Greg Mankiw makes a fool of himself — again

31 January, 2015 at 20:02 | Posted in Economics | 16 Comments

d7dOne thing that commentators sometimes fail to notice is that the big increase in the one percent’s income share came between 1980 and 2000. Since 2000, it has fluctuated but without much of a trend. Why, then, are we all talking about income inequality only now? I am not sure. One hypothesis is that we don’t worry about inequality when everyone is doing well. Another hypothesis is that we now have a president with a political ideology that sees inequality as especially pernicious.

Greg Mankiw

“Fail to notice”? “Only now”? Wonder on which planet Greg has been living the last twenty years …

Added February 2: Responding to my critique, Greg Mankiw has a new post up today where he inter alia tries to explain what he really meant by “all.” Notwithstanding his elucidations on the term’s denotation, there are still — and more importantly — a lot of dubious argumentation re inequality in Mankiw’s writings, as yours truly previously has highlighted e. g. here, here, and here.

Wasserman on Bayesian religion

30 January, 2015 at 18:10 | Posted in Statistics & Econometrics | 4 Comments

There is a nice YouTube video with Tony O’Hagan interviewing Dennis Lindley. Of course, Dennis is a legend and his impact on the field of statistics is huge.

At one point, Tony points out that some people liken Bayesian inference to a religion. Dennis claims this is false. Bayesian inference, he correctly points out, starts with some basic axioms and then the rest follows by deduction. This is logic, not religion.

I agree that the mathematics of Bayesian inference is based on sound logic. But, with all due respect, I think Dennis misunderstood the question. When people say that “Bayesian inference is like a religion,” they are not referring to the logic of Bayesian inference. They are referring to how adherents of Bayesian inference behave.

(As an aside, detractors of Bayesian inference do not deny the correctness of the logic. They just don’t think the axioms are relevant for data analysis. For example, no one doubts the axioms of Peano arithmetic. But that doesn’t imply that arithmetic is the foundation of statistical inference. But I digress.)

The vast majority of Bayesians are pragmatic, reasonable people. But there is a sub-group of die-hard Bayesians who do treat Bayesian inference like a religion. By this I mean:

They are very cliquish.
They have a strong emotional attachment to Bayesian inference.
They are overly sensitive to criticism.
They are unwilling to entertain the idea that Bayesian inference might have flaws.
When someone criticizes Bayes, they think that critic just “doesn’t get it.”
They mock people with differing opinions …

No evidence you can provide would ever make the die-hards doubt their ideas. To them, Sir David Cox, Brad Efron and other giants in our field who have doubts about Bayesian inference, are not taken seriously because they “just don’t get it.”

So is Bayesian inference a religion? For most Bayesians: no. But for the thin-skinned, inflexible die-hards who have attached themselves so strongly to their approach to inference that they make fun of, or get mad at, critics: yes, it is a religion.

Larry Wasserman

For some more thoughts on the limits of the Bayesian approach, Stephen Senn’s You May Believe You Are a Bayesian But You Are Probably Wrong is a good read.

The Lady Tasting Tea

29 January, 2015 at 15:20 | Posted in Statistics & Econometrics | Comments Off on The Lady Tasting Tea

En av mina absoluta favoriter i statistikhyllan är David Salsburgs insiktsfulla statistikhistoria The Lady Tasting Tea. Boken är full av djupa och värdefulla reflektioner kring statistikens roll i modern vetenskap. Salsburg är, precis som tidigare till exempel Keynes, tveksam till hur många samhällsvetare – inte minst ekonomer – okritiskt och oargumenterat ofta bara antar att man kan applicera statistikteorins sannolikhetsfördelningar på sitt eget undersökningsområde. I slutkapitlet skriver han:

Kolmogorov established the mathematical meaning of probability: Probability is a measure of sets in an abstract space of events. All the mathematical properties of probability can be derived from this definition. When we wish to apply probability to real life, we need to identify that abstract space of events for the particular problem at hand … It is not well established when statistical methods are used for observational studies … If we cannot identify the space of events that generate the probabilities being calculated, then one model is no more valid than another … As statistical models are used more and more for observational studies to assist in social decisions by government and advocacy groups, this fundamental failure to be able to derive probabilities without ambiguity will cast doubt on the usefulness of these methods.

Kloka ord för ekonometriker och andra “räknenissar” att begrunda!

Marginalising heterodoxy hampers good teaching in economics

28 January, 2015 at 22:17 | Posted in Economics | 1 Comment


A sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline …

Marginalising heterodoxy creates problems for teaching economics as a discipline in which economists constructively disagree and can be in error. This is important because it is through a conformity that suppresses a continual and diverse critical awareness that economics becomes a dangerous discourse prone to lack of realism, complacency, and dogmatism. Marginalising heterodoxy reduces the potential realisation of the different components of economics one might expect to be transformed as part of a project to transform the discipline …

Highlighting the points we have may seem like simple griping by a special interest. But there is far more involved than that. Remember we are talking about the failure of a discipline and how it is to be transformed. The marginalisation of heterodoxy has real consequences. In a general sense the marginalisation creates manifest problems that hamper teaching economics in a plural and critically aware way. For example, the marginalisation promotes a Whig history approach. It is also important to bear in mind that heterodoxy is a natural home of pluralism and of critical thinking in economics … Unlike the mainstream, heterodoxy does not have to be made compatible with pluralism and with critical thinking; it is predisposed to these and is already a resource for their development. So, marginalising heterodoxy really does narrow the base by which the discipline seeks to be renewed. That narrowing contributes to restricting the potential for good teaching in economics (including the profoundly important matter of how economists disagree and how they can be in error).

The Association for Heterodox Economics


27 January, 2015 at 21:02 | Posted in Varia | Comments Off on Dievaines


Elina Garanca — pure magic

Economics curriculum reformulation

27 January, 2015 at 15:42 | Posted in Economics | 1 Comment


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.”

One of the textbooks I analyze is the 8th edition of Greg Mankiw’s intermediate textbook Macroeconomics. After thoroughly neglecting anything resembling a real-world finance system, Mankiw appends a chapter to the other nineteen chapters where finance more or less is equated to the neoclassical thought-construction of a “market for loanable funds.”

On the subject of financial crises he admits that

perhaps we should view speculative excess and its ramifications as an inherent feature of market economies … but preventing them entirely may be too much to ask given our current knowledge.

This is of course self-evident for all of us who understand that both ontologically and epistemologically founded uncertainty makes any such hopes totally unfounded. But it’s rather odd to read this in a book that bases its models on assumptions of rational expectations, representative actors and dynamically stochastic general equilibrium – assumptions that convey the view that markets – give or take a few rigidities and menu costs – are efficient! For being one of many neoclassical economists so proud of their (unreal, yes, but) consistent models, Mankiw here certainly is flagrantly inconsistent!

And as if being afraid that all the talk of financial crises might weaken the student’s faith in the financial system, Mankiw, in his concluding remarks, has to add a more Panglossian warning that we

should not lose sight of the great benefits that the system brings … By bringing together those who want to save and those who want to invest, the financial system promotes economic growth and overall prosperity


Finance has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies, and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterwards, simply isn’t enough. We should demand more of our economics textbooks.

Nationalekonomi — en sexist-elitistisk vetenskap

27 January, 2015 at 10:37 | Posted in Economics | 2 Comments

Paul Krugman … påpekar att hierarkin inom nationalekonomi inte är formaliserad, utan huvudsakligen bygger på ryktesmekanismen: ”The profession runs on reputation — basically the shared perception that you’re a smart guy.” Enligt Krugman räcker det inte alla gånger med goda formella meriter för att bli en ansedd nationalekonom, utan det handlar alltså också om att göra smarta grejer och framstå som en smart person …

burn-the-beer-schlitz-adDet ligger nära till hands att misstänka att fokuseringen på ryktet om huruvida man är en klipsk kis eller ej kan ge större spelrum för stereotyper och därmed missgynna kvinnor. I linje med detta visas i en färsk artikel i Science att det är färre kvinnor i akademiska discipliner där inneboende briljanta förmågor tros vara viktiga för framgång. Kvinnor är rejält underrepresenterade inom nationalekonomi och det finns en del tecken på att kvinnor möter särskilt motstånd inom nationalekonomi.

Nationalekonomen och bloggaren Noah Smith skrev nyligen en rosenrasande artikel om den utbredda sexismen inom nationalekonomi. Han pekar på studier som visar att könsgapet i termer av hur mycket mer meriterad en kvinna behöver vara för att få en viss befattning är större i nationalekonomi än i andra discipliner. Han pekar också på att sexistiska attityder är vanliga inom nationalekonomi och att till exempel förlegade, evolutionsbiologiska idéer om könsskillnader tycks frodas bland just nationalekonomer …

Jag har länge haft intrycket att nationalekonomin genomsyras av en slags grabbig elitism, men jag vet förstås inte om det är annorlunda i andra discipliner. Det är också svårt att veta vad som är hönan och ägget — sexism frodas ofta i manligt dominerade miljöer — men jag tycker vi självkritiskt bör reflektera över detta för att minska risken att kvinnor avskräcks från att studera och forska i nationalekonomi.

Robert Östling

Och hur var det nu med det där så kallade Nobelpriset i ekonomi? Nästan 80 personer har fått det. Hur många är kvinnor? Svar: 1.

NAIRU — more religion than science

26 January, 2015 at 13:58 | Posted in Economics | 12 Comments

In an interesting comment on a recent attempt at measuring NAIRU in the U.S., Matias Vernengo notes that NAIRU is basically measured as an average of actual unemployment and that a fortiori NAIRU

is NOT an attractor around which the actual unemployment level fluctuates. It is an average of the actual rate, which is essentially another way of writing the same data. It is the actual unemployment rate that determines the natural one, and if unemployment rates were reduced sufficiently with expansionary policies, the natural (being an average) would also come down. Economics is NOT a serious science.

NAIRU has been the subject of much heated discussion and debate lately. Many politicians — and economists — subscribe to the NAIRU story and its policy implication that attempts to promote full employment is doomed to fail, since governments and central banks can’t push unemployment below the critical NAIRU threshold without causing harmful runaway inflation.

One of the main problems with NAIRU is that if it essentially seen as a timeless long-run equilibrium attractor to which actual unemployment (allegedly) has to adjust, then if that equilibrium is itself changing — and in ways that depend on the process of getting to the equilibrium — well, then we can’t really be sure what that equlibrium will be without contextualizing unemployment in real historical time. And when we do, we will see how seriously wrong we go if we omit demand from the analysis. Demand policy has long-run effects and matters also for structural unemployment — and governments and central banks can’t just look the other way and legitimize their passivity re unemployment by refering to NAIRU.

NAIRU does not hold water simply because it does not exist — and to base economic policy on such a weak theoretical and empirical construct is nothing short of writing out a prescription for self-inflicted economic havoc.

When the NRH [the Natural Rate Hypothesis, or as it is often called today, the NAIRU theory] was first proposed, Friedman assumed that expectations are adaptive. The combination of adaptive expectations and the NRH led to a theory where variations in the unemployment rate are caused, primarily, by incorrect expectations. In this theory, households and firms forecast price inflation and their forecast determines which Phillips curve prevails in the period. Expected price inflation feeds into wages, and, through mark-ups, into realised inflation.

According to the NRH, unemployment differs from its natural rate only if expected inflation differs from actual inflation. If expectations are rational, we should see as many quarters when inflation is above expected inflation as quarters when it is below expected inflation. That suggests the following test
of the NRH.

ignore-the-facts-cartoonBecause a decade contains 40 quarters, the probability that average expected inflation over a decade will be different from naverage actual inflation should be small. If the NRH and rational expectations are both true simultaneously, a plot of decade averages of inflation against unemployment should
reveal a vertical line at the natural rate of unemployment … This prediction fails dramatically.

There is no tendency for the points to lie around a vertical line and, if anything, the long-run Phillips curve revealed by this chart is upward sloping, and closer to being horizontal than vertical. Since it is unlikely that expectations are systematically biased over decades, I conclude that the NRH is false.

Defenders of the Natural Rate Hypothesis might choose to respond to these empirical findings by arguing that the natural rate of unemployment is time varying. But I am unaware of any theory which provides us, in advance, with an explanation of how the natural rate of unemployment varies over time. In the absence of such a theory the NRH has no predictive content. A theory like this, which cannot be falsified by any set of observations, is closer to religion than science.

Roger Farmer

Greece — the true cost of austerity

25 January, 2015 at 20:12 | Posted in Economics | 3 Comments


Who is bullshiting who here?

25 January, 2015 at 15:48 | Posted in Politics & Society | 11 Comments

Larry Wasserman — statistics professor at Carnegie Mellon University — wrote a while ago on Deborah Mayo’s blog Error Statistics Philosophy:

First, I now think Franken was wrong. CNN and network news have a 
strong liberal bias, especially on economic issues. FOX has an 
obvious right wing, and anti-atheist bias. (At least FOX has some 
libertarians on the payroll.) And this does matter. Because people
 believe what they see on TV and what they read in the NY times. Paul
 Krugman’s socialist bullshit parading as economics has brainwashed 
millions of Americans. So media bias is much more than who makes 
better hummus.

bullshit-1-232x300Oh dear, oh dear. I’ve been following Krugman’s blog for years — how could I miss that he was not actually an economist, but a bullshiting socialist?

Let’s see what a somewhat more level-headed statistics professor — Andrew Gelman — has to say on his colleague’s, to say the least, somewhat bizarre statement:

Larry also writes of “Paul
 Krugman’s socialist bullshit parading as economics.” That’s another example of defining away the problem. I think I’d prefer to let Paul Krugman (or, on the other side, Greg Mankiw) define his approach. For better or worse, I think it’s ridiculous to describe what Krugman (or Mankiw) does as X “parading as economics,” for any X. Sorry, but what Krugman and Mankiw do is economics. They’re leading economists, and if you don’t like what they do, fine, but that just means there’s some aspect of economics that you don’t like. It’s silly to restrict “economics” to just the stuff you like. Just to shift sideways for a moment, I hate the so-called Fisher randomization test, and I also can’t stand the inverse-gamma (0.001, 0.001) prior distribution—but I recognize that these are part of statistics. They’re just statistical methods that I don’t like. For good reasons. I’m not saying that my dislike of these methods (or Larry’s dislike of Krugman’s economics) is merely a matter of taste—we have good reasons for our attitudes—but, no, we don’t have the authority to rule that a topic is not part of economics, or not part of statistics, just because we don’t like it.

Oddly enough, I don’t really have a problem with someone describing Krugman’s or Mankiw’s writing as “bullshit” (even though I don’t personally agree with this characterization, at least not most of the time) as with the attempt to define it away by saying it is “parading as economics.” Krugman’s and Mankiw’s writing may be bullshit, but it definitely is economics. No parading about that.

True, Andrew. Let’s have no parading. Wasserman’s shameless gibberish is one of the most viciously misleading bullshit I’ve come across for a long time.


25 January, 2015 at 15:17 | Posted in Varia | Comments Off on America

Absolutely fabulous

Barry Eichengreen — Hall of Mirrors

24 January, 2015 at 17:04 | Posted in Economics | Comments Off on Barry Eichengreen — Hall of Mirrors


Layers of light

24 January, 2015 at 12:12 | Posted in Varia | Comments Off on Layers of light

Nils Landgren (trombone) & Esbjörn Svensson (piano).

It breaks my heart every time I play your music and I’m reminded you’re no longer with us.

Thank goodness your music lives on, Esbjörn.

Ayn Rand — a psychopath and amateurish ‘philosophizer’

23 January, 2015 at 18:33 | Posted in Politics & Society | 3 Comments

Now, I don’t care to discuss the alleged complaints American Indians have against this country. I believe, with good reason, the most unsympathetic Hollywood portrayal of Indians and what they did to the white man. They had no right to a country merely because they were born here and then acted like savages. The white man did not conquer this country …

Since the Indians did not have the concept of property or property rights—they didn’t have a settled society, they had predominantly nomadic tribal “cultures”—they didn’t have rights to the land, and there was no reason for anyone to grant them rights that they had not conceived of and were not using …

What were they fighting for, in opposing the white man on this continent? For their wish to continue a primitive existence; for their “right” to keep part of the earth untouched—to keep everybody out so they could live like animals or cavemen. Any European who brought with him an element of civilization had the right to take over this continent, and it’s great that some of them did. The racist Indians today—those who condemn America—do not respect individual rights.

Ayn Rand,  Address To The Graduating Class Of The United States Military Academy at West Point, 1974

It’s sickening to read this gobsmacking trash. But it’s perhaps even more sickening that people like Alan Greenspan consider Rand som kind of intellectual hero.

Alan Greenspan isn’t just a bad economist. He’s a bad person. What else can one think of a person that considers Ayn Rand — with the ugliest psychopathic philosophy the postwar world has produced — one of the great thinkers of the 20th century? A person that even co-edited a book with her — maintaining that unregulated capitalism is a “superlatively moral system”. A person that in his memoirs tries to reduce his admiration for Rand to a youthful indiscretion — but who actually still today can’t be described as anything else than a loyal Randian disciple.

Ayn Rand and her objectivist philosophy has more disciples than Greenspan. But as Hilary Putnam rightfully noticed in The Collapse of the Fact/Value Dichotomy (Harvard University Press, 2002) it’s doubtful if it even qualifies as a real philosophy:

It cannot be the case that the only universally valid norm refers solely to discourse. It is, after all, possible for someone to recognize truth-telling as a binding norm while otherwise being guided solely by ‘enlightened egoism.’ (This is, indeed, the way of life that was recommended by the influential if amateurish philosophizer – I cannot call her a philosopher – Ayn Rand.) But such a person can violate the spirit if not the letter of the principle of communicative action at every turn. After all, communicative action is contrasted with manipulation, and as such a person can manipulate people without violating the maxims of ‘sincerity, truth-telling, and saying only what one believes to be rationally warranted.’ Ayn Rand’s capitalist heroes manipulated people all the time (even if she didn’t consider it manipulation) via their control of capital, for example. Indeed, the person who says, ‘do what I want or I’ll shoot you,’ need not be violating any maxim concerned solely with discourse. But it would be a mistake to use such examples as objections to Habermasian ‘discourse ethics.’

In her diary from 1928, Ayn Rand approvingly quotes a statement made by a William Edward Hickman – “What is good for me is right.” Rand is enthusiastic and writes: “The best and strongest expression of a real man’s psychology I have heard.”

Later she models one of her heros  – Danny Renahan – after Hickman. Renahan is portrayed as

born with a wonderful, free, light consciousness — [resulting from] the absolute lack of social instinct or herd feeling. He does not understand, because he has no organ for understanding, the necessity, meaning, or importance of other people … Other people do not exist for him and he does not understand why they should.

Who was this  Hickman that so inspired Rand?

Hickman was a notorious bank robber, child kidnapper and mass murderer. One of the most hated and heinous criminals in U. S. history.

How people like Alan Greenspan and Paul Ryan — not to mention all modern day ‘objectivist’ disciples — can consider Ayn Rand “one of the greatest thinkers of the 20th century” is really beyond comprehension. It’s sickening.

The new Oxfam report on inequality

22 January, 2015 at 14:33 | Posted in Economics, Politics & Society | Comments Off on The new Oxfam report on inequality


The big problem with randomization (wonkish)

22 January, 2015 at 09:54 | Posted in Statistics & Econometrics | Comments Off on The big problem with randomization (wonkish)

But when the randomization is purposeful, a whole new set of issues arises — experimental contamination — which is much more serious with human subjects in a social system than with chemicals mixed in beakers … Anyone who designs an experiment in economics would do well to anticipate the inevitable barrage of questions regarding the valid transference of things learned in the lab (one value of z) into the real world (a different value of z) …

randomizeAbsent observation of the interactive compounding effects z, 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 …

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. This is the error made by the bond rating agencies in the recent financial crash — they transferred findings from one historical experience to a domain in which they no longer applied because, I will suggest, social confounders were not included.

Ed Leamer

Hästskitsteoremet i svensk tappning

22 January, 2015 at 09:06 | Posted in Economics, Politics & Society | Comments Off on Hästskitsteoremet i svensk tappning

Så hur många svenska miljardärer krävs då för att det ska motsvara förmögenheten hos den fattigare halvan av den svenska befolkningen? Ja, enligt beräkningen ovan ungefär två; Ingvar Kamprad och Stefan Persson har med god marginal mer än 700 miljarder kronor och därmed mer än de 615 miljarder som den fattigare hälften av den svenska befolkningen har tillsammans …

imagesVad ska man nu dra för slutsatser av detta? Att Sverige är extremt ojämlikt kanske? Ja … men man kan förstås lika gärna dra slutsatsen att svenska miljardärer varit exceptionellt framgångsrika internationellt sett och att det varit till gagn för alla i Sverige.

Hur man ska se på förmögenhetsfördelning handlar i långt mycket större utsträckning om faktorer som hur förmögenheter skapas, på vilka sätt de med förmögenheter bidrar till samhället i stort och hur samhället i övrigt är organiserat. Det är långt ifrån självklart att en enorm förmögenhetskoncentration är dålig för samhället men det är inte heller uppenbart att det inte är något att bekymra sig om … I en svensk kontext finns skäl till att individer inte har samma behov av personlig förmögenhet som man har i andra länder eftersom många utgifter, förutsägbara såväl som oförutsägbara, till stor del finansieras gemensamt (skola, sjukvård, arbetslöshet etc.).

Jesper Roine

Ja, vad ska man säga om denna, med både hängslen och livrem försedda, ekonomistiska ojämlikhetsapologetik? Ibland säger en bild mer än tusen ord …


Econometrics made easy — Gretl

21 January, 2015 at 21:53 | Posted in Statistics & Econometrics | Comments Off on Econometrics made easy — Gretl


Thanks to Allin Cottrell and Riccardo Lucchetti we today have access to a high quality tool for doing and teaching econometrics — Gretl. And, best of all, it is totally free!

Gretl is up to the tasks you may have, so why spend money on expensive commercial programs?

The latest snapshot version of Gretl – 1.9.92 – can be downloaded here.

So just go ahead. With a program like Gretl econometrics has never been easier to master!

[And yes, I do know there’s another fabulously nice and free program — R. But R hasn’t got as nifty a GUI as Gretl — and at least for students, it’s more difficult to learn to handle and program. I do think it’s preferable when students are going to learn some basic econometrics to use Gretl so that they can concentrate more on “content” rather than “technique.”]

Overconfident economists

20 January, 2015 at 13:14 | Posted in Statistics & Econometrics | 1 Comment

We economists trudge relentlessly toward Asymptopia, where data are unlimited and estimates are consistent, where the laws of large numbers apply perfectly and where the full intricacies of the economy are completely revealed … Worst of all, when we feel pumped up with our progress, a tectonic shift can occur, like the Panic of 2008, making it seem as though our long journey has left us
disappointingly close to the State of Complete Ignorance whence we began …

overconfidenceWe may listen, but we don’t hear, when the Priests warn that the new direction is only for those with Faith, those with complete belief in the Assumptions of the Path. It often takes years down the Path, but sooner or later, someone articulates the concerns that gnaw away in each of us and asks if the Assumptions are valid …

It would be much healthier for all of us if we could accept our fate, recognize that perfect knowledge will be forever beyond our reach and find happiness with what we have …

Can we economists agree that it is extremely hard work to squeeze truths from our data sets and what we genuinely understand will remain uncomfortably limited? We need words in our methodological vocabulary to express the limits … Those who think otherwise should be required to wear a scarlet-letter O around their necks, for “overconfidence.”

Ed Leamer

On abstraction and idealization in economics

20 January, 2015 at 10:18 | Posted in Theory of Science & Methodology | 4 Comments

When applying deductivist thinking to economics, neoclassical economists usually set up “as if” models based on a set of tight axiomatic assumptions from which consistent and precise inferences are made. The beauty of this procedure is of course that if the axiomatic premises are true, the conclusions necessarily follow. idealization-in-cognitive-and-generative-linguistics-6-728The snag is that if the models are to be relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often don’t. When addressing real economies, the idealizations and abstractions necessary for the deductivist machinery to work simply don’t hold.

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? The logic of idealization is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, in which concepts and entities are without clear boundaries and continually interact and overlap.

Or as Hans Albert has it on the neoclassical style of thought:

In everyday situations, if, in answer to an inquiry about the weather forecast, one is told that the weather will remain the same as long as it does not change, then one does not normally go away with the impression of having been particularly well informed, although it cannot be denied that the answer refers to an interesting aspect of reality, and, beyond that, it is undoubtedly true …

We are not normally interested merely in the truth of a statement, nor merely in its relation to reality; we are fundamentally interested in what it says, that is, in the information that it contains …

Information can only be obtained by limiting logical possibilities; and this in principle entails the risk that the respective statement may be exposed as false. It is even possible to say that the risk of failure increases with the informational content, so that precisely those statements that are in some respects most interesting, the nomological statements of the theoretical hard sciences, are most subject to this risk. The certainty of statements is best obtained at the cost of informational content, for only an absolutely empty and thus uninformative statement can achieve the maximal logical probability …

hans_albertThe neoclassical style of thought – with its emphasis on thought experiments, reflection on the basis of illustrative examples and logically possible extreme cases, its use of model construction as the basis of plausible assumptions, as well as its tendency to decrease the level of abstraction, and similar procedures – appears to have had such a strong influence on economic methodology that even theoreticians who strongly value experience can only free themselves from this methodology with difficulty …

Science progresses through the gradual elimination of errors from a large offering of rivalling ideas, the truth of which no one can know from the outset. The question of which of the many theoretical schemes will finally prove to be especially productive and will be maintained after empirical investigation cannot be decided a priori. Yet to be useful at all, it is necessary that they are initially formulated so as to be subject to the risk of being revealed as errors. Thus one cannot attempt to preserve them from failure at every price. A theory is scientifically relevant first of all because of its possible explanatory power, its performance, which is coupled with its informational content …

The connections sketched out above are part of the general logic of the sciences and can thus be applied to the social sciences. Above all, with their help, it appears to be possible to illuminate a methodological peculiarity of neoclassical thought in economics, which probably stands in a certain relation to the isolation from sociological and social-psychological knowledge that has been cultivated in this discipline for some time: the model Platonism of pure economics, which comes to expression in attempts to immunize economic statements and sets of statements (models) from experience through the application of conventionalist strategies …

Clearly, it is possible to interpret the ‘presuppositions’ of a theoretical system … not as hypotheses, but simply as limitations to the area of application of the system in question. Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought …

A further possibility for immunizing theories consists in simply leaving open the area of application of the constructed model so that it is impossible to refute it with counter examples. This of course is usually done without a complete knowledge of the fatal consequences of such methodological strategies for the usefulness of the theoretical conception in question, but with the view that this is a characteristic of especially highly developed economic procedures: the thinking in models, which, however, among those theoreticians who cultivate neoclassical thought, in essence amounts to a new form of Platonism.

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