## Simple logistic regression (student stuff)

18 mars, 2014 kl. 14:58 | Publicerat i Statistics & Econometrics | Kommentarer inaktiverade för Simple logistic regression (student stuff)

And in the video below (in Swedish) yours truly shows how to perform a logit regression using Gretl.

## Libertarian magic dust

18 mars, 2014 kl. 13:00 | Publicerat i Politics & Society | Kommentarer inaktiverade för Libertarian magic dust

## Searching for causality — statistics vs. history

17 mars, 2014 kl. 11:37 | Publicerat i Theory of Science & Methodology | 4 kommentarer

History and statistics serve a common purpose: to understand the causal force of some phenomenon. It seems to me, moreover, that statistics is a simplifying tool to understand causality, whereas history is a more elaborate tool. And by “more elaborate” I mean that history usually attempts to take into account both more variables as well as fundamentally different variables in our quest to understand causality.

To make this point clear, think about what a statistical model is: it is a representation of some dependent variable as a function of one or more independent variables, which we think, perhaps because of some theory, have a causal influence on the dependent variable in question. A historical analysis is a similar type of model. For example, a historian typically starts by acknowledging some development, say a war, and then attempts to describe, in words, the events that led to the particular development. Now, it is true that historians typically delve deeply into the details of the events predating the development – e.g., by examining written correspondence between officials, by reciting historical news clippings to understand the public mood, etc. – but this simply means that the historian is examining more variables than the simplifying statistician. If the statistician added more variables to his regression, he would be on his way to producing a historical analysis.

There is, however, one fundamental way in which the historian’s model is different from the statistician’s: namely, the statistician is limited by the fact that he can only consider precisely quantified variables in his model. The historian, in contrast, can add whatever variables he wants to his model. Indeed, the historian’s model is non-numeric …

It is my view that what differentiates whether history or statistics will be successful relates to the subject area to which each tool is applied. In subjects where precisely quantified variables are all we need to confidently determine the causal force of some phenomenon, statistics will be preferable; in subjects where imprecisely quantified variables play an important causal role, we need to rely on history.

It seems to me, moreover, that the line dividing the subjects to which we apply our historical or statistical tools cuts along the same seam as does the line dividing the social sciences from the natural sciences. In the latter, we can ignore imprecisely quantified variables, such as human beliefs, as these variables don’t play an important causal role in the movement of natural phenomena. In the former, such imprecisely quantified variables play a central role in the construction and the stability of the laws that govern society at any given moment.

Econolosophy

## On the limits of randomization

16 mars, 2014 kl. 18:23 | Publicerat i Statistics & Econometrics | 1 kommentar

In the video below, Angus Deaton — Professor of International Affairs and Professor of Economics and International Affairs at the Woodrow Wilson School and the Economics Department at Princeton — explains why using Randomized Controlled Trials (RCTs) is not at all the ”gold standard” that it has lately often been portrayed as. As yours truly has repeatedly argued on this blog (e.g. here and here), RCTs usually do not provide evidence that their results are exportable to other target systems. The almost religious belief with which its propagators portray it, cannot hide the fact that RCTs cannot be taken for granted to give generalizable results. That something works somewhere is no warranty for it to work for us or even that it works generally.

## Elegy

15 mars, 2014 kl. 20:42 | Publicerat i Varia | Kommentarer inaktiverade för Elegy

## The pretense-of-knowledge syndrome in economics

15 mars, 2014 kl. 16:15 | Publicerat i Economics | 6 kommentarer

What does concern me about my discipline … is that its current core — by which I mainly mean the so-called dynamic stochastic general equilibrium approach — has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one …

While it often makes sense to assume rational expectations for a limited application to isolate a particular mechanism that is distinct from the role of expectations formation, this assumption no longer makes sense once we assemble the whole model. Agents could be fully rational with respect to their local environments and everyday activities, but they are most probably nearly clueless with respect to the statistics about which current macroeconomic models expect them to have full information and rational information.

This issue is not one that can be addressed by adding a parameter capturing a little bit more risk aversion about macro-economic, rather than local, phenomena. The reaction of human beings to the truly unknown is fundamentally different from the way they deal with the risks associated with a known situation and environment … In realistic, real-time settings, both economic agents and researchers have a very limited understanding of the mechanisms at work. This is an order-of-magnitude less knowledge than our core macroeconomic models currently assume, and hence it is highly likely that the optimal approximation paradigm is quite different from current workhorses, both for academic andpolicy work. In trying to add a degree of complexity to the current core models, by bringing in aspects of the periphery, we are simultaneously making the rationality assumptions behind that core approach less plausible …

The challenges are big, but macroeconomists can no longer continue playing internal games. The alternative of leaving all the important stuff to the “policy”-typ and informal commentators cannot be the right approach. I do not have the answer. But I suspect that whatever the solution ultimately is, we will accelerate our convergence to it, and reduce the damage we do along the transition, if we focus on reducing the extent of our pretense-of-knowledge syndrome.

Ricardo J. Caballero

A great article that also underlines — especially when it comes to forecasting and implementing economic policies  — that the future is inherently unknowable, and using statistics, econometrics, decision theory or game theory, does not in the least overcome this ontological fact.

It also further underlines how important it is in social sciences — and economics in particular — to incorporate Keynes’s far-reaching and incisive analysis of induction and evidential weight in his seminal A Treatise on Probability (1921).

According to Keynes we live in a world permeated by unmeasurable uncertainty – not quantifiable stochastic risk – which often forces us to make decisions based on anything but ”rational expectations.” Keynes rather thinks that we base our expectations on the confidence or “weight” we put on different events and alternatives. To Keynes expectations are a question of weighing probabilities by “degrees of belief,” beliefs that often have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents as modeled by ”modern” social sciences. And often we “simply do not know.”

How strange that social scientists and mainstream economists as a rule do not even touch upon these aspects of scientific methodology that seems to be so fundamental and important for anyone trying to understand how we learn and orient ourselves in an uncertain world. An educated guess on why this is a fact would be that Keynes concepts are not possible to squeeze into a single calculable numerical “probability.” In the quest for measurable quantities one puts a blind eye to qualities and looks the other way.

So why do economists, companies and governments continue with the expensive, but obviously worthless, activity of trying to forecast/predict the future?

A couple of months ago yours truly was interviewed by a public radio journalist working on a series on Great Economic ThinkersWe were discussing the monumental failures of the predictions-and-forecasts-business. But — the journalist asked — if these cocksure economists with their “rigorous” and “precise” mathematical-statistical-econometric models are so wrong again and again — why do they persist wasting time on it?

In a discussion on uncertainty and the hopelessness of accurately modeling what will happen in the real world — in M. Szenberg’s Eminent Economists: Their Life Philosophies — Nobel laureate Kenneth Arrow comes up with what is probably the most plausible reason:

It is my view that most individuals underestimate the uncertainty of the world. This is almost as true of economists and other specialists as it is of the lay public. To me our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness … Experience during World War II as a weather forecaster added the news that the natural world as also unpredictable. An incident illustrates both uncer-tainty and the unwilling-ness to entertain it. Some of my colleagues had the responsi-bility of preparing long-range weather forecasts, i.e., for the following month. The statisticians among us subjected these forecasts to verification and found they differed in no way from chance. The forecasters themselves were convinced and requested that the forecasts be discontinued. The reply read approximately like this: ‘The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.’

## Der Himmel über Berlin

14 mars, 2014 kl. 16:53 | Publicerat i Varia | 1 kommentar

One of my favourite movies. Absolutely fabulous.

## Friskolor — selektion och segregering

14 mars, 2014 kl. 10:52 | Publicerat i Education & School | Kommentarer inaktiverade för Friskolor — selektion och segregering

När landets grundskolor grupperas efter elevernas socioekonomiska bakgrund är det uppenbart att elevunderlaget skiljer sig markant mellan fristående och kommunala skolor …

Genom att dela in landets skolor i tio lika stora socio-ekonomiska grupper och undersöka andelen friskolor i var och en av dessa framträder … ett tydligt mönster: ju gynnsammare socio-ekonomisk elevsammansättning, desto större andel fristående skolor …

Incitamenten att lämna det offentliga skolsystemet kan av flera skäl vara starkast för socialt starka elever. Om friskolorna till exempel ersätts efter kommunens genomsnittliga skolutgifter kan socio-ekonomiskt starka elever genom att byta till en fristående skola slippa den omfördelning till mindre socialt gynnade elever som vanligtvis sker. Detta skulle även kunna påverka utbudet eftersom fristående skolor som lyckas locka till sig socialt starka elevsegment i sådana fall överkompenseras jämfört med de kommunala skolorna.

Att den sociala selektionen av elever är tydligare bland icke-vinstdrivande än bland vinstdrivande friskolor tyder på att efterfrågan spelar en viktig roll. Samtidigt är mönstret tydligt även bland vinstdrivande skolor vilket kan bero på att vinstmarginalerna är större för dessa elevsegment. En bidragande orsak kan vara att koncernskolor som är måna om sitt varumärke kan vara ovilliga att öppna skolor i socialt utsatta områden eftersom sådana skolor sannolikt kommer att uppvisa relativt svaga resultat, även om skolan skulle göra ett bra jobb. Det skulle i så fall inte vara en slump att just Academedia, som driver skolor under olika varumärken, har något fler skolor i socialt svaga grupper än de övriga koncernerna.

Jonas Vlachos

## What is neoclassical economics?

14 mars, 2014 kl. 09:10 | Publicerat i Economics | 4 kommentarer

For your edification, I offer this link to an elegant explanation of why neoclassical economics presents itself as purely scientific and denies any ideological commitments, and strangles pluralism.

In brief: Arnsperger and Varoufakis define “neoclassical” economics in terms of three “meta-axioms.” First, neoclassicism assumes “methodological individualism,” i.e. that economists must ultimately posit individuals’ behaviors as the root cause of broad economic phenomena. Second, it assumes “methodological instrumentalism,” i.e. that these actors are somehow or other acting instrumentally in pursuit of goals, are “irreversibly ends-driven.” Third, it assumes “methodological equilibration,” i.e. rather than asking whether or under what conditions shall a state of affairs continue unchanged, it seeks to show that if equilibrium occurs, then it will endure.

The big twist of Ansperger and Varoufakis’ argument is that by keeping these assumptions well-hidden and unquestioned, neoclassicism simultaneously guts its own ability to effectively explain and predict real-world economic phenomena AND expands its own discursive authority.

The real genius of this article is in demonstrating how this paradoxical circumstance occurs. They carefully and explicitly reject the view that economics professors are cynically and purposively responsible as a “conspiracy theory.” Instead, they pursue a “functionalist” explanation (which seems like maybe the defining characteristic of science itself: showing how cause and effect, independent of any overarching purpose, lead from situation A to situation B), which boils down to funding sources. Basically, they claim that economists who pursue technical elaborations, “who simply ‘get on with the job,’” get funding while those who raise important but non-actionable questions about assumptions, method, and framework do not. “No one wants to keep quiet on the meta-axioms. They are just too busy building magnificent edifices on top of them, and being magnificently rewarded for it” …

So the three meta-axioms of neoclassical economics define the language and concepts which can/must be invoked by any economist who wishes to be taken seriously. By presenting as self-evident and obvious, they effectively make themselves invisible while also precluding alternative approaches.

Casey Jaywork

[h/t Mark Buchanan]

For my own take on this issue, see, e.g., here and here.

## Time to rewrite the textbooks on money creation

12 mars, 2014 kl. 19:13 | Publicerat i Economics | 6 kommentarer

This article has discussed how money is created in the modern economy. Most of the money in circulation is created, not by the printing presses of the Bank of England, but by the commercial banks themselves: banks create money whenever they lend to someone in the economy or buy an asset from consumers. And in contrast to descriptions found in some textbooks, the Bank of England does not directly control the quantity of either base or broad money. The Bank of England is nevertheless still able to influence the amount of money in the economy. It does so in normal times by setting monetary policy — through the interest rate that it pays on reserves held by commercial banks with the Bank of England. More recently, though, with Bank Rate constrained by the effective lower bound, the Bank of England’s asset purchase programme has sought to raise the quantity of broad money in circulation. This in turn affects the prices and quantities of a range of assets in the economy, including money.

Michael McLeay, Amar Radia and Ryland Thomas of Bank of England’s Monetary Analysis Directorate

(h/t Phil Pilkington)

## Lux Aeterna

11 mars, 2014 kl. 13:48 | Publicerat i Economics | Kommentarer inaktiverade för Lux Aeterna

## Inför moratorium för nedläggelser av järnvägar

11 mars, 2014 kl. 09:54 | Publicerat i Politics & Society | 2 kommentarer

Inför ett moratorium för arbetet med banned-läggningar och satsa också på regionala banor för att motverka den ökande regionala obalansen. De flesta politiska par­tier säger att man vill minska de miljö- och klimatfarliga bilavgaserna och att företagsamhet ska kunna växa i hela landet. Näringslivet efterlyser olika transportalternativ för att kunna välja de mest ekonomiska och miljö- och klimatvänliga och då är järnvägen en viktig del.

Miljörörelsen har i decennier efterlyst en upprustad järnvägstrafik inklusive en samordning av information, biljettpriser och tidtabeller. Det har emellertid blivit precis tvärtom.

Många åker tåg och de har liksom näringslivet i decennier noterat vanskötseln av järnvägen. Nu planeras nya bannedläggningar och försämrad tågtrafik. Trafikverket arbetar för ökad vägtrafik med inte minst fler tunga transporter på ­vägarna och hindrar utveckling av järnvägen genom bland annat nya bannedläggningar.

Trafikverket beslutade 18 februari att upphöra med banunderhåll och alltså fortsätta nedläggningsprocessen för åtta banor …

På 1860-talet stod staten för en framsynt järnvägspolitik och ledande politiker insåg värdet av långsiktiga investeringar. Nu tycks det vara precis tvärtom. En ny politisk medvetenhet krävs och då gäller det att först besluta om moratorium för ­ytterligare bannedläggningar. Gör det och gör det nu!

Hans Albin Larsson   Lars Pålsson Syll   Jan Du Rietz   Göran Sandström

## Also Sprach Zarathustra

10 mars, 2014 kl. 18:31 | Publicerat i Varia | Kommentarer inaktiverade för Also Sprach Zarathustra

## Microfoundations for finite beings in a world of boundless possibilities

10 mars, 2014 kl. 18:19 | Publicerat i Economics | 1 kommentar

People are not, and cannot be, the infinitely foresightful, unbounded rational utility maximizers assumed in DSGE models. On the contrary, economic behavior, even that of highly sophisticated actors like the ‘rocket scientists’ who design financial instruments for investment banks, is inevitably driven by a partial view of the world. Heuristics and unconsidered assumptions inevitably play a crucial role. For finite beings in a world of boundless possibilities, nothing else is possible …

The problem is to focus on behavioral foundations that are most relevant to the problems of macroeconomics. An obvious place to start is with attitudes toward risk and uncertainty.

## On disconfirming rational expectations

9 mars, 2014 kl. 14:18 | Publicerat i Economics | 2 kommentarer

In his latest blogpost Noah Smith writes that

Rational expectations have not been empirically disconfirmed.

Noah Smith is, of course, entitled to have whatever view he likes (it’s, to say the least, difficult to empirically disconfirm the non-existence of Gods …) — but for the rest of us, let’s see how rational expectations really fares as an empirical assumption. Empirical efforts at testing the correctnes of the hypothesis has resulted in a series of empirical studies that have more or less concluded that it is not consistent with the facts. In one of the more well-known and highly respected evaluation reviews made, Michael Lovell (1986) concluded:

it seems to me that the weight of empirical evidence is sufficiently strong to compel us to suspend belief in the hypothesis of rational expectations, pending the accumulation of additional empirical evidence.

And this is how Nikolay Gertchev summarizes studies on the empirical correctness of the hypothesis:

More recently, it even has been argued that the very conclusions of dynamic models assuming rational expectations are contrary to reality: ”the dynamic implications of many of the specifications that assume rational expectations and optimizing behavior are often seriously at odds with the data” (Estrella and Fuhrer 2002, p. 1013). It is hence clear that if taken as an empirical behavioral assumption, the RE hypothesis is plainly false; if considered only as a theoretical tool, it is unfounded and selfcontradictory.

For more on the issue, permit me to self-indulgently recommend reading my article Rational expectations — a fallacious foundation for macroeconomics ina non-ergodic world in real-world economics review no. 62.

## On Noah Smith and failing macroeconomics

9 mars, 2014 kl. 13:14 | Publicerat i Economics | 2 kommentarer

Noah Smith points out advances in neoclassical DSGE models. Lars Syll does not agree. But what do DSGE economists themselves think about their models? The failure of the DSGE paradigm is clearly shown by the utter lack of independent measurement or even conceptual description of the core variables of these models, like ‘social indifference curves’ which, of course, leads to a proliferation of models: each economist his own rational expectations, consistent with his and only his model. Proper science however does not only consist of theory but also of the measurement (and discovery!) of variables. DSGE economics fails this test. As shown by Frank Schorfheide, a DSGE economist from the university of Pennsylvania. He does what ever DSGE economist should be doing. In the beginning of his paper he does not invoke the usual bland canonical incantations that this is about a non-trivial, micro-founded and sound model but actually investigates if these models really are non-trivial.

And he finds, as predicted above, ad-hoc chaos …

The answer to this chaos, indicative of the lack of empirical discipline of these models should be: independent micro-measurement of this variable and aggregating the micro data in a credible, non-trivial way (i.e. the procedure which the ‘national accounts’ statisticians have been following for decades…) – that, and only that, would yield a really sound, really micro-founded model. But that’s not what’s happening. They are just going on …

Comparable remarks can be made about the use of inflation metrics: an ad-hoc conceptual and empirical mess.

Merijn Knibbe

## On evidence and establishing scientific claims

8 mars, 2014 kl. 17:54 | Publicerat i Theory of Science & Methodology | Kommentarer inaktiverade för On evidence and establishing scientific claims

In her interesting Pufendorf lectures Nancy Cartwright presents a theory of evidence and explains why randomized controlled trials (RCTs) are not at all the ”gold standard” that it has lately often been portrayed as. As yours truly has repeatedly argued on this blog (e.g. here and here), RCTs usually do not provide evidence that their results are exportable to other target systems. The almost religious belief with which its advocates portray it, cannot hide the fact that RCTs cannot be taken for granted to give generalizable results. That something works somewhere is no warranty for it to work for us or even that it works generally.

## Noah Smith and other teflon-coated defenders of mainstream macro modeling

8 mars, 2014 kl. 09:26 | Publicerat i Economics | 6 kommentarer

Those of us in the economics community who are impolite enough to dare question the preferred methods and models applied in mainstream macroeconomics, are as a rule met with disapproval. But although people seem to get very agitated and upset by the critique — just read the commentaries on this blog if you don’t believe me — defenders of ”received theory” always say that the critique is ”nothing new”, that they have always been ”well aware” of the problems, and so on, and so on.

So, for the benefit of all mindless practitioners of mainstream macroeconomic modeling — like Noah Smith, who defends mainstream macroeconomics with arguments like ”the speed with which macro has put finance at the center of its theories of the business cycle has been nothing less than stunning,” and re the patently ridiculous representative-agent modeling, maintains that there ”have been efforts to put heterogeneity into big DSGE-type models” but that these models ”didn’t get quite as far, because this kind of thing is very technically difficult to model,” and as for rational expectations admits that ”so far, macroeconomists are still very timid about abandoning this pillar of the Lucas/Prescott Revolution,” but that ”there’s no clear alternative” — and who don’t want to be disturbed in their doings, eminent mathematical statistician David Freedman has put together a very practical list of vacuous responses to criticism that can be freely used to save your peace of mind:

We know all that. Nothing is perfect … The assumptions are reasonable. The assumptions don’t matter. The assumptios are conservative. You can’t prove the assumptions are wrong. The biases will cancel. We can model the biases. We’re only doing what evereybody else does. Now we use more sophisticated techniques. If we don’t do it, someone else will. What would you do? The decision-maker has to be better off with us than without us … The models aren’t totally useless. You have to do the best you can with the data. You have to make assumptions in order to make progress. You have to give the models the benefit of the doubt. Where’s the harm?

Added 21:30 GMT: And if you think yours truly is the only one critical of Noah’s post, you’ve better read what one of his former guest bloggers — Peter Dorman — writes in the comments field:

“….macroeconomists are definitely thinking about heterogeneity.” Come on, you must surely see that one can have both heterogeneity and representative agents. If there are 300 million agents in an economy and you model them as two or three decision-makers, on balance you are doing a lot more homogenizing than heterogenizing. This matters because just about everything we know about complex systems tells us that the density of interaction effects is central. An economy of you, me and a few other people simply isn’t going to have the same dynamics as an economy of millions of interacting agents. This is true even if agent-based modeling turns out to be unproductive. It’s enough to know that the model people are using is systematically giving bad advice. Microfounding macro is a choice, and if the there aren’t any good microfoundations at hand, you don’t have to do it.

“….there’s no clear alternative [to rational expectations].” The previous paragraph applies here as well. If the only microfoundations you can find are empirically disconfirmed, regularly and broadly, then you may just have to postpone this microfounding business until you can come up with better models. Beyond that, I think the core problem is that the models are structured to permit the solution of equilibrium conditions, and that this imposes a restrictive framework for thinking about rationality, optimization. If the point were to model adjustment, we could use a much looser but more empirically defensible conception of rationality. Of course, that would also mean severing economic analysis from welfarism: we’d have to give up trying to answer questions like“what’s the welfare cost of this situation compared to the optimum?” In the end, the attachment of economists, micro and macro alike, to equilibrium models with rational agents is that they want to be able make definitive judgments about what society should do. I prefer Keynes’ dentists: they don’t tell you whether you have an optimal dental structure, but they can help you get the structure you tell them you want.

“….[macro] looks like a vigorous, energetic field full of excited young true believers and respected older figures who are still blazing new trails.” The more accurate criticism of macro is not that it is simply an ideological smokescreen or an unthinking herd, but that it operates on a tilted playing field. It is openly acknowledged that the “leading” (i.e. career-determining) journals have engaged in tendentious selection practices for the past generation. Lots of shoddy research (which in my book includes calibration exercises promoted as “testing” theories) has gotten the star treatment, alongside a stream of genuinely significant macro work. Ideologically loaded assumptions, such as those typically used in public choice, are dropped in without any justification. Not all macro is bad! But the problem is that (a) the bad stuff of a certain ideological orientation gets an extra push that the good stuff doesn’t get, and (b) there isn’t a clear process by which the bad stuff is weeded out over time as its badness becomes evident. We refight the same damned macro battles year after year.

## The Grace of Undómiel

7 mars, 2014 kl. 20:14 | Publicerat i Varia | Kommentarer inaktiverade för The Grace of Undómiel

## Euler’s method (student stuff)

7 mars, 2014 kl. 16:58 | Publicerat i Statistics & Econometrics | Kommentarer inaktiverade för Euler’s method (student stuff)

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