Adair Turner läxar upp svenska ekonometablissemanget

19 October, 2013 at 12:39 | Posted in Economics | Comments Off on Adair Turner läxar upp svenska ekonometablissemanget

 

När den brittiske ekonomen Adair Turner läxar upp ekonomeliten gör han det från grunden. De har inte riktigt förstått hur banker fungerar – ett rätt så tidigt inslag i grundkursen. I publiken på Global utmanings seminarium där Turner talar sitter såväl medlemmar i Riksbanksdirektionen som folk från Finansinspektionen och IMF-ekonomer …

Läroböckerna i ekonomi skriver fortfarande att bankerna lånar in pengar från hushållen som de sedan lånar vidare till företagens produktiva investeringar. De är ”intermediärer” som slussar den av Riksbanken fastställda penningmängden till investeringarna med störst avkastning.

Well, invänder Turner, för det första är det inte längre Riksbanken som fastställer penningmängden. Bankerna och skuggbankerna kan i stället skapa i stort sett obegränsade tillgångar själva. De är fria att låna ut ständigt större summor utan att hålla några betydande krav på reserver eller kapitaltäckning. Detta har lett till kraftigt ökade lån.

För det andra går inte lånen till samhällsnyttiga investeringar. De går till att betala allt högre priser för redan existerande tillgångar … Enligt Turner är bara en dryg tiondel av den brittiska skulden investerad i produktiva investeringar medan över 60 procent är ”investerad” i redan existerande tillgångar.

Siffrorna i Storbritannien förskräcker om vi betänker att Sverige, som har en konstant underproduktion av bostäder, har halkat efter övriga Europa i infrastrukturinvesteringar med 30 procent de senaste 15 åren. Här väljer regeringen att i stället satsa på privatkonsumtion genom skattesänkningar, rot och rut. Och de svenska krediterna går efter IT-boomen på 1990-talet nu till ständigt ökade bostadslån.

Svenska hushålls skulder har ungefär dubblats som andel av BNP sedan 1995. Likaså har penningmängden ungefär dubblerats som andel av BNP sedan 1980-talet … Fastighets- och aktiepriser sticker i väg utan ände för att skapa nya bubblor. Ständigt ökade priser ökar i sin tur efterfrågan och tillgången på krediter i en självförstärkande spiral.

Lägg till Turners tanke om att höjda räntor på kort sikt endast minskar investeringar (något som vi egentligen skulle behöva mer av). Vad höjda räntor däremot inte gör är att sänka priserna på tillgångar på kort sikt, eftersom priserna är relativt trögrörliga.

Räntevapnet som skulle hindra framtida kriser är både trubbigt och riskerar dessutom att förstärka utvecklingen mot färre samhällsnyttiga investeringar. Och om man tror på att tillväxten tar stryk med färre produktiva investeringar, blir konsekvensen en ekonomi av ständigt uppblåsta tillgångsvärden och ständiga finanskriser med medföljande deflation.

Lösningen? Adair Turner föreslår att bankernas utlåning börjar regleras så att en större andel går till produktiva investeringar …

Mikael Feldbaum

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Still stunned and disappointed at the 2013 ‘Nobel Prize’ in Economics

18 October, 2013 at 17:18 | Posted in Economics | Comments Off on Still stunned and disappointed at the 2013 ‘Nobel Prize’ in Economics

The Royal Swedish Academy of Sciences continues to astonish the public when awarding the Nobel Memorial Prize in Economics … People with knowledge of financial economics may be further surprised that this year Eugene Fama and Robert Shiller are both recipients. Prof Fama made his name by developing the efficient market hypothesis, long the cornerstone of finance theory. Prof Shiller is the most prominent critic of that hypothesis. It is like awarding the physics prize jointly to Ptolemy for his theory that the Earth is the centre of the universe, and to Copernicus for showing it is not …
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The prize committee gives the misleading impression that there is an agreed, established and advancing body of knowledge in financial economics: but the subject, for half a century a showpiece in economic departments and business schools because of its mix of intellectual rigour and practical relevance, is today struggling to maintain credibility in the face of the financial instability of the past two decades.

The problem is not the efficient market hypothesis itself, which should be understood as a tendency, not a law. The problem is with the superstructure built around it – a world of rational agents holding rational expectations achieving a state of “equilibrium” – a term economists have borrowed from physics – through trade with other rational agents holding similar rational expectations. In a masterpiece of persuasive language, the word “rational” is used to describe agents and expectations with a meaning very different from its ordinary usage …

There was no scope for compromise on the nature of the physical world: Copernicus was right and Ptolemy was wrong. There are not, and will not be, equivalent certainties in economics, and if such certainty is the hallmark of science – I do not think it is – then economics is not a science. The resulting insecurity seems to lead the Nobel committee to claim more for the subject of economics than it has achieved.

John Kay

Eugene Fama — economics of denial

16 October, 2013 at 08:06 | Posted in Economics | 2 Comments

The so-called “Chicago School” has mounted a robust defense of its rational expectations-based approach, rejecting the notion that a rethink is required. The Nobel laureate economist Robert Lucas has argued that the crisis was not predicted because economic theory predicts that such events cannot be predicted. So all is well …

We should not focus attention exclusively on economists, however.
Arguably the elements of the conventional intellectual toolkit found most wanting are the capital asset pricing model and its close cousin, the efficient-market hypothesis. Yet their protagonists see no problems to address.

On the contrary, the University of Chicago’s Eugene Fama has described the notion that finance theory was at fault as “a fantasy,” and argues that “financial markets and financial institutions were casualties rather than causes of the recession.” And the efficient-market hypothesis that he championed cannot be blamed, because “most investing is done by active managers who don’t believe that markets are efficient.”

This amounts to what we might call an “irrelevance” defense: Finance theorists cannot be held responsible, since no one in the real world pays attention to them!

Howard Davies

Proggmusikens non plus ultra

15 October, 2013 at 21:01 | Posted in Varia | Comments Off on Proggmusikens non plus ultra

 

Snow on cholera — real science without substituting statistical assumptions for work

15 October, 2013 at 18:56 | Posted in Theory of Science & Methodology | 1 Comment

 

For more on the methodological significance of Snow’s work:
David Freedman — Statistical Models and Shoe Leather

Statistical assumptions — convenient fictions, but also almost certainly false

15 October, 2013 at 12:36 | Posted in Statistics & Econometrics | 8 Comments

In one of the best articles ever published on applied statistics, eminent statisticians David Freedman and Richard Berk share some of their incisive insights with us:
assumptions

Random sampling is hardly universal … More typically, perhaps, the data in hand are simply the data most readily available …

“Convenience samples” of this sort are not random samples. Still, researchers may quite properly be worried about replicability. The generic concern is the same as for random sampling: if the study were repeated, the results would be different. What, then, can be said about the results obtained? … The moment that conventional statistical inferences are made from convenience samples, substantive assumptions are made about how the social world operates. Conventional statistical inferences (e.g., formulas for the standard error of the mean, t-tests, etc.) depend on the assumption of random sampling. This is not a matter of debate or opinion; it is a matter of mathematical necessity. When applied to convenience samples, the random sampling assumption is not a mere technicality or a minor revision on the periphery; the assumption becomes an integral part of the theory …

What kinds of social processes are assumed by the application of conventional statistical techniques to convenience samples? Our answer will be that the assumptions are quite unrealistic. If so, probability calculations that depend on the assumptions must be viewed as unrealistic too …

[One] way to treat uncertainty is to define a real population and assume that the data can be treated as a random sample from that population … This “as-if”strategy would seem to set the stage for statistical business as usual. An explicit goal of the “as-if ” strategy is generalizing to a specific population.And one issue is this: are the data representative? For example, did each member of the specified population have the same probability of coming into the sample? If not, and the investigator fails to weight the data, inferences from the sample to the population will likely be wrong …

Another way to treat uncertainty is to create an imaginary population from which the data are assumed to be a random sample … With this approach, the investigator does not explicitly define a population that could in principle be studied, with unlimited resources of time and money. The investigator merely assumes that such a population exists in some ill-defined sense. And there is a further assumption, that the dataset being analyzed can be treated as if it were based on a random sample from the assumed population. These are convenient fictions. Convenience will not be denied; the source of the fiction is two-fold: (i) the population does not have any empirical existence of its own, and (ii) the sample was not in fact drawn at random …

Handwaving is inadequate … Nevertheless, reliance on imaginary populations is widespread. Indeed, regression models are commonly used to analyze convenience samples: … such analyses are often predicated on random sampling from imaginary populations. The rhetoric of imaginary populations is seductive precisely because it seems to free the investigator from the necessity of understanding how data were generated.

David Freedman & Richard Berk

Statistical Assumptions as Empirical Commitments (emphasis added)

Assumptions Analysis

Fama and Shiller — like the Inquisitor and Galileo

15 October, 2013 at 09:36 | Posted in Economics | Comments Off on Fama and Shiller — like the Inquisitor and Galileo

A half-century ago, there was a lively discussion among economists about the dynamics of price expectations … But that thinking was largely cast aside in the 1960s, when my profession embraced the theory that efficient markets formed by people holding rational expectations could explain virtually all economic activity.

As a result, economists in recent decades have not developed expectations theory much further. That needs to be corrected in coming years. In the meantime, this failing helps explain why the current crisis was generally unpredicted, and why its future course is so poorly understood.

Robert Shiller

galileo-inquisition_large

The moment I heard that Fama and Shiller (together with Hansen) were awarded the latest pseudo-Nobel in Economics, my initial thought was: What next? A Darwin Prize to some Arch Creationist? The Award for Top Seamanship to the Titanic’s captain?

But then I quickly changed my mind. Awarding this ‘Nobel’ to both Fama and Shiller was a brilliant hedge. One that can only be bested by awarding the Physics Nobel to Galileo and to the Inquisitor who condemned him.

Yanis Varoufakis

[h/t Jan Milch]

How to get a “Nobel Prize” in economics — talking absolute nonsense!

14 October, 2013 at 20:58 | Posted in Economics | 6 Comments

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.

Eugene Fama: 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.

Eugene Fama: 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?

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

John Cassidy

Robert Shiller — an excellent choice

14 October, 2013 at 17:57 | Posted in Economics | Comments Off on Robert Shiller — an excellent choice

Pundits, Professors and their Predictions: Robert J. Shiller

Paul Krugman is of course absolutely right when he writes on his blog today that it’s

an old jibe against economics that it’s the only field where two people can win the Nobel for saying exactly the opposite thing; even the people making that jibe, however, probably didn’t envisage those two guys sharing the same prize, which is kind of what happened here.

On the rest of Krugman’s article — and especially on the question if Mr Fama “deserved” the prize — I’ve already stated my views.

For the benefit of my Swedish readers I thought it could be interesting to read what I wrote on one of the other winners — Robert Shiller — a couple of years ago in the Swedish newspaper Dagens Nyheter:

I början av år 2000 utkom en bok med den slående titeln “Irrational Exuberance”. Den amerikanske ekonomiprofessorn Robert Shiller varnade där för att de omfattande avregleringar på den finansiella marknaden som ägt rum sedan Thatcher-Reagan-eran medfört en alltför snabb kreditexpansion. Bankernas och finansbolagens utlåning ökade lavinartat och satsningen på att vinna allt större marknadsandelar gjorde att kreditvärdighetskontrollen eftersattes och dåliga kundförbindelser kom att accepteras. Framför allt IT-aktiernas värden var oproportionerligt höga. Det skulle oundvikligen leda till en finansiell kris.

Shiller fick rätt. Mindre än två månader efter att boken kommit ut gick det som det brukar. Bubblan sprack och finansmarknadskrisen var ett faktum.

Eftersom människans minne är kort, tornar nu orosmolnen åter upp sig. Och åter har Shiller publicerat en bok med till synes profetisk kraft. I den nyligen utkomna “The Subprime Solution. How Today’s Global Financial Crisis Happened, and What to Do about It” visar han hur samma mekanismer åter skapat en finansiell härdsmälta. Skillnaden är att det denna gång inte är IT-aktier som skapat den ursprungliga manin, utan främst bolån.

Den kris den amerikanska ekonomin nu är mitt uppe i har sitt ursprung i den spekulativa bubbla som utvecklades på den amerikanska bolånemarknaden mellan 1997 och 2006. Trots att räntor och byggnadskostnader sjönk kom huspriserna under de tio år då bubblan blåstes upp att stiga med i genomsnitt 85 procent. Sedan dess har priserna sjunkit i en allt snabbare takt och ligger i dag på en nivå som är halvvägs tillbaka till prisnivån före manin.

Det genomgående mönstret är detsamma i denna som i andra finanskriser. Av någon anledning uppstår en förskjutning (krig, innovationer, nya spelregler med mera) i det ekonomiska kretsloppet som leder till förändringar i bankers och företags vinstmöjligheter. Efterfrågan och priser stiger och drar med sig allt fler delar av en ekonomi som hamnar i ett slags eufori. Fler och fler dras med och snart är spekulationsmanin – vare sig det gäller tulpanlökar, fastigheter eller bolån – ett faktum. Förr eller senare säljer någon för att ta ut sina vinster och en rusning efter likviditet sätter in. Det har blivit dags att hoppa av karusellen och lösa in sina värdepapper och andra tillgångar i reda pengar. Ett finansiellt nödläge uppstår och breder ut sig. Priserna börjar sjunka, konkurserna ökar och krisen påskyndas och går över i panik.

För att hindra den slutliga kraschen dras krediten åt och man börjar ropa på en långivare som i sista hand kan garantera tillgången på de efterfrågade kontanta medlen och återupprätta förtroendet. Lyckas inte det är kraschen ett faktum.

Precis som sina föregångare Hyman Minsky och Charles Kindleberger betonar Shiller att bubblor är ett oundvikligen återkommande inslag i en ekonomi med fritt spelrum för väsentligen oreglerade marknader. Men Shiller menar också att vår tids omvärdering av arbete och rikedom spelar in. Under de senaste årtiondena har människors syn på sin roll i ekonomin genomgått en avgörande omvandling. Från att ut­ifrån en protestantisk arbetsetik i grunden se på arbete som basen för vår välfärd har idén om att vi ska förvänta oss göra pengar på investeringar i allt större utsträckning spritt sig. Dagens hjälte är inte den hårt arbetande industriarbetaren utan den smarte investeraren, för vilken pengar inte längre är ett medel utan ett mål i sig. Enligt Shiller är detta omtänkande den djupast liggande orsaken till krisen. Här är mörkrets hjärta.

Att Shiller betonar just de psykologiska aspekterna är inte så märkligt mot bakgrund av att han är en ledande företrädare för den forskningsinriktning inom finansiell ekonomi som kallas finansiell beteendeteori.
Read more …

Eugene Fama got the Nobel Prize in Chicago Economics — and guess who told you already a week ago

14 October, 2013 at 14:12 | Posted in Economics | 3 Comments

My forecast from last week (here and here) turned out to be right — the Swedish Academy of Sciences awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2013 to (besides Lars Peter Hansen and Robert Shiller) Eugene Fame. The prize committee really did show how in tune with the times it is …

I love to be right of course, but otherwise this is only saddening and shows what a joke this prize is, when someone like Fama can get it. Dump it!

David Hendry on models and forecasts

14 October, 2013 at 08:29 | Posted in Statistics & Econometrics | 3 Comments

 

Krugman gets it right on ‘sticky wages’ — as did Keynes 80 years ago

13 October, 2013 at 15:31 | Posted in Economics | 1 Comment

Sao_Paulo_Stock_Exchange

Paul Krugman  writes about “sticky wages” on his blog today:

I probably should have made clear in my post on sticky wages that I was arguing for stickiness as a central issue in the history of macroeconomic thought, not as a central issue in current policy. I’ve been arguing for years that when you’re in a liquidity trap wage flexibility actually hurts rather than helps; this is the paradox of flexibility, which arises, roughly speaking, because under current conditions the aggregate demand curve is upward-sloping thanks to debt and balance sheet effects.

That’s absolutely correct — but there are unfortunately a lot of other neoclassical economists out there, who still think that price and wage rigidities are the prime movers behind unemployment. What is even worse — I’m totally gobsmacked every time I come across this utterly ridiculous misapprehension — is that some of them even think that these rigidities are the reason John Maynard Keynes gave for the high unemployment of the Great Depression. This is of course pure nonsense. For although Keynes in General Theory (1936) devoted substantial attention to the subject of wage and price rigidities, he certainly did not hold this view.

Since unions/workers, contrary to classical assumptions, make wage-bargains in nominal terms, they will – according to Keynes – accept lower real wages caused by higher prices, but resist lower real wages caused by lower nominal wages. However, Keynes held it incorrect to attribute “cyclical” unemployment to this diversified agent behaviour. During the depression money wages fell significantly and – as Keynes noted – unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment.

In any specific labour market, lower wages could, of course, raise the demand for labour. But a general reduction in money wages would leave real wages more or less unchanged. The reasoning of the classical economists was, according to Keynes, a flagrant example of the “fallacy of composition.” Assuming that since unions/workers in a specific labour market could negotiate real wage reductions via lowering nominal wages, unions/workers in general could do the same, the classics confused micro with macro.

Lowering nominal wages could not – according to Keynes – clear the labour market. Lowering wages – and possibly prices – could, perhaps, lower interest rates and increase investment. But to Keynes it would be much easier to achieve that effect by increasing the money supply. In any case, wage reductions was not seen by Keynes as a general substitute for an expansionary monetary or fiscal policy.

Even if potentially positive impacts of lowering wages exist, there are also more heavily weighing negative impacts – management-union relations deteriorating, expectations of on-going lowering of wages causing delay of investments, debt deflation et cetera.

So, what Keynes actually did argue in General Theory, was that the classical proposition that lowering wages would lower unemployment and ultimately take economies out of depressions, was ill-founded and basically wrong.

To Keynes, flexible wages would only make things worse by leading to erratic price-fluctuations. The basic explanation for unemployment is insufficient aggregate demand, and that is mostly determined outside the labor market.

The classical school [maintains that] while the demand for labour at the existing money-wage may be satisfied before everyone willing to work at this wage is employed, this situation is due to an open or tacit agreement amongst workers not to work for less, and that if labour as a whole would agree to a reduction of money-wages more employment would be forthcoming. If this is the case, such unemployment, though apparently involuntary, is not strictly so, and ought to be included under the above category of ‘voluntary’ unemployment due to the effects of collective bargaining, etc …
The classical theory … is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemploy-ment, which is in the above sense involuntary, cannot occur. Apparent unemployment must, therefore, be the result either of temporary loss of work of the ‘between jobs’ type or of intermittent demand for highly specialised resources or of the effect of a trade union ‘closed shop’ on the employment of free labour. Thus writers in the classical tradition, overlooking the special assumption underlying their theory, have been driven inevitably to the conclusion, perfectly logical on their assumption, that apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity …

Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment – if there be such a thing (and who will deny it?). The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. We need to throw over the second postulate of the classical doctrine and to work out the behaviour of a system in which involuntary unemployment in the strict sense is possible.

J M Keynes General Theory

Laws of Nature — are they really ‘facts of life’?

13 October, 2013 at 14:36 | Posted in Theory of Science & Methodology | 1 Comment

fmaill
 
Melvyn Bragg and guests — Nancy Cartwright, Mark Buchanan and Frank Close — discuss if there are any Laws of Nature. And if so — are they really ‘facts of life’

Gödel’s Incompleteness Theorems

13 October, 2013 at 11:11 | Posted in Theory of Science & Methodology | Comments Off on Gödel’s Incompleteness Theorems

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Melvyn Bragg and guests discuss an iconic piece of 20th century maths – Gödel’s Incompleteness Theorems.

The greatest gift of all

12 October, 2013 at 20:53 | Posted in Varia | Comments Off on The greatest gift of all


[h/t Jeanette Meyer]

Top 10 Statistics & Econometrics Books

12 October, 2013 at 12:03 | Posted in Statistics & Econometrics | 6 Comments

top-10-retail-news-thumb-610xauto-79997-600x240-1

• Feller, W: An Introduction to Probability Theory and Its Applications

• Freedman, D: Statistical Models: Theory and Practice

• Freedman, D: Statistical Models and Causal Inference

• Hamilton, J D : Time Series Analysis

• Kennedy, P:  A Guide to Econometrics

• Keuzenkamp, HProbability, Econometrics and Truth: The Methodology of Econometrics

• Keynes, J M: A Treatise on Probability

• Ross, SIntroduction to Probability and Statistics for Engineers and Scientists

• Salsburg, DThe Lady Tasting Tea: How Statistics Revolutionized Science

• Stock, J  & Watson, M : Introduction to Econometrics

The Fed has a conflict of interest

12 October, 2013 at 10:34 | Posted in Economics | Comments Off on The Fed has a conflict of interest

At a March 2012 meeting, a group of examiners at the Federal Reserve Bank of New York agreed that Goldman Sachs had inadequate procedures to guard against conflicts of interest — guidelines aimed at stopping firms from putting their pursuit of profit ahead of their clients’ best interests.

541409_524253330950731_423666326_nThe examiners voted to downgrade a confidential rating assigned by the New York Fed that could have spurred costly enforcement actions and other regulatory penalties. It is not known whether the vote in fact led to a rating change. The former examiner who pushed for a downgrade, Carmen M. Segarra, now contends in a lawsuit filed on Thursday that just weeks after the vote, her superiors asked her to change her findings on Goldman and fired her after she refused.

The vote to downgrade, which has not been previously reported, could have been a big blow for Goldman.

“Goldman Sachs does not have a conflicts-of-interest policy, not firmwide, and not for any divisions,” Ms. Segarra wrote to Michael F. Silva, a senior executive at the New York Fed. “I would go so far as to say they have never had a policy on conflicts.”

The lawsuit, along with a review by The New York Times of confidential government documents and internal e-mails, raises questions about the success of Goldman’s efforts to police potential conflicts.

The bank has been buffeted by accusations that it has put its own interests ahead of its clients, a contention it denies. Goldman, for instance, faced accusations that in the run-up to the financial crisis that it sold billions of dollars in souring real estate assets to unsuspecting clients. Just weeks before the examiners’ vote last year, the bank was publicly excoriated by a federal judge who found that Goldman had conflicts in a huge energy deal.

The lawsuit also provides a look into the often-opaque relationship between federal regulators and Wall Street. After the financial crisis, banking regulators faced criticism that they were too cozy with the banks that they were overseeing — a familiarity that failed to thwart some of the risky behavior precipitating the housing crisis and ensuing recession.

Even now, banks have sway over their regulators, especially those stationed at a bank’s headquarters, according to two former regulators who spoke on the condition of anonymity. The banks, for example, can work behind the scenes to avert a vote like the one to downgrade Goldman. The people said, however, that once a vote to downgrade has taken place, it is difficult to reverse.

New York Times

For absent friends

11 October, 2013 at 21:23 | Posted in Varia | Comments Off on For absent friends

 

Niall Ferguson has done it — again

11 October, 2013 at 14:16 | Posted in Varia | 1 Comment

niall-fergusonNiall Ferguson hits out at Paul Krugman yesterday for having a nasty online behaviour.

Look who’s talking!

This is really überpathetic — coming from a Harvard professor who only a couple of months ago made bizarre and offensive remarks about economist John Maynard Keynes at an investment conference in California, saying that Keynes’ economic philosophy was the result of Keynes not caring about future generations because he was gay and did not have children.

Niall, as Mr Pickwick so eloquently had it — You are a humbug, sir!

Significance tests DO NOT validate the model

11 October, 2013 at 12:54 | Posted in Statistics & Econometrics | Comments Off on Significance tests DO NOT validate the model

images-19In journal articles a typical regression equation will have an intercept and several explanatory variables. The regression output will usually include an F-test, with p – 1 degrees of freedom in the numerator and n – p in the denominator. The null hypothesis will not be stated. The missing null hypothesis is that all the coefficients vanish, except the intercept.

If F is significant, that is often thought to validate the model. Mistake. The F-test takes the model as given. Significance only means this: if the model is right and the coefficients are 0, it is very unlikely to get such a big F-statistic. Logically, there are three possibilities on the table:
i) An unlikely event occurred.
ii) Or the model is right and some of the coefficients differ from 0.
iii) Or the model is wrong.
So?

The Nobel Prize in US Economics

11 October, 2013 at 10:26 | Posted in Economics | 2 Comments

Nobel Prize medalThe Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, usually — incorrectly — referred to as the Nobel Prize in Economics, is an award for outstanding contributions to the field of economics. The Prize in Economics was established and endowed by Sweden’s central bank Sveriges Riksbank in 1968 on the occasion of the bank’s 300th anniversary.The first award was given in 1969. The award is presented in Stockholm at an annual ceremony on December 10.

As of 2012 the prize has been given to 71 individuals.
Of all laureates, 56 have been (by birth or by naturalisation) US citizens — that is: 79 %
The University of Chicago has had 26 affiliated laureates — that is 37 %
Only 5 laureates have come from outside North America or Western Europe — that is: 7 %
Only 1 woman has got the prize — that is: 1.4 %

The world is really a small place when it comes to economics …

Lönediskriminering — en liten statistiklektion

11 October, 2013 at 09:21 | Posted in Statistics & Econometrics | Comments Off on Lönediskriminering — en liten statistiklektion

Pontus Bäckström har några intressanta reflektioner kring den svåra konsten att dra kausala slutsatser utifrån observationsdata:

diskrimering_176455388I 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.

Econ 101 — dumbed-down garbage

11 October, 2013 at 08:55 | Posted in Economics | 2 Comments

ECON101-money-by-borman818As we can see from the current dismal state of economic affairs, economies are incredibly complex systems, and policymakers who are forced to act in the face of this uncertainty and complexity want guidance. And over the last half century, neoclassical economists have not only been more than happy to offer it, but largely been able to marginalize any other disciplines or approaches, giving them a virtual monopoly on economic policy advice.

But there are two big problems with this. First, despite economists’ calming assurances, we still know little about how economies actually work and the effect of policies. If we did, then economists should have sounded the alarm bells to head off the financial collapse and Great Recession. But even more problematic, even though most economists know better, they present to the public, the media and politicians a simplified, vulgar version of neoclassical economics — what can be called Econ 101 — that leads policymakers astray. Economists fear that if they really expose policymakers to all the contradictions, uncertainties and complications of “Advanced Econ,” the latter will go off track — embracing protectionism, heavy-handed “industrial policy” or even socialism. In fact, the myths of Econ 101 already lead policymakers dangerously off track, with tragic results for the economy and everyday Americans.

Myth 1: Economics is a science …
Myth 2: The goal of economic policy is maximizing efficiency …
Myth 3: The economy is a market …
Myth 4: Prices reflect value …
Myth 5: All profitable activities are good for the economy …
Myth 6: Monopolies and oligopolies are always bad because they distort prices …
Myth 7: Low wages are good for the economy …
Myth 8: “Industrial policy” is bad …
Myth 9: The best tax code is one that doesn’t pick winners …
Myth 10: Trade is always win-win …

Robert Atkinson & Michael Lind

[h/t Tom Hickey]

Why putting all eggs in the RCT basket is a mistake

10 October, 2013 at 19:14 | Posted in Theory of Science & Methodology | Comments Off on Why putting all eggs in the RCT basket is a mistake

 

Drivel that passes academic quality control

10 October, 2013 at 10:14 | Posted in Theory of Science & Methodology | 1 Comment

impostor
 

The Sokal hoax, as it came to be known, demonstrated how easy it was for any old drivel to pass academic quality control in highbrow humanities journals, so long as it contained lots of fancy words and pandered to referees’ and editors’ ideological preconceptions. Hard scientists gloated. That could never happen in proper science, they sniffed. Or could it?

Alas, as a report in this week’s Science shows, the answer is yes, it could. John Bohannon, a biologist at Harvard with a side gig as a science journalist, wrote his own Sokalesque paper describing how a chemical extracted from lichen apparently slowed the growth of cancer cells. He then submitted the study, under a made-up name from a fictitious academic institution, to 304 peer-reviewed journals around the world.

Despite bursting with clangers in experimental design, analysis and interpretation of results, the study passed muster at 157 of them. Only 98 rejected it. (The remaining 49 had either not responded or had not reviewed the paper by the time Science went to press.) Just 36 came back with comments implying that they had cottoned on to the paper’s sundry deficiencies, though Dr Bohannon says that 16 of those eventually accepted it anyway.

The Economist

Why austerity is no solution to economic crises

10 October, 2013 at 07:53 | Posted in Economics | Comments Off on Why austerity is no solution to economic crises

Mainstream neoclassical economists seem to think that there really isn’t any difference between solving a liquidity trap by lowering real wages via inflation or by lowering nominal wages.

But that is of course pure nonsense. Lowering real wages via inflation and lowering nominal wages aren’t equivalent measures.

As John Maynard Keynes wrote in General Theory (1936):

keynes-john-maynardThe method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage-unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former … If a sagging rate of interest has to be brought about by a sagging wage-level … there is … a double reason for putting off investment and thus postponing recovery.

Or as Irving Fisher – the originator of the debt-deflation theory – wrote in Debt-Deflation Theory of Great Depressions (Econometrica, 1933):

fisherIn summary, we find that: (1) economic changes include steady trends and unsteady occasional disturbances which act as starters for cyclical oscillations of innumerable kinds; (2) among the many occasional disturbances, are new opportunities to invest, especially because of new inventions; (3) these, with other causes, sometimes conspire to lead to a great volume of over-indebtedness; (4) this in turn, leads to attempts to liquidate; (5) these, in turn, lead (unless counteracted by reflation) to falling prices or a swelling dollar; (6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place.

Austerity policies will only bring our economies deep into the kind of debt-deflationary depressions that Fisher and Keynes warned us of in the 1930s.

And as the Reinhart-Rogoff brouhaha has shown us, there are no general indication of higher levels of indebtedness and inflation substantially reducing growth. So, then, why not really, really, make an effort to put an end to the mass unemployment that today haunts economies on both sides of the Atlantic – instead of pursuing headless austerity policies that only make things worse?
 
neoliberal austerity

The Likelihood Ratio Test (wonkish)

10 October, 2013 at 07:42 | Posted in Statistics & Econometrics | Comments Off on The Likelihood Ratio Test (wonkish)

 

On science and the importance of external validity

9 October, 2013 at 12:34 | Posted in Theory of Science & Methodology | 1 Comment

test-tubeThe claimed strength of a social experiment, relatively to non-experimental methods, is that few assumptions are required to establish its internal validity in identifying a project’s impact. The identification is not assumption-free. People are (typically and thankfully) free agents who make purposive choices about whether or not they should take up an assigned intervention. As is well understood by the randomistas, one needs to correct for such selective compliance … The randomized assignment is assumed to only affect outcomes through treatment status (the “exclusion restriction”).

There is another, more troubling, assumption just under the surface. Inferences are muddied by the presence of some latent factor—unobserved by the evaluator but known to the participant—that influences the individual-specific impact of the program in question … Then the standard instrumental variable method for identifying [the average treatment effect on the treated] is no longer valid, even when the instrumental variable is a randomized assignment … Most social experiments in practice make the implicit and implausible assumption that the program has the same impact for everyone.

While internal validity … is the claimed strength of an experiment, its acknowledged weakness is external validity—the ability to learn from an evaluation about how the specific intervention will work in other settings and at larger scales. The randomistas see themselves as the guys with the lab coats—the scientists—while other types, the “policy analysts,” worry about things like external validity. Yet it is hard to argue that external validity is less important than internal validity when trying to enhance development effectiveness against poverty; nor is external validity any less legitimate as a topic for scientific inquiry.

Martin Ravaillon

Mitt favoritpensionat

9 October, 2013 at 08:24 | Posted in Varia | Comments Off on Mitt favoritpensionat

 

Ett smakprov från den efterlängtade samlingsvolymen med Thor Modéen-klassiker

den_stora_pilsnerboxen_6_disc

Farewell theme

8 October, 2013 at 19:26 | Posted in Varia | Comments Off on Farewell theme

 

Eleni Karaindrou and Jan Garbarek. Pure magic.

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