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 | Leave a comment

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

Big-vs-Small

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

Drumherumgerede

28 January, 2015 at 21:56 | Posted in Politics & Society | Leave a comment

Alte Liebe rostet nie …

Dievaines

27 January, 2015 at 21:02 | Posted in Varia | Leave a comment

 

Elina Garanca — pure magic

Economics curriculum reformulation

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

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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

Really?

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

jobs%20cartoon
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

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