia | Comments Off on Metamorphosis


Eugene Fama — outstanding mumbo jumbo from Chicago

28 September, 2013 at 19:51 | Posted in Economics | 1 Comment

eugeneI met Eugene Fama in his office at the Booth School of Business. I began by pointing out that the efficient markets hypothesis, which he promulgated in the nineteen-sixties and nineteen-seventies, had come in for a lot of criticism since the financial crisis began in 1987, and I asked Fama how he thought the theory, which says prices of financial assets accurately reflect all of the available information about economic fundamentals, had fared.

Eugene Fama: I think it did quite well in this episode. Stock prices typically decline prior to and in a state of recession. This was a particularly severe recession. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient.

Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst.

I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals.

That’s what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It’s easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.

Are you saying that bubbles can’t exist?

They have to be predictable phenomena. I don’t think any of this was particularly predictable.

John Cassidy

Songs of Hard Times

28 September, 2013 at 17:47 | Posted in Varia | Comments Off on Songs of Hard Times


What a fabulously majestic voice! And if you have access to Spotify you can enjoy that absolutely incredible voice even more in this superb recording of Sviridov’s masterpiece (and don’t forget to turn up the volume):

Judea Pearl on regression and causation

28 September, 2013 at 11:35 | Posted in Statistics & Econometrics | 6 Comments

Judea Pearl was kind enough to send yours truly his article (co-authored with Bryant Chen) Regression and causation: a critical examination of six econometrics textbooks a while ago. It has now been published in real-world economics review  issue no. 65.


The article addresses two very important questions in the teaching of modern econometrics and its different textbooks – how is causality treated in general, and more specifically, to what extent they use a distinct causal notation.

The authors have for years been part of an extended effort of advancing explicit causal modeling (especially graphical models) in applied sciences, and this is a first examination of to what extent these endeavours have found their way into econometrics textbooks.

Although the text partly is of a rather demanding “technical” nature, I would definitely recommend it for reading, especially for social scientists with an interest in these issues.

Pearl’s seminal contribution to this research field is well-known and indisputable, but on the “taming” and “resolve” of the issues, I however have to admit that — under the influence of especially David Freedman and Nancy Cartwright — I still have some doubts on the reach, especially in terms of “realism” and “relevance,” of these “solutions” for social sciences in general and economics in specific (see here, here, here and here). And with regards to the present article I think that since the distinction between the “interventionist” E[Y|do(X)] and the more traditional “conditional expectationist” E[Y|X] is so crucial for the subsequent argumentation, a more elaborated presentation had been of value, not the least because then the authors could also more fully explain why the first is so important and if/why this (in my, Freedman’s and Cartwright’s view) can be exported from “engineer” contexts where it arguably easily and universally apply, to “socio-economic” contexts where “manipulativity” and “modularity” are not perhaps so universally at hand.

Thinking about inequality — Sweden and the United States

28 September, 2013 at 10:03 | Posted in Economics | Comments Off on Thinking about inequality — Sweden and the United States


Inequality and well-being

28 September, 2013 at 09:50 | Posted in Economics, Politics & Society | Comments Off on Inequality and well-being

Sometimes a picture says more than a thousand words …

Mogens Buxtehude — en dansklektion

28 September, 2013 at 09:00 | Posted in Varia | 1 Comment


Articulate Silences

27 September, 2013 at 21:19 | Posted in Varia | Comments Off on Articulate Silences


Ricardo’s theory of comparative advantage is not relevant anymore

27 September, 2013 at 08:43 | Posted in Economics | 8 Comments


Testing game theory on real people

25 September, 2013 at 19:19 | Posted in Economics | Comments Off on Testing game theory on real people

The “prisoner’s dilemma” is a familiar concept to just about everyone who took Econ 101 …

GametheoryYet no one’s ever actually run the experiment on real prisoners before, until two University of Hamburg economists tried it out in a recent study comparing the behavior of inmates and students.

Surprisingly, for the classic version of the game, prisoners were far more cooperative than expected.

Menusch Khadjavi and Andreas Lange put the famous game to the test for the first time ever, putting a group of prisoners in Lower Saxony’s primary women’s prison, as well as students, through both simultaneous and sequential versions of the game …

They expected, building off of game theory and behavioral economic research that show humans are more cooperative than the purely rational model that economists traditionally use, that there would be a fair amount of first-mover cooperation, even in the simultaneous simulation where there’s no way to react to the other player’s decisions.

And even in the sequential game, where you get a higher payoff for betraying a cooperative first mover, a fair amount will still reciprocate.

As for the difference between student and prisoner behavior, you’d expect that a prison population might be more jaded and distrustful, and therefore more likely to defect.

The results went exactly the other way …

The paper … demonstrates that prisoners aren’t necessarily as calculating, self-interested, and untrusting as you might expect, and as behavioral economists have argued for years, as mathematically interesting as Nash equilibrium might be, they don’t line up with real behavior all that well.

Business Insider

[h/t Geoff Kennedy]

Henryk Górecki — Symphony of Sorrowful Songs

25 September, 2013 at 18:17 | Posted in Varia | Comments Off on Henryk Górecki — Symphony of Sorrowful Songs


Für Alina

25 September, 2013 at 18:00 | Posted in Varia | 7 Comments


How to argue with economists

25 September, 2013 at 10:37 | Posted in Economics | Comments Off on How to argue with economists
Principle 1: Credentials are not an argument.
Example: “You say Theory X is wrong…but don’t you know that Theory X is supported by Nobel Prize winners A, B, and C, not to mention famous and distinguished professors D, E, F, G, and H?”
Suggested Retort: Loud, barking laughter.
Alternative Suggested Retort: “Richard Feynman said that ‘Science is the belief in the ignorance of experts.’ And you’re not going to argue with HIM, are you?”
Reason You’re Right: Credentials? Gimme a break. Nobody accepts received wisdom from sages these days. Show me the argument!
Principle 2: “All theories are wrong” is false.
Example: “Sure, Theory X fails to forecast any variable of interest or match important features of the data. But don’t you know that all models are wrong? I mean, look at Newton’s Laws…THOSE ended up turning out to be wrong, ha ha ha.”
Suggested Retort: Empty an entire can of Silly String onto anyone who says this. (I carry Silly String expressly for this purpose.)
Alternative Suggested Retort: “Yeah, well, when your theory is anywhere near as useful as Newton’s Laws, come back and see me, K?”
Reason You’re Right: To say models are “wrong” is fatuous semantics; philosophically, models can only have degrees of predictive power within domains of validity. Newton’s Laws are only “wrong” if you are studying something very small or moving very fast. For most everyday applications, Newton’s Laws are very, very right.
Principle 3: “We have theories for that” is not good enough.
Example: “How can you say that macroeconomists have ignored Phenomenon X? We have theories in which X plays a role! Several, in fact!”
Suggested Retort: “Then how come no one was paying attention to those theories before Phenomenon X emerged and slapped us upside the head?”
Reason You’re Right: Actually, there are two reasons. Reason 1 is that it is possible to make many models to describe any phenomenon, and thus there is no guarantee that Phenomenon X is correctly describe by Theory Y rather than some other theory, unless there is good solid evidence that Theory Y is right, in which case economists should be paying more a lot attention to Theory Y. Reason 2 is that if the profession doesn’t have a good way to choose which theories to apply and when, then simply having a bunch of theories sitting around gathering dust is a little pointless.
Principle 4: Argument by accounting identity almost never works.
Example: “But your theory is wrong, because Y = C + I + G!”
Suggested Retort: “If my theory violates an accounting identity, wouldn’t people have noticed that before? Wouldn’t this fact be common knowledge?”
Reason You’re Right: Accounting identities are mostly just definitions. Very rarely do definitions tell us anything useful about the behavior of variables in the real world. The only exception is when you have a very good understanding of the behavior of all but one of the variables in an accounting identity, in which case of course it is useful. But that is a very rare situation indeed.
Principle 5: The Efficient Markets Hypothesis does not automatically render all models useless.
Example: “But if your model could predict financial crises, then people could use it to conduct a riskless arbitrage; therefore, by the EMH, your model cannot predict financial crises.”
Suggested Retort: “By your logic, astrophysics can never predict when an asteroid is going to hit the Earth.”
Reason You’re Right: Conditional predictions are different than unconditional predictions. A macro model that is useful for making policy will not say “Tomorrow X will happen.” It will say “Tomorrow X will happen unless you do something to stop it.” If policy is taken to be exogenous to a model (a “shock”), then the EMH does not say anything about whether you can see an event coming and do something about it.
Principle 6: Models that only fit one piece of the data are not very good models.
Example: “Sure, this model doesn’t fit facts A, B, and C, but it does fit fact D, and therefore it is a ‘laboratory’ that we can use to study the impact of changes in the factors that affect D.”
Suggested Retort: “Nope!”
Reason You’re Right: Suppose you make a different model to fit each phenomenon. Only if all your models don’t interact will you be able to use each different model to study its own phenomenon. And this is highly unlikely to happen. Also, it’s generally pretty easy to make a large number of different models that fit any one given fact, but very hard to make models that fit a whole bunch of facts at once. For these reasons, many philosophers of science claim that science theories should explain a whole bunch of phenomena in terms of some smaller, simpler subset of underlying phenomena. Or, in other words, wrong theories are wrong.
Principle 7: The message is not the messenger.
Example: “Well, that argument is being made by Person X, who is obviously just angry/a political hack/ignorant/not a real economist/a commie/stupid/corrupt.”
Suggested Retort: “Well, now it’s me making the argument! So what are you going to say about me?”
Reason You’re Right: This should be fairly obvious, but people seem to forget it. Even angry hackish ignorant stupid communist corrupt non-economists can make good cogent correct arguments (or, at least, repeat them from some more reputable source!). Arguments should be argued on the merits. This is the converse of Principle 1.
There are, of course, a lot more principles than these, and I’ll include some in a later post. The set of silly things that people can and will say to try to beat an interlocutor down is, well, very large. But I think these seven principles will guard you against much of the worst of the silliness. Keep them always with you at your side … Happy arguing!

Noah Smith: Seven principles for arguing with economists

O horrible! O, horrible! most horrible!

24 September, 2013 at 20:56 | Posted in Politics & Society | Comments Off on O horrible! O, horrible! most horrible!

The newspaper Dagens Nyheter revealed Monday that the Swedish police have established a register of Roma people. More than 4,000 Roma are said to be listed in the database, which according to constitutional experts breaks several Swedish laws. Justice Minister Beatrice Ask said she was “shocked” by the revelations.

The Commission on Security and Integrity Protection, which supervises the surveillance methods of the police, has launched an investigation.

arbeitIn all, 4,029 people from around Sweden are listed in the database. Over 1,000 of them are children. Many of those registered are not suspected of committing any crime.

The registry, marked “travelers”, reportedly sits in a folder in the computer system of the Skåne police in southern Sweden.

There were strong reactions from within Sweden’s Roma community on Monday. Fred Taikon, publisher of the É Romani Glinda magazine, told news agency TT that he was dumbfounded after hearing the news:

“This is a terrible, unlawful action that the police are committing. It is forbidden to register people based on their ethnicity – and that is exactly what the authorities are doing.”

Hans Caldaras, an artist and author of Roma origin, told Swedish Television News … that the registry brings to mind the early 1940s, when Swedish police, acting in response to the Nazis, mapped Roma and Jews living in Sweden.

Radio Sweden

Rent-seeking in the financial sector

24 September, 2013 at 17:33 | Posted in Economics | 2 Comments

Are too many of our most talented people choosing careers in finance – and, more specifically, in trading, speculating, and other allegedly “unproductive” activities? …

rent3According to a study by Thomas Philippon and Ariell Reshef, much of the increase in financial activity has taken place in the more speculative fields, at the expense of traditional finance. From 1950 to 2006, credit intermediation (lending, including traditional banking) declined relative to “other finance” (including securities, commodities, venture capital, private equity, hedge funds, trusts, and other investment activities like investment banking). Moreover, wages in “other finance” skyrocketed relative to those in credit intermediation.

We surely need some people in trading and speculation. But how do we know whether we have too many?

To some people, the question is a moral one. Trading against others is regarded as an inherently selfish pursuit, even if it might have indirect societal benefits. But, as economists like to point out, traders and speculators provide a useful service. They sort through information about businesses and (at least some of the time) try to judge their real worth. They are thus helping to allocate society’s resources to the best uses – that is, to the most promising businesses.

But these people’s activities also impose costs on the rest of us. Indeed, a 2011 paper by Patrick Bolton, Tano Santos, and José Scheinkman argues that a significant amount of speculation and deal-making is pure rent-seeking. In other words, it is wasteful activity that achieves nothing more than enabling the collection of rents on items that might otherwise be free …

Those in “other finance” often engage in similar behavior. They skim the best business deals, creating a “negative externality” on those who are not party to them. If the bad assets that they reject – for example, the subprime mortgage securities that fueled the 2008 financial crisis – are created anyway and foisted on less knowledgeable investors, financiers contribute no more to society than a lord who installs a chain across a river …

Bolton and his colleagues seem to be right in many respects, though economic research has not yet permitted us to estimate the value to society of so many of our best and brightest making their careers in the currently popular kinds of “other finance.” Speculative activities have plusses and minuses, much that is good and some that is bad, and these are very difficult to quantify. We need to be very careful about regulations that impinge on such activities, but we should not shy away from making regulations once we have clarity.

Robert Shiller

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