Peace on Earth

18 december, 2014 kl. 18:21 | Publicerat i Varia | 2 kommentarer

 

The true meaning of econometric ‘unbiasedness’

18 december, 2014 kl. 16:32 | Publicerat i Statistics & Econometrics | 1 kommentar

One should not jump to the conclusion that there is necessarily a substantive difference between drawing inferences from experimental as opposed to nonexperimental data …

In the experimental setting, the fertilizer treatment is ”randomly” assigned to plots of land, whereas in the other case nature did the assignment … ”Random” does not mean adequately mixed in every sample. It only means that on the average, the fertilizer treatments are adequately mixed …

abRandomization implies that the least squares estimator is “unbiased,” but that definitely does not mean that for each sample the estimate is correct. Sometimes the estimate is too high, sometimes too low …

In particular, it is possible for the randomization to lead to exactly the same allocation as the nonrandom assignment … Many econometricians would insist that there is a difference, because the randomized experiment generates ”unbiased” estimates. But all this means is that, if this particular experiment yields a gross overestimate, some other experiment yields a gross underestimate.

Ed Leamer

Kindleberger and the Minsky model

18 december, 2014 kl. 11:25 | Publicerat i Economics | 1 kommentar

In an often cynical world, standard financial and macroeconomic quantitative models give people the benefi t of the doubt. Fundamental economic theory assumes the best of us, supposing that human beings are perfectly rational, know all the facts of a given situation, understand the risks, and optimize our behavior and portfolios accordingly. Reality, of course, is quite different. While a significant portion of individual and market behavior can be modeled reasonably well, the human emotions that drive cycles of fear and greed are not predictable and can often defy historical precedent. As a result, quantitative models sometimes fail to anticipate major macroeconomic turning points. The ongoing debt crisis in Europe is the most recent example of an extreme event shattering historical norms.

kindleOnce an extreme event occurs, standard models offer limited insight as to how the ensuing crisis could play out and how it should be managed, which is why policy responses can seem disjointed. The latest policy responses to the European crisis have been no exception. To understand and respond to a crisis like the one in Europe, perhaps we need to consider some new models that include the “human factor.” Economic historian Charles Kindleberger can offer some insight. In his book Manias, Panics, and Crashes, Kindleberger explores the anatomy of a typical financial crisis and provides a framework that considers the impact of the powerful human dynamics of fear and greed. Kindleberger’s descriptive process of the boom and bust liquidity cycle can help shed light on the current European sovereign debt saga, and perhaps illuminate whether we have in fact turned the corner on this financial crisis.

Kindleberger analyzed hundreds of financial crises dating back centuries and found them to share a common sequence of events, one that followed monetary theorist Hyman Minsky’s model of the instability of a credit system. Fundamentally, the more stable and prosperous an economic structure appears, the more leverage and speculative financing will build within the system, eventually making it highly vulnerable to a surprising, extreme collapse. Kindleberger provided the qualitative (as opposed to quantitative!) description of the Minsky Model, shown below, which is a useful snapshot of the liquidity cycle. It can be applied to Europe and any potential boom/bust candidate, including Chinese real estate, commodity prices, or investors’ recent love affair with emerging markets. Kindleberger famously dubbed this sequence a “hardy perennial,” probably because the galvanizing human conditions of fear and greed are more often than not prone to overshoot fundamental values compared to the behavior of a rational individual, which exists only in macroeconomic theory.

ScreenShot2012-03-28at3_24_51PM

Loomis Sayles

hymanFor more on Minsky, listen to BBC 4 where Duncan Weldon tries to explain in what way Hyman Minsky’s thoughts on banking and finance offer a radical challenge to mainstream economic theory.

As a young research stipendiate in the U.S. thirty years ago, yours truly had the great pleasure and privelege of having Hyman Minsky as teacher. He was a great inspiration at the time. He still is.

Austerity kills

18 december, 2014 kl. 10:19 | Publicerat i Economics, Politics & Society | 2 kommentarer

The correlation between unemployment and suicide has been observed since the 19th century. People looking for work are about twice as likely to end their lives as those who have jobs.

In the United States, the suicide rate, which had slowly risen since 2000, jumped during and after the 2007-9 recession. In a new book, we estimate that 4,750 “excess” suicides — that is, deaths above what pre-existing trends would predict — occurred from 2007 to 2010. Rates of such suicides were significantly greater in the states that experienced the greatest job losses. Deaths from suicide overtook deaths from car crashes in 2009.

passport_The-Body-Economic-Why-Austerity-Kills-154521-ff93369df63aab983003If suicides were an unavoidable consequence of economic downturns, this would just be another story about the human toll of the Great Recession. But it isn’t so. Countries that slashed health and social protection budgets, like Greece, Italy and Spain, have seen starkly worse health outcomes than nations like Germany, Iceland and Sweden, which maintained their social safety nets and opted for stimulus over austerity. (Germany preaches the virtues of austerity — for others.) …

Our research suggests that investing $1 in public health programs can yield as much as $3 in economic growth. Public health investment not only saves lives in a recession, but can help spur economic recovery. These findings suggest that three principles should guide responses to economic crises.

First, do no harm: if austerity were tested like a medication in a clinical trial, it would have been stopped long ago, given its deadly side effects. Each nation should establish a nonpartisan, independent Office of Health Responsibility, staffed by epidemiologists and economists, to evaluate the health effects of fiscal and monetary policies.

Second, treat joblessness like the pandemic it is. Unemployment is a leading cause of depression, anxiety, alcoholism and suicidal thinking. Politicians in Finland and Sweden helped prevent depression and suicides during recessions by investing in “active labor-market programs” that targeted the newly unemployed and helped them find jobs quickly, with net economic benefits.

Finally, expand investments in public health when times are bad. The cliché that an ounce of prevention is worth a pound of cure happens to be true. It is far more expensive to control an epidemic than to prevent one. New York City spent $1 billion in the mid-1990s to control an outbreak of drug-resistant tuberculosis. The drug-resistant strain resulted from the city’s failure to ensure that low-income tuberculosis patients completed their regimen of inexpensive generic medications.

One need not be an economic ideologue — we certainly aren’t — to recognize that the price of austerity can be calculated in human lives. We are not exonerating poor policy decisions of the past or calling for universal debt forgiveness. It’s up to policy makers in America and Europe to figure out the right mix of fiscal and monetary policy. What we have found is that austerity — severe, immediate, indiscriminate cuts to social and health spending — is not only self-defeating, but fatal.

David Stuckler & Sanjay Basu

Why randomization is not enough

17 december, 2014 kl. 19:24 | Publicerat i Statistics & Econometrics | Kommentarer inaktiverade för Why randomization is not enough

randWith interactive confounders explicitly included, the overall treatment effect β0 + β′zt is not a number but a variable that depends on the confounding effects. Absent observation of the interactive compounding effects, what is estimated is some kind of average treatment effect which is called by Imbens and Angrist (1994) a “Local Average Treatment Effect,” which is a little like the lawyer who explained that when he was a young man he lost many cases he should have won but as he grew older he won many that he should have lost, so that on the average justice was done. In other words, if you act as if the treatment effect is a random variable by substituting βt for β0 + β′zt , the notation inappropriately relieves you of the heavy burden of considering what are the interactive confounders and finding some way to measure them. Less elliptically, absent observation of z, the estimated treatment effect should be transferred only into those settings in which the confounding interactive variables have values close to the mean values in the experiment. If little thought has gone into identifying these possible confounders, it seems probable that little thought will be given to the limited applicability of the results in other settings.

Ed Leamer

Friedman’s Folly

17 december, 2014 kl. 11:04 | Publicerat i Economics | 5 kommentarer

In economic theory, there is no true sense of government’s central role in a nation’s economy and in every aspect of its citizen’s lives. I call this Friedman’s Folly …

Seven-Bad-Ideas-jacketModern economics has not made a positive case for what government must and can do. Government, after all, is society; it is all of us getting together. The economy is not. But prevailing orthodox economics would have us believe, following Friedman at least to a degree, and with only a little exaggeration, that it is …

Economists across the spectrum were influenced by the extremist Friedman, I’d argue, because he always defended himself by being consistent with the beautiful idea of the Invisible Hand. By the time the financial crisis of 2008 hit, Americans did not feel themselves part of a great national enterprise, a democracy of opportunity and social justice. They were busy reinventing a modern materialistic individualism, unaware of and apparently not caring how lacking they were in community. The failure to sense an obligation to each other is the worst consequence of Friedman’s Folly. There have been intelligent critics of his economic ideas, but economists in general are Friedman’s handmaidens.

Nancy Cartwright on the limits of linear causal models

16 december, 2014 kl. 21:42 | Publicerat i Theory of Science & Methodology | 1 kommentar

 

Towards a radical reformulation of the economics curriculum

16 december, 2014 kl. 09:45 | Publicerat i Economics | 2 kommentarer

a

One of the main ideas underlining the book is that ”being an economist” in the XXI century requires a radical change in the training of economists and such change requires a global effort. A new economics curriculum is needed in order to improve the understanding of the deep interactions between economics and the political forces and the historical processes of social change. The need for trans-disciplinary and interdisciplinary work is highlighted.

Discussions include the following. Main critiques of current practices on theory, methods and structures. Current gaps in the economics curriculum. What should economics graduates know? The contributors are: Nicola Acocella, Sheila Dow, David Hemenway, Arturo Hermann, Grazia Ietto-Gillies, Maria Alejandra Madi, Lars Pålsson Syll, Constantine Passaris, Paul Ormerod, Jack Reardon, Alessando Roncaglia, Asad Zaman.

Yours truly’s contribution to the collection is on “Economics textbooks – anomalies and transmogrification of truth.”

Buy now: Amazon US $17.10 Amazon UK £ 12.00 Amazon.de €19.50 Amazon.it €18.95

Proper use of math in economics

16 december, 2014 kl. 08:31 | Publicerat i Economics | 1 kommentar

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

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

13.1a Alfred MarshallBut I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules — (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I did often.

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

Your emptyhandedly,

Alfred Marshall

Statistics — not very helpful for understanding economies

15 december, 2014 kl. 18:23 | Publicerat i Statistics & Econometrics | 4 kommentarer

I cannot offer a course in mathematics in this slim volume, but I will do what I can to hit a few of the highlights, when genuinely needed. I will issue one early warning: do not be intimidated by what you don’t completely understand. Statistical Science is not really very helpful for understanding or forecasting complex evolving self-healing organic ambiguous social systems – economies, in other words.

edA statistician may have done the programming, but when you press a button on a computer keyboard and ask the computer to find some good patterns, better get clear a sad fact: computers do not think. They do exactly what the programmer told them to do and nothing more. They look for the patterns that we tell them to look for, those and nothing more. When we turn to the computer for advice, we are only talking to ourselves. This works in a simple setting in which there is a very well-defined set of alternative theories and we can provide the computer with clear instructions. But in complex nonexperimental settings, Sherlock Holmes admonishes: “Never theorize before you have all the evidence. It biases the judgments” …

Mathematical analysis works great to decide which horse wins, if we are completely confident which horses are in the race, but it breaks down when we are not sure. In experimental settings, the set of alternative models can often be well agreed on, but with nonexperimental economics data, the set of models is subject to enormous disagreements. You disagree with your model made yesterday, and I disagree with your model today. Mathematics does not help much resolve our internal intellectual disagreements.

Ed Leamer

The ultimate Piketty collection

15 december, 2014 kl. 13:08 | Publicerat i Economics | 2 kommentarer

econ00001Thomas Piketty’s book Capital in the Twenty-First Century has already attracted more serious attention than any economics book published in the last 75 years. This collection of 17 essays by some of the world’s most prominent economists explores Piketty’s book in depth and from various vantage points.

Yours truly’s contribution to the collection is on ”Piketty and the limits of marginal productivity theory.”

Buy now: Amazon US $18.00Amazon UK £12.50Amazon.de €20.50Amazon.fr €16.74

On the limits of cross-country regressions

14 december, 2014 kl. 10:30 | Publicerat i Statistics & Econometrics | 5 kommentarer

Endogeneity problems are of course nothing new in growth regressions. But what is special here is that policy endogeneity is not just an econometric nuisance, but typically an integral part of the null hypothesis that is being tested. The supposition that governments are trying to achieve some economic or political objective is at the core of the theoretical framework that is subjected to empirical tests. In such a setting, treating policy as if it were exogenous or random is problematic not just from an econometric standpoint, but also conceptually …

escherThe cross-national variation we observe in government ownership is unlikely to be random by the very logic of the theories that are tested. Under the developmental perspective, this variation will be driven by the magnitude of the financial market failures that need to be addressed and the governments’ capacity to do so effectively. Under the political motive, the variation will be generated by the degree of “honesty” or “corruption” of political leaders. I show in this paper that the cross-national association between performance and policy will have a very different interpretation depending on which of these fundamental drivers dominate. Unfortunately, none of these drivers is likely to be observable to the analyst. In such a setting the estimated coefficient on state ownership is not informative about either the positive or the normative questions at stake. It cannot help us distinguish between the develop-mental and political views, because the estimated coefficient on government ownership will be negative in both cases.

Dani Rodrik

You can call me John

13 december, 2014 kl. 11:33 | Publicerat i Economics | 1 kommentar

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At last something worth watching for our youngsters — a website on Keynes for kids!

‘Uncertain’ knowledge

12 december, 2014 kl. 19:14 | Publicerat i Theory of Science & Methodology | 3 kommentarer


It is generally recognised that the Ricardian analysis was concerned with what we now call long-period equilibrium. Marshall’s contribution mainly consisted in grafting on to this the marginal principle and the principle of substitution, together with some discussion of the passage from one position of long-period equilibrium to another. But he assumed, as Ricardo did, that the amounts of the factors of production in use were given and that the problem was to determine the way in which they would be used and their relative rewards. Edgeworth and Professor Pigou and other later and contemporary writers have embroidered and improved this theory by considering how different peculiarities in the shapes of the supply functions of the factors of production would affect matters, what will happen in conditions of monopoly and imperfect competition, how far social and individual advantage coincide, what are the special problems of exchange in an open system and the like. But these more recent writers like their predecessors were still dealing with a system in which the amount of the factors employed was given and the other relevant facts were known more or less for certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in which the disappointment of expectation was ruled out. But at any given time facts and expectations were assumed to be given in a definite and calculable form; and risks, of which, though admitted, not much notice was taken, were supposed to be capable of an exact actuarial computation. The calculus of probability, though mention of it was kept in the background, was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself; just as in the Benthamite calculus of pains and pleasures or of advantage and disadvantage, by which the Benthamite philosophy assumed men to be influenced in their general ethical behaviour.

Actually, however, we have, as a rule, only the vaguest idea of any but the most direct consequences of our acts. Sometimes we are not much concerned with their remoter consequences, even though time and chance may make much of them. But sometimes we are intensely concerned with them, more so, occasionally, than with the immediate consequences. Now of all human activities which are affected by this remoter preoccupation, it happens that one of the most important is economic in character, namely, wealth. The whole object of the accumulation of wealth is to produce results, or potential results, at a comparatively distant, and sometimes indefinitely distant, date. Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders wealth a peculiarly unsuitable subject for the methods of the classical economic theory. This theory might work very well in a world in which economic goods were necessarily consumed within a short interval of their being produced. But it requires, I suggest, considerable amendment if it is to be applied to a world in which the accumulation of wealth for an indefinitely postponed future is an important factor; and the greater the proportionate part played by such wealth accumulation the more essential does such amendment become.

By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of an European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth-owners in the social system in 1970. About these matters their is no scientific basis on which to form any calculable probability whatever. We simply do not know.

J M Keynes  ”The General Theory of Employment” Quarterly Journal of Economics, February 1937.

Okun and the ”leaky bucket” argument against limiting inequality

11 december, 2014 kl. 17:34 | Publicerat i Economics | Kommentarer inaktiverade för Okun and the ”leaky bucket” argument against limiting inequality

On the theoretical side, there is a long tradition in economics arguing that acting to reduce inequality could be counterproductive. Yale University economist Arthur Okun summarized this view in his 1975 book, Equality and Efficiency: The Big Tradeoff, where he posited that income equality and economic efficiency are in tension. Inequality provides incentives for work and investment …

leakyOkun’s view is based on the idea that monetary rewards and penalties drive productive activity, that is, if you pay people more (or, perhaps, pay them at all), they will work harder and be more productive. These rewards and penalties are optimal for growth. In this view, any intervention is distortionary and will, therefore, lower economic growth …

To be clear, Okun was not opposed to policymakers acting to reduce inequality. “The market needs a place, and the market needs to be kept in its place,” he said. Rather, he was concerned with how policymakers should act, given the economic realities of the supposed trade-off. His main concern was what he termed, “the leaky bucket,” that is, how much of redistributive policy leaks out of the system due to administrative costs, reduction in work effort, effects on saving and investment, and “socio-economic leakages” such as claims that extending unemployment benefits will reduce efforts to find a job …

While the idea that there is a trade-off between equality and efficiency as Okun put forth in 1975 may have been a widely accepted idea at the time, it is not the case that theory points entirely to this conclusion … However, strong simplifying assumptions limit the utility of the predictions from many of these theories and economists have been developing new approaches to account for a more realistic level of complexity … It is not the purpose of this paper to summarize this sub-field of economics, yet it is critical to understand that inequality may not always provide sufficient incentives for people to work harder despite the implications from some branches of theory.

Heather Boushey & Carter Price

OECD study shows trickle-down economics is total horseshit

11 december, 2014 kl. 13:09 | Publicerat i Economics | Kommentarer inaktiverade för OECD study shows trickle-down economics is total horseshit

The econometric analysis suggests that income inequality has a sizeable and statistically significant negative impact on growth, and that redistributive policies achieving greater equality in disposable income has no adverse consequences …

These findings have relevant implications for policymakers concerned about slow growth and rising inequality.reaganomics On one hand it points to the importance of carefully assessing the potential consequences of pro-growth policies on inequality: focusing exclusively on growth and assuming that its benefits will automatically trickle down to the different segments of the population may undermine growth in the long run inasmuch as inequality actually increases. On the other hand it indicates that policies that help limiting or — ideally — reversing the long-run rise in ineqauality would not only make societies less unfair, but also richer.

Federico Cingano

Perilous use of statistics

11 december, 2014 kl. 10:34 | Publicerat i Economics | 3 kommentarer

uncertaintyOne thing we’ve been discussing a lot lately is the discomfort many people—many researchers—feel about uncertainty … We see it all over: people find some pattern in their data and they don’t even want to consider the possibility that it might not hold in the general population …

The story seems pretty clear to me (but, admittedly, this is all speculation, just amateur psychology on my part): in general, people are uncomfortable with not knowing and would like to use statistics to create fortresses of certainty in a dangerous, uncertain world.

Along with this is an even more extreme attitude, which is not just to deny uncertainty but to deny variation … Even in regular psychology this attitude comes up, of focusing on similarities between people rather than differences. For example, we learn from Piaget that children can do X at age 3 and Y at age 4 and Z at age 5, not that some children go through one developmental process and others learn in a different order …

But then I recalled an even more extreme example, from a paper by Phoebe Clarke and Ian Ayres that claimed that “sports participation [in high school] causes women to be less likely to be religious . . . more likely to have children . . . more likely to be single mothers.” In my post on this paper a few months ago, I focused on the implausibility of the claimed effect sizes and on the problems with trying to identify individual-level causation from state-level correlations in this example … The article by Clarke and Ayres includes the following footnote:

”It is true that many successful women with professional careers, such as Sheryl Sandberg and Brandi Chastain, are married. This fact, however, is not necessarily opposed to our hypothesis. Women who participate in sports may “reject marriage” by getting divorces when they find themselves in unhappy marriages. Indeed, Sheryl Sandberg married and divorced before marrying her current husband.”

This footnote is a striking (to me) example of what Tversky and Kahneman called the fallacy of “the law of small numbers”: the attitude that patterns in the population should appear in any sample, in this case even in a sample of size 1. Even according to their own theories, Clarke and Ayres should not expect their model to work in every case! The above paragraph indicates that they want their theory to be something it can’t be; they want it to be a universal explanation that works in every example. Framed that way, this is obvious. My point, though, is that it appears that Clarke and Ayres were thinking deterministically without even realizing it.

Andrew Gelman

OECD study shows inequality causes growth to slow

10 december, 2014 kl. 20:35 | Publicerat i Economics | 11 kommentarer

The Organization for Economic Cooperation and Development (OECD) has found that the divide between the richest 10 percent and poorest 10 percent in many of the world’s wealthiest countries – including Germany – has been growing. In a report released Monday, OECD said that this, in turn, had caused growth to slow …

oneOne result of the growing divide between rich and poor, the OECD report showed, was that gross domestic product (GDP) – measuring the general level of economic activity – was smaller than it would be if inequality had not increased …

Strong and sustainable GDP growth was only possible if governments take energetic and decisive measures against further increases in inequality, the OECD said. Suitable measures could include income or wealth redistribution through tax measures, and transfers of money and benefits to the poor …

The results reported in the new OECD study provide further statistical evidence of negative effects of growing inequality, complementing – using different sets of data – the results found by French economist Thomas Piketty, whose 2013 book ”Capital in the 21st Century” has become one of the most talked-about economics books in decades …

The impact of inequality on growth stems from the gap between the bottom 40 percent and the rest of society, not just the poorest 10 percent, the OECD report said. Improvements and increasing access to public services like good education, training and healthcare, as well as cash transfers, are essential to generate greater equality of opportunities in the long run.

The report also found no evidence that redistributive policies such as taxes and social benefits harm economic growth, provided the policies are well designed and implemented.

Deutsche Welle

[For Swedish readers: Jesper Roine har en läsvärd post på ekonomistas om rapporten här (se även Finanspolitiska rådet här)]

Economists — humble and competent people?

10 december, 2014 kl. 18:22 | Publicerat i Economics | Kommentarer inaktiverade för Economists — humble and competent people?

aMost modern economists have a strong practical bent. They believe in the ideal
of an expert-advised democracy, in which their competence would be utilized and on
display in high profile, non-elective positions in government and other institutions. But
democratic societies are deeply suspicious of (non-democratic) expertise, and economic
advice, unlike dentistry, can never be humble. The fact is that – in some ways true
to its philosophical origins – economics is a very moral science after all. Unlike atoms and molecules, the “objects” upon which economists seek to act have a perspective on the world, too. Human life is messy, never to be grasped in its full complexity or shaped according to a plan: people act in unanticipated ways, politics makes its own demands, cultures (which economists do not understand well) resist. Thus the very real success of economists in establishing their professional dominion also inevitably throws them into the rough and tumble of democratic politics, forcing them to try to manage a hazardous intimacy with economic, political, and administrative power. It takes a lot of self-confidence to put forward decisive expert claims in that context. That confidence is perhaps the greatest achievement of the economics profession — but it is also its most vulnerable trait, its Achilles heel.

Marion Fourcade, Etienne Ollion & Yann Algan

Economics without aspirations

10 december, 2014 kl. 08:48 | Publicerat i Economics | 2 kommentarer

The problem is that the new theories, the theories embedded in general equilibrium dynamics of the sort that we know how to use pretty well now—there’s a residue of things they don’t let us think about.lucas They don’t let us think about the U.S. experience in the 1930s or about financial crises and their real consequences inAsia and LatinAmerica. They don’t let us think, I don’t think, very well about Japan in the 1990s. We mayn be disillusioned with the Keynesian apparatus for thinking about these things, but it doesn’t mean that this replacement apparatus can do it either. It can’t. In terms of the theory that researchers are developing as a cumulative body of knowledge—no one has figured out how to take that theory to successful answers to the real effects of monetary instability. Some people just deny that there are real effects of monetary instability, but I think that is just a mistake. I don’t think that argument can be sustained.

Robert Lucas

Hmm … isn’t that like having seismological and meteorological sciences that can’t help us explain or predict earthquakes or hurricanes? Maybe we should have just a little higher aspiration level as scientists? After all, if uncertainty is all around in the economy and — as Lucas has said — ”in cases of uncertainty, economics reasoning will be of no value,” then why should we bother with economics at all? Just wondering …

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