Open letter to students everywhere

24 september, 2013 kl. 11:04 | Publicerat i Education & School | Kommentarer inaktiverade för Open letter to students everywhere

One of the popular myths of higher education is that professors are sadists who live to inflict psychological trauma on undergraduates. Perhaps you believe that we pick students at random and then schedule all our assignments in such a way as to make those students’ lives as difficult as possible. The older I get and the longer I do this, the more I recognize that we (the professors) need to be more transparent about our philosophies of evaluation. How does this work? Let’s clarify a few things.
caligula2First, I do not “take off” points. You earn them. The difference is not merely rhetorical, nor is it trivial. In other words, you start with zero points and earn your way to a grade. You earn a grade in (say) Econ 100 for demonstrating that you have gained a degree of competence in economics ranging from being able to articulate the basic principles (enough to earn a C) to mastery and the ability to apply these principles to day-to-day affairs (which will earn an A). I’ve hurt my own grades before by confusing my own incompetence with competence and my own (bare) competence with mastery, so trust me: I’ve been there, and I understand.

Second, this means that the burden of proof is on you to demonstrate that you have mastered the material. It is not on me to demonstrate that you have not. My assumption at the beginning of each class is that you know somewhere between nothing and very little about basic economics unless you were lucky enough to have an exceptional high school economics course. Otherwise, why are you here? You might say that the course is a prerequisite for other things you want to do, but if that it is the case and you know the material, you’re more than welcome to simply show up for the exams, ace them, and be on your way …

In this light, consider this: the fact that you “don’t understand” why you didn’t earn full points for a particular question might itself help explain why you didn’t earn full points. Don’t take this personally or interpret it as a sneer. See it as a learning opportunity. If you understood the material–and do note that there is a large difference between really understanding the material and being able to reproduce a graph or definition you might remember from class–you would have answered the question flawlessly. I recommend (as I have recommended to many others) that you go back, take another crack at it, and see if you can find where you have gone wrong. Then bring it by my office, and we will talk.

Finally, I’m here to be a mentor and instructor. This means that our relationship differs from the relationships that you have with your friends and family. Please don’t infer from this that I don’t care about you, because I do. A lot. I want to see you make good choices. I want to see you understand basic economics because I hope it will rock your world as it continues to rock mine and because the human consequences of lousy economic policy are enormous. That said, you should never take grades personally. I don’t think you’re stupid because you tank an exam, an assignment, or even an entire course. Economics is hard. A D or an F on an economics exam does not diminish your value in God’s eyes (or in mine) or indicate that economics just isn’t for you. It probably means you need to work smarter, and I’m here to help you with that.

Dear student, I once thought as you do. I once carried about the same misconceptions, the same litany of cognitive biases, and the same adolescent desire to blame others for my errors. I was (and remain) very poorly served by my immaturity. As shocking as it may seem, I still cling to a lot of it, even after four years of college, five years of graduate school, and now five-and-a-half years as a professor. Economics is hard, but becoming a responsible member of a free society is very, very, very hard. I’m still learning to put aside childish things. I hope you will do the same. Start now. The effort is daunting, but the rewards are substantial.

Letter from professor Art Carden to students everywhere

The Economists’ Warning

23 september, 2013 kl. 22:27 | Publicerat i Economics, Politics & Society | 1 kommentar

euro_1805998cThe European crisis continues to destroy jobs. By the end of 2013 there will be 19 million unemployed in the eurozone alone, over 7 million more than in 2008, an increase unprecedented since the end of World War II and one that will stretch on into 2014. The employment crisis strikes above all the peripheral member countries of the European Monetary Union, where an exceptional rise in bankruptcy is also under way, whereas Germany and the other central countries of the eurozone have instead witnessed growth on the job front. This asymmetry is one of the causes of Europe’s present-day political paralysis and the embarrassing succession of summit meetings that result in measures glaringly incapable of halting the processes of divergence under way. While this sluggishness of political response may appear justified in the less severe phases of the cycle and moments of respite on the financial market, it could have the most serious consequences in the long run.

The European authorities are … now making a new mistake. They appear to be convinced that the peripheral member countn solve their problems by implementing “structural reforms”, which will supposedly reduce costs and prices, boost competitiveness, and hence foster export-driven recovery and a reduction of foreign debt. While this view does highlight some real problems, the belief that the solution put forward can safeguard European unity is an illusion. The deflationary policies applied in Germany and elsewhere to build up trade surpluses have worked for years, togeteher with other factors, to create huge imbalances in debt and credit between the eurozone countries. The correction of these imbalances would require concerted action on the part of all the member countries. Expecting the peripheral countries of Union to solve the problem unaided means requiring them to undergo a drop in wages and prices on such a scale as to cause a still more accentuated collapse of incomes and violent debt deflation with the concrete risk of causing new banking crises and crippling production in entire regions of Europe.

It is essential to realise that if the European authorities continue with policies of austerity and rely on structural reforms alone to restore balance, the fate of the euro will be sealed. The experience of the single currency will come to an end with repercussions on the continued existence of the European single market. In the absence of conditions for a reform of the financial system and a monetary and fiscal policy making it possible to develop a plan to revitalise public and private investment, counter the inequalities of income and between areas, and increase employment in the peripheral countries of the Union, the political decision makers will be left with nothing other than a crucial choice of alternative ways out of the euro.

Emiliano Brancaccio and Riccardo Realfonzo (Sannio University, promoters of “the economists’ warning”), Philip Arestis, James Galbraith, Alan Kirman, Dani Rodrik, Engelbert Stockhammer, Malcolm Sawyer …

Financial Times

[h/t Jan Milch]

Lars E. O. Svensson har kommit på bättre tankar

23 september, 2013 kl. 15:11 | Publicerat i Economics | 1 kommentar

Som yours truly påpekade i en artikel förra veckan gjorde den nyligen avgångne Riksbanksledamoten Lars  E. O. Svensson det lite väl — vilseledande — lätt för sig när han argumenterade att de svenska hushållens — enkannerligen — bolånerelaterade skulder på aggregerad nivå inte var något problem och därför inte heller någon anledning för Riksbanken att fortsätta hålla fast vid en högre styrränta av det skälet.

Uppenbarligen har Svensson tagit intryck av kritiken och återkommer nu med en ny artikel där han — mindre vilseledande — resonerar utifrån disaggregerade data.

Bra — och då bortser jag från den lätt löjeväckande dimridå han lägger ut i form av jämförelser mellan hushålls och bankers bruttosoliditet — och definitivt ett steg i riktning mot att öppna upp för en verkligt intressant diskussion. Alea jacta est!

Endogenous growth theory — a very short introduction

23 september, 2013 kl. 08:57 | Publicerat i Economics | 4 kommentarer

shawIf you have an apple and I have an apple and we exchange these apples then you and I will each have one apple.

But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.

George Bernard Shaw

Adam Smith once wrote that a really good explanation is ”practically seamless.” Is there any such theory within one of the most important fields of social sciences – economic growth?

In Paul Romer’s Endogenous Technological Change (1990) knowledge is made the most important driving force of growth. Knowledge (ideas) are presented as the locomotive of growth — but as Allyn Young, Piero Sraffa and others had shown already in the 1920s, knowledge is also something that has to do with increasing returns to scale and therefore not really compatible with neoclassical economics with its emphasis on decreasing returns to scale.

Increasing returns generated by non-rivalry between ideas is simply not compatible with pure competition and the simplistic invisible hand dogma. That is probably also the reason why neoclassical economists have been so reluctant to embrace the theory wholeheartedly.

Neoclassical economics has tried to save itself by more or less substituting human capital for knowledge/ideas. But knowledge or ideas should not be confused with human capital. Although some have problems with the distinction between ideas and human capital in modern endogenous growth theory, this passage gives a succinct and accessible account of the difference:

Of the three statevariables that we endogenize, ideas have been the hardest to bring into the applied general equilibrium structure. The difficulty arises because of the defining characteristic of an idea, that it is a pure nonrival good. A given idea is not scarce in the same way that land or capital or other objects are scarce; instead, an idea can be used by any number of people simultaneously without congestion or depletion.

Because they are nonrival goods, ideas force two distinct changes in our thinking about growth, changes that are sometimes conflated but are logically distinct. Ideas introduce scale effects. They also change the feasible and optimal economic institutions. The institutional implications have attracted more attention but the scale effects are more important for understanding the big sweep of human history.

The distinction between rival and nonrival goods is easy to blur at the aggregate level but inescapable in any microeconomic setting. Picture, for example, a house that is under construction. The land on which it sits, capital in the form of a measuring tape, and the human capital of the carpenter are all rival goods. They can be used to build this house but not simultaneously any other. Contrast this with the Pythagorean Theorem, which the carpenter uses implicitly by constructing a triangle with sides in the proportions of 3, 4 and 5. This idea is nonrival. Every carpenter in the world can use it at the same time to create a right angle.

Of course, human capital and ideas are tightly linked in production and use. Just as capital produces output and forgone output can be used to produce capital, human capital produces ideas and ideas are used in the educational process to produce human capital. Yet ideas and human capital are fundamentally distinct. At the micro level, human capital in our triangle example literally consists of new connections between neurons in a carpenter’s head, a rival good. The 3-4-5 triangle is the nonrival idea. At the macro level, one cannot state the assertion that skill-biased technical change is increasing the demand for education without distinguishing between ideas and human capital.


Chicago economics — where do we unload the garbage?

22 september, 2013 kl. 14:56 | Publicerat i Economics | 2 kommentarer

chicagotrashThere is also a practical problem, if economics as a discipline is to survive. There is a huge amount of junk in the peer-reviewed economics literature–the reviewing process is no protection when the reviewers themselves are prejudiced. A comparison that comes to mind is the collapse of “scientific” eugenics. There were vast amounts of that written, and now it is only read as an object example of the capture of a social science by prejudice and authoritarianism. For economists, meantime, there is a huge task ahead: the garbage must be taken out; removed from the field’s teaching, textbooks, and policy advice. It will be a generation at least before this is set right, if indeed it can be set right at all.

Advice Unasked

On the art of using absolutely ridiculous modeling assumptions

22 september, 2013 kl. 13:58 | Publicerat i Theory of Science & Methodology | 1 kommentar

Time after time you hear people speaking in baffled terms about mathematical models that somehow didn’t warn us in time, that were too complicated to understand, and so on. If you have somehow missed such public displays of throwing the model (and quants) under the bus, stay tuned below for examples.
But this is far from the case – most of the really enormous failures of models are explained by people lying …
A common response to these problems is to call for those models to be revamped, to add features that will cover previously unforeseen issues, and generally speaking, to make them more complex.

For a person like myself, who gets paid to “fix the model,” it’s tempting to do just that, to assume the role of the hero who is going to set everything right with a few brilliant ideas and some excellent training data.

Unfortunately, reality is staring me in the face, and it’s telling me that we don’t need more complicated models.

If I go to the trouble of fixing up a model, say by adding counterparty risk considerations, then I’m implicitly assuming the problem with the existing models is that they’re being used honestly but aren’t mathematically up to the task.

If we replace okay models with more complicated models, as many people are suggesting we do, without first addressing the lying problem, it will only allow people to lie even more. This is because the complexity of a model itself is an obstacle to understanding its results, and more complex models allow more manipulation …

I used to work at Riskmetrics, where I saw first-hand how people lie with risk models. But that’s not the only thing I worked on. I also helped out building an analytical wealth management product. This software was sold to banks, and was used by professional “wealth managers” to help people (usually rich people, but not mega-rich people) plan for retirement.

We had a bunch of bells and whistles in the software to impress the clients – Monte Carlo simulations, fancy optimization tools, and more. But in the end, the bank’s and their wealth managers put in their own market assumptions when they used it. Specifically, they put in the forecast market growth for stocks, bonds, alternative investing, etc., as well as the assumed volatility of those categories and indeed the entire covariance matrix representing how correlated the market constituents are to each other.

The result is this: no matter how honest I would try to be with my modeling, I had no way of preventing the model from being misused and misleading to the clients. And it was indeed misused: wealth managers put in absolutely ridiculous assumptions of fantastic returns with vanishingly small risk.

Cathy O’Neil

Spiegel im spiegel

22 september, 2013 kl. 00:06 | Publicerat i Varia | 2 kommentarer


The Last Resort

21 september, 2013 kl. 18:02 | Publicerat i Varia | Kommentarer inaktiverade för The Last Resort


One of the most brilliantly beautiful songs ever written.

Stabat Mater

21 september, 2013 kl. 17:23 | Publicerat i Varia | Kommentarer inaktiverade för Stabat Mater


Vetenskapliga modeller och atomistiska felslut

20 september, 2013 kl. 18:14 | Publicerat i Theory of Science & Methodology | Kommentarer inaktiverade för Vetenskapliga modeller och atomistiska felslut

Det finns tyvärr få böcker på svenska som behandlar frågan om vad vetenskapliga modeller är för något och vad som utgör deras epistemologiska och ontologiska förutsättningar och status. I ett av de få föreliggande arbeten som försöker tackla frågan kan vi läsa:

gerlee2För att förstå sig på olika aspekter av ett komplicerat fenomen … är det därför vanligt att observera och studera olika delar av systemet som separata företeelser, dvs stycka upp fenomenet i bitar av lagom storlek, som sedan kan studeras var och en för sig … Denna uppdelning i mer fundamentala processer och byggstenar kan sägas vara det första steget inom modellbyggandet … Genom att isolera olika delsystem skapar vi en tydlig avgränsning som ger förutsättningar för vidare studier av systemet … Interaktioner och samspel är ofta väldigt komplexa, och de tillhörande ekvationerna olösliga. För att komma framåt måste vi förenkla fenomen.

Detta ”förenklande” och ”isolerande” har utan tvekan medverkat till att göra många vetenskaper mer matematiska och modellorienterade. MEN — om vi inte kan visa att de mekanismer och orsaker som vi isolerar och hanterar i våra matematiskt formulerade modeller är stabila i den meningen att de inte förändras när vi exporterar dem till våra ”target systems,” så håller ju dessa modeller bara ceteris paribus och är a fortiori av begränsat värde för att förstå, förklara eller predicera verkliga system. Eller som den alltid eminent citerbare nationalekonomen John Maynard Keynes skriver i Treatise on Probability (1921):

KeynesByGrantThe kind of fundamental assumption about the character of material laws, on which scientists appear commonly to act, seems to me to be [that] the system of the material universe must consist of bodies … such that each of them exercises its own separate, independent, and invariable effect, a change of the total state being compounded of a number of separate changes each of which is solely due to a separate portion of the preceding state … Yet there might well be quite different laws for wholes of different degrees of complexity, and laws of connection between complexes which could not be stated in terms of laws connecting individual parts … If different wholes were subject to different laws qua wholes and not simply on account of and in proportion to the differences of their parts, knowledge of a part could not lead, it would seem, even to presumptive or probable knowledge as to its association with other parts … These considerations do not show us a way by which we can justify induction … /427 No one supposes that a good induction can be arrived at merely by counting cases. The business of strengthening the argument chiefly consists in determining whether the alleged association is stable, when accompanying conditions are varied … /468 In my judgment, the practical usefulness of those modes of inference … on which the boasted knowledge of modern science depends, can only exist … if the universe of phenomena does in fact present those peculiar characteristics of atomism and limited variety which appears more and more clearly as the ultimate result to which material science is tending.

Vi bör som forskare självklart hålla utkik efter kausala relationer. Men vi måste också vara varse att det alltid föreligger en risk att det kan finnas andra (kanske icke-kvantifierbara) variabler — viktiga och även om kanske icke-observerbara och icke-additiva, inte nödvändigtvis epistemologiskt oåtkomliga — som inte övervägs för inklusion i den formaliserade matematiska modellen. Detta fundamentalproblem berördes också av Keynes, i dennes kritik av det atomistiska felslutet:

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

I sina resonemang om modeller problematiserar Philip Gerlee och Torbjörn Lundh tyvärr inte att de ”lagar” och relationer som vetenskapen etablerat genomgående förutsätter att de  åberopade kausala mekanismerna är atomistiska och additiva. Detta är tveksamt även i naturvetenskapen — vilket bl. a. Nancy Cartwright övertygande visat i flera av sina vetenskapsteoretiska arbeten — och i samhällsvetenskapliga sammanhang är det ett oomtvistligt faktum att kausala mekanismer bara opererar i ständigt föränderliga och instabila kombinationer där helheten är mer än en mekanisk summation av delarna. Om regulariteter eller lagliknande relationer föreligger är detta i regel bara ett resultat av design eller experimentell manipulation. Om så är fallet borde författarna kanske mer diskuterat denna grundläggande förutsättning för vetenskapligt modellerande.

Karl Popper till morgonkaffet

19 september, 2013 kl. 14:09 | Publicerat i Politics & Society | Kommentarer inaktiverade för Karl Popper till morgonkaffet

Neg_5Med ekonomijournalister som Per Lindvall och Andreas Cervenka har Svenska Dagbladet  etablerat sig som en av ytterst få tidningar i Sverige som bedriver ekonomisk journalistik värd namnet.

Alla vi som sedan länge tröttnat på övriga mediers tyckmyckentrutade nonsens bockar och bugar!

Det är inte var dag man får Karl Popper till morgonkaffet. Men ibland händer det. I Svenska Dagbladet Näringsliv skriver Per Lindvall om europrojektet som ett systemskifte som fått vad Popper benämnde ”oavsiktliga konsekvenser”:

Införandet av euron är ett exempel på ett av vår tids systemskiften. Euroekonomierna skulle , som det heter, konvergera. I stället har de divergerat och de ekonomiska och sociala spänningarna inom unionen är på bristningsgränsen.

Även andra storskaliga ekonomiska experiment har tappat färgen. Det handlar om idén att marknaden – den osynliga handen – är överlägsen när det gäller att allokera kapital dit det ger bäst långsiktig avkastning, och att avreglera och konkurrensutsätta verksamhet är det saliggörande medlet för att skapa ekonomisk effektivitet och kreativ förnyelse …

Idén om att konkurrens driver utvecklingen framåt håller på att överges till förmån för insikten om att symbios, ömsesidigt beroende och samarbete i många fall är en minst lika framgångsrik strategi i såväl naturen som i samhällsutvecklingen.

Sverige — det klasslösa samhället

18 september, 2013 kl. 21:02 | Publicerat i Politics & Society | 2 kommentarer


Man tager sig för pannan! Och detta ankors plask och grodors plums ska man behöva höra i ett land där klassklyftorna sedan ett par-tre decennier tillbaka åter växer lavinartat!

Kanske var det ändå inte så tokigt att stänga ner den där skolan …

Wolfgang Schäuble needs a massive reality check

18 september, 2013 kl. 19:27 | Publicerat i Economics, Politics & Society | 1 kommentar

According to the German minister of finance we ought to ignore the doomsayers and instead rejoice because of

the positive economic signals the eurozone is sending almost continuously these days. While the crisis continues to reverberate, the eurozone is clearly on the mend both structurally and cyclically.

Hmmm …

Can’t help myself wondering on what planet that guy lives …

Jesper Jespersen, Karl Popper & kritisk realism (wonkish)

18 september, 2013 kl. 14:06 | Publicerat i Theory of Science & Methodology | Kommentarer inaktiverade för Jesper Jespersen, Karl Popper & kritisk realism (wonkish)

jesperJesper Jespersens Macroeconomic methodology: a post Keynesian perspective (Cheltenham (MA): Edward Elgar, 2009) är det främsta skandinaviska bidraget till den pågående metodologiska vitalisering av postkeynesiansk ekonomisk teori som tillförandet av en kritisk realistisk vetenskapsteoretisk ansats utgör.

Jespersens bok måste ses som ett viktigt bidrag till den makroekonomiska metodologiska förnyelsen inom heterodox ekonomisk teori. Den bygger vidare på och utvecklar den givande korsbefruktning som – med arbeten av bl a Paul Davidson, Sheila Dow, Victoria Chick och Tony Lawson – nu under en tid ägt rum mellan kritisk realism och postkeynesiansk ekonomisk teori. Speciellt med sin betoning på makroekonomins metodologi tillför den ekonomiska metodologin nya bärande synpunkter som varje makroekonom borde (måste) förhålla sig till i sin forskargärning.

Jespersens arbete är ett imponerande kraftprov — men liksom de flesta andra stora vetenskapliga arbeten innehåller den också några mer kritisabla inslag. I Jespersens bok handlar detta om försöket att tillämpa Karl Poppers ”three worlds”-perspektiv på de ekonomisk-metodologiska frågor som kritisk realism reser.

Jespersen kommer i boken in på frågan om man kan förena Popper och ett kritisk-realistiskt perspektiv på makroekonomi. Jespersens diskussion är intressant och så vitt jag kan bedöma uttryck för ett bland kritiska realister nytt positivt förhållningssätt till Popper.

Vad Jespersen tar fasta på hos Popper (se t ex A world of propensities (1990)) är dennes tredelning av relationen mellan teori och verklighet i World 1 (som är den verklighet vi försöker förstå och förklara), World 2 (den analytiska) och World 3 (som representerar våra teorier och föreställningar om verkligheten).

Noteras bör att beskrivningarna ovan av de tre världarna är Jespersens. Poppers egna är – se exempelvis hans Tannerföreläsningar ”Three Worlds” (1978) – väsentligen annorlunda. Jespersen har uppenbarligen låtit sig inspireras av Poppers trikotomi, utan att känna sig bunden av upphovsmannens egna explikationer.

Här tror jag dock också att det är viktigt att klarare än Jespersen betona att svaret på frågan om Poppers vetenskapsteoretiska hållning kan vara något att bygga vidare på utifrån kritisk-realistiska synpunkter i stor utsträckning hänger samman med vilken Popper vi talar om. Om vi talar om den sene Popper som skrev exempelvis A world of propensities är det tänkbart. Om vi talar om den yngre Popper (–1970) är jag tveksam.
Read more …

Sagan om Frankensteins medeltal

18 september, 2013 kl. 09:50 | Publicerat i Statistics & Econometrics | Kommentarer inaktiverade för Sagan om Frankensteins medeltal

tageTänkte bara jag skulle tipsa ekonomer som fått det här med värdet av medeltal lite om bakfoten. Tage Danielsson och hans lilla saga om Frankenstein ger nyttiga insikter …
[h/t Jan Milch]

Lars E. O. Svensson gets it so wrong, so wrong

17 september, 2013 kl. 21:33 | Publicerat i Economics | 6 kommentarer

The increase in house loans – and house prices – in Sweden has for many years been among the steepest in the world.

Sweden’s house price boom started in mid-1990s, and looking at the development of real house prices since 1986, there are obvious reasons to be deeply worried:

Source: Statistics Sweden and own calculations

The indebtedness of the Swedish household sector has also risen to alarmingly high levels, as indicated by the figure below (based on new data published earlier this year by Statistics Sweden, showing the development of household debts/disposable income 1990 – 2012):

Source: Statistics Sweden and own calculations

As a result yours truly has been trying to argue with ”very serious people” that it’s really high time to ”take away the punch bowl.”

Lars E. O. Svensson — former deputy governor of the Swedish Riksbank — now argues in a recent article that there is no reason to be worried about the indebtedness of the Swedish household sector since he has noted that (emphasis added)

the households on average have very strong balance sheets

Hmm …

I think maybe Svensson should take a look at the book  The Flaw of Averages by Sam Savage, explaining why average assumptions on average are wrong …


Why it is better to be roughly right than precisely wrong

17 september, 2013 kl. 18:44 | Publicerat i Economics | 4 kommentarer


When applying deductivist thinking to economics, economists usually set up “as if” models based on a set of tight axiomatic assumptions from which consistent and precise inferences are made. The beauty of this procedure is of course that if the axiomatic premises are true, the conclusions necessarily follow. The snag is that if the models are to be relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often don’t. When addressing real economies, the idealizations necessary for the deductivist machinery to work, simply don’t hold.

So how should we evaluate the search for ever greater precision and the concomitant arsenal of mathematical and formalist models? To a large extent, the answer hinges on what we want our models to perform and how we basically understand the world.

For Keynes the world in which we live is inherently uncertain and quantifiable probabilities are the exception rather than the rule. To every statement about it is attached a “weight of argument” that makes it impossible to reduce our beliefs and expectations to a one-dimensional stochastic probability distribution. If “God does not play dice” as Einstein maintained, Keynes would add “nor do people”. The world as we know it, has limited scope for certainty and perfect knowledge. Its intrinsic and almost unlimited complexity and the interrelatedness of its organic parts prevent the possibility of treating it as constituted by “legal atoms” with discretely distinct, separable and stable causal relations. Our knowledge accordingly has to be of a rather fallible kind.

To search for precision and rigour in such a world is self-defeating, at least if precision and rigour are supposed to assure external validity. The only way to defend such an endeavour is to take a blind eye to ontology and restrict oneself to prove things in closed model-worlds. Why we should care about these and not ask questions of relevance is hard to see. We have to at least justify our disregard for the gap between the nature of the real world and our theories and models of it.

Keynes once wrote that economics “is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world.” Now, if the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? Even if there always has to be a trade-off between theory-internal validity and external validity, we have to ask ourselves if our models are relevant.

Models preferably ought to somehow reflect/express/correspond to reality. I’m not saying that the answers are self-evident, but at least you have to do some philosophical under-labouring to rest your case. Too often that is wanting in modern economics, just as it was when Keynes in the 1930s complained about Tinbergen’s and other econometricians lack of justifications of the chosen models and methods.

“Human logic” has to supplant the classical, formal, logic of deductivism if we want to have anything of interest to say of the real world we inhabit. Logic is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, in which concepts and entities are without clear boundaries and continually interact and overlap. In this world I would say we are better served with a methodology that takes into account that “the more we know the more we know we don’t know”.

The models and methods we choose to work with have to be in conjunction with the economy as it is situated and structured. Epistemology has to be founded on ontology. Deductivist closed-system theories, as all the varieties of the Walrasian general equilibrium kind, could perhaps adequately represent an economy showing closed-system characteristics. But since the economy clearly has more in common with an open-system ontology we ought to look out for other theories – theories who are rigorous and precise in the meaning that they can be deployed for enabling us to detect important causal mechanisms, capacities and tendencies pertaining to deep layers of the real world.

Rigour, coherence and consistency have to be defined relative to the entities for which they are supposed to apply. Too often they have been restricted to questions internal to the theory or model. But clearly the nodal point has to concern external questions, such as how our theories and models relate to real-world structures and relations. Applicability rather than internal validity ought to be the arbiter of taste.

The Wisdom of Crowds and Bean Jar Experiments

17 september, 2013 kl. 14:19 | Publicerat i Economics | 7 kommentarer

”Who Wants to Be a Millionaire?” was a simple show in terms of structure: a contestant was asked multiple-choice questions, which got successively more difficult, and if she answered fifteen questions in a row correctly, she walked away with $1 million. The show’s gimmick was that if a contestant got stumped by a question, she could pursue three avenues of assistance. First, she could have two of the four multiple-choice answers removed (so she’d have at least a fifty-fifty shot at the right response). Second, she could place a call to a friend or relative, a person whom, before the show, she had singled out as one of the smartest people she knew, and ask him or her for the answer. And third, she could poll the studio audience, which would immediately cast its votes by computer. Everything we think we know about intelligence suggests that the smart individual would offer the most help. And, in fact, the ”experts” did okay, offering the right answer—under pressure—almost 65 percent of the time. But they paled in comparison to the audiences. Those random crowds of people with nothing better to do on a weekday afternoon than sit in a TV studio picked the right answer 91 percent of the time.

WoCNow, the results of ”Who Wants to Be a Millionaire?” would never stand up to scientific scrutiny … As it happens, the possibilities of group intelligence, at least when it came to judging questions of fact, were demonstrated by a host of experiments conducted by American sociologists and psychologists between 1920 and the mid-1950s … A classic demonstration of group intelligence is the jelly-beans-in-the-jar experiment, in which invariably the group’s estimate is superior to the vast majority of the individual guesses. When finance professor Jack Treynor ran the experiment in his class with a jar that held 850 beans, the group estimate was 871. Only one of the fifty-six people in the class made a better guess.

There are two lessons to draw from these experiments. First, in most of them the members of the group were not talking to each other or working on a problem together. They were making individual guesses, which were aggregated and then averaged … Second, the group’s guess will not be better than that of every single person in the group each time. In many (perhaps most) cases, there will be a few people who do better than the group. This is, in some sense, a good thing, since especially in situations where there is an incentive for doing well (like, say, the stock market) it gives people reason to keep participating. But there is no evidence in these studies that certain people consistently outperform the group. In other words, if you run ten different jelly-bean-counting experiments, it’s likely that each time one or two students will outperform the group. But they will not be the same students each time. Over the ten experiments, the group’s performance will almost certainly be the best possible. The simplest way to get reliably good answers is just to ask the group each time.

Fooled by representativeness

16 september, 2013 kl. 15:45 | Publicerat i Theory of Science & Methodology | 8 kommentarer

The Coin-tossing Problem

My friend Ben says that on the first day he got the following sequence of Heads and Tails when tossing a coin:

And on the second day he says that he got the following sequence:

Which day-report makes you suspicious?

Most people I ask this question says the first day-report looks suspicious.

But actually both days are equally probable! Every time you toss a (fair) coin there is the same probability (50 %) of getting H or T. Both days Ben makes equally many tosses and every sequnece are equally probable!

The Linda Problem

Linda is 40 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Which of the following two alternatives is more probable?

A. Linda is a bank teller.
B. Linda is a bank teller and active in the feminist movement.

”Rationally,” alternative B cannot be more likely than alternative A. Nonetheless Amos Tversky and Daniel Kahneman reported — ”Judgments of and by representativeness”. In D. Kahneman, P. Slovic & A. Tversky (Eds.), Judgment under uncertainty: Heuristics and biases. Cambridge, UK: Cambridge University Press 1982 — that more than 80 percent of respondents said that it was.

Why do we make such ”irrational” judgments in both these cases? Tversky and Kahneman argued that in making this kind of judgment we seek the closest resemblance between causes and effects (in The Linda Problem, between Linda’s personality and her behaviour), rather than calculating probability, and that this makes alternative B seem preferable. By using a heuristic called representativeness statement B in The Linda Problem seems more ”representative” of Linda based on the description of her, although from a probabilistic point of view it is clearly less likely.

Mark Blaug — a rebel economist

16 september, 2013 kl. 14:36 | Publicerat i Economics | Kommentarer inaktiverade för Mark Blaug — a rebel economist

Richard LipseyRichard Lipsey has been kind enough to send me an e-mail commenting on my article on rational expectations in a recent issue of the Real-World Economics Review. In it he raises some questionmarks on the state of current macro and why ”the experience of our world is neither well described nor well predicted by ergodic models.”

Lipsey also forwarded a chapter he has written for a forthcoming book on Mark Blaug: Rebel With Many Causes (Edward Elgar). Interesting reading!

Issue 2: Should a theory’s assumptions be subject to testing or just its predictions?

If making falsifiable predictions is a necessary condition for a theory to have relevance, is´it sufficient? I think Mark would have agreed with me that the answer is to this question is “no”. After all, the simple assertion that there will be a recession next year is a testable prediction but not even a theory …

Mark was always critical of what he called (Blaug 1998: 20) “…the license that Friedman’s ‘methodology of positive economics’ gave economists to make any and all unrealistic assumptions, provided only that their theories yielded verifiable implications” … First, Friedman failed to note the important requirement that assumptions that are patently counter factual be robust in the sense that they can be relaxed without seriously altering the theory’s predictions. Second, Friedman’s discussion did not recognise the several different senses in which assumptions are used in economics and the different implicit ways in which they should be assessed. Third, since one of the key purposes of behavioural assumptions is to link a theory`s predictions to observable behaviour, the view of the extreme irrelevance of assumptions reduces theory to mere operationalism. It then does not make sense to ask which of the assumptions is causing the trouble if a theory that seemed to accord with the facts no longer does so …

Issue 5: What reason do we have to accept predictions made with respect both to the reaction to shocks and the value of various economic policies when they are derived from models that assume the economy has a unique equilibrium that no one has even seriously attempted to prove for a model that displays the variety of market forms − competitive, oligopolistic and monopolistic – and behavioural modes that characterise any modern economy?

I answer that when we use the comparative static properties of an economy-wide competitive equilibrium to generate predictions and policy prescriptions concerning real market economies, we are merely taking shots in the dark since no one has any idea of the comparative static properties of a model that captures the realities of the market structures and behavioural modes that characterise any real economy.

That market economies, buttressed by appropriate institutions, are self-organising is beyond question. So is the observation that they are more efficient than the alternative of running them solely according to the commands of bureaucrats – a question that was settled beyond doubt in the 20th century by the failed experiments in planned economies in the USSR and its satellite nations. But just how efficient are the results of that self-organisation is much debated (and, hence, so is the appropriate degree of mix between market determination and state intervention)

Issue 6 Can we learn anything about the efficiency of real-world market economies by studying the efficiency of Arrow-Debreu-style general equilibrium models?

Some economists hold that although this idealised model of the competitive economy bears little relation to the economy in which we live, it nonetheless helps us to understand the virtues of our actual market economy; others hold that this model is of no use in guiding our understanding of any actual market economy. When discussing this issue, Mark wrote (Blaug 2007: 200): “How can anything that is so patently impractical be a useful reference point? Well, actually, it cannot…”. He went on to refer to economists’ schizophrenia in accepting that, although the assumptions required by this model bear virtually no relation to reality, the model nevertheless is in some way useful in helping us to understand reality. The importance of the model lies, he argued, solely in its “ceremonial value”. I agree but also observe that the extreme importance of this model lies in its underpinnings of intuition-based policy prescriptions − intuition based on hours and hours of hard intellectual work spent in graduate school in proving the optimal properties of this model. ”If I was asked to work so hard on understanding this model, surely it must be of some value” is a common reaction of students. I stress that such policy advice is intuition- not theory-based. Many, perhaps most, teachers would argue that they stress the limitations of GE theory in general and the two fundamental theorems of welfare economics in particular. But try as they may, it is hard to undo students’ intuition that the time spent on these theories must mean that they have some policy relevance to the real world …

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