Some unsettled questions in macroeconomic theory

31 October, 2016 at 18:39 | Posted in Economics | Leave a comment



What is mainstream economics?

30 October, 2016 at 15:00 | Posted in Economics | 4 Comments

The reason you study an issue at all is usually that you care about it, that there’s something you want to achieve or see happen. Motivation is always there; the trick is to do all you can to avoid motivated reasoning that validates what you want to hear.

economist-nakedIn my experience, modeling is a helpful tool (among others) in avoiding that trap, in being self-aware when you’re starting to let your desired conclusions dictate your analysis. Why? Because when you try to write down a model, it often seems to lead some place you weren’t expecting or wanting to go. And if you catch yourself fiddling with the model to get something else out of it, that should set off a little alarm in your brain.

Paul Krugman 

Hmm …

So when Krugman and other ‘modern’ mainstream economists use their models — standardly assuming rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative agents with homothetic and identical preferences, etc. — and standardly ignoring complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc. — we are supposed to believe that this somehow helps them ‘to avoid motivated reasoning that validates what you want to hear.’

Yours truly  is, to say the least, far from convinced. The alarm that sets off in my brain is that this, rather than being helpful for understanding real world economic issues, sounds more like an ill-advised plaidoyer for voluntarily taking on a methodological straight-jacket of unsubstantiated and known to be false assumptions.

Modern (expected) utility theory is a good example of this. Leaving the specification of preferences without almost any restrictions whatsoever, every imaginable evidence is safely made compatible with the all-embracing ‘theory’ — and a theory without informational content never risks being empirically tested and found falsified. Used in mainstream economics ‘thought experimental’ activities, it may of course be very ‘handy’, but totally void of any empirical value.

Utility theory has like so many other economic theories morphed into an empty theory of everything. And a theory of everything explains nothing — just as Gary Becker’s ‘economics of everything’ it only makes nonsense out of economic science.

Using false assumptions, mainstream modelers can derive whatever conclusions they want. Wanting to show that ‘all economists consider austerity to be the right policy,’ just e.g. assume ‘all economists are from Chicago’ and ‘all economists from Chicago consider austerity to be the right policy.’  The conclusions follows by deduction — but is of course factually totally wrong. Models and theories building on that kind of reasoning is nothing but a pointless waste of time.

Mainstream economics today is mainly an approach in which you think the goal is to be able to write down a set of empirically untested assumptions and then deductively infer conclusions from them. When applying this deductivist thinking to economics, 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. The 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 do for the simple reason that empty theoretical exercises of this kind do not tell us anything about the world. When addressing real economies, the idealizations necessary for the deductivist machinery to work, simply don’t hold.

So how should we evaluate the search for ever greater precision and the concomitant arsenal of mathematical and formalist models? To a large extent, the answer hinges on what we want our models to perform and how we basically understand the world.

The world as we know it, has limited scope for certainty and perfect knowledge. Its intrinsic and almost unlimited complexity and the interrelatedness of its parts prevent the possibility of treating it as constituted by atoms with discretely distinct, separable and stable causal relations. Our knowledge accordingly has to be of a rather fallible kind. To search for deductive precision and rigour in such a world is self-defeating. The only way to defend such an endeavour is to restrict oneself to prove things in closed model-worlds. Why we should care about these and not ask questions of relevance is hard to see.

Econometrics and the rabbits principle

29 October, 2016 at 19:03 | Posted in Statistics & Econometrics | Leave a comment

pulling_a_rabbit_out_of_a_hat_by_candiphoenixes-d3ee5jaIn econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes causal knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come in to the picture.

The assumption of imaginary ‘superpopulations’ is one of the many dubious assumptions used in modern econometrics, and as Clint Ballinger has highlighted, this is a particularly questionable rabbit pulling assumption:

Inferential statistics are based on taking a random sample from a larger population … and attempting to draw conclusions about a) the larger population from that data and b) the probability that the relations between measured variables are consistent or are artifacts of the sampling procedure.

However, in political science, economics, development studies and related fields the data often represents as complete an amount of data as can be measured from the real world (an ‘apparent population’). It is not the result of a random sampling from a larger population. Nevertheless, social scientists treat such data as the result of random sampling.

Because there is no source of further cases a fiction is propagated—the data is treated as if it were from a larger population, a ‘superpopulation’ where repeated realizations of the data are imagined. Imagine there could be more worlds with more cases and the problem is fixed …

What ‘draw’ from this imaginary superpopulation does the real-world set of cases we have in hand represent? This is simply an unanswerable question. The current set of cases could be representative of the superpopulation, and it could be an extremely unrepresentative sample, a one in a million chance selection from it …

The problem is not one of statistics that need to be fixed. Rather, it is a problem of the misapplication of inferential statistics to non-inferential situations.

Economics — the triumph of ideology over science

29 October, 2016 at 11:24 | Posted in Economics | Leave a comment

Research shows not only that individuals sometimes act differently than standard economic theories predict, but that they do so regularly, systematically, and in ways that can be understood and interpreted through alternative hypotheses, competing with those utilised by orthodox economists.

Senate Banking Subcommittee On Financial Institutions Hearing With StiglitzTo most market participants – and, indeed, ordinary observers – this does not seem like big news … In fact, this irrationality is no news to the economics profession either. John Maynard Keynes long ago described the stock market as based not on rational individuals struggling to uncover market fundamentals, but as a beauty contest in which the winner is the one who guesses best what the judges will say …

Adam Smith’s invisible hand – the idea that free markets lead to efficiency as if guided by unseen forces – is invisible, at least in part, because it is not there …

For more than 20 years, economists were enthralled by so-called “rational expectations” models which assumed that all participants have the same (if not perfect) information and act perfectly rationally, that markets are perfectly efficient, that unemployment never exists (except when caused by greedy unions or government minimum wages), and where there is never any credit rationing.

That such models prevailed, especially in America’s graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science. Unfortunately, students of these graduate programmes now act as policymakers in many countries, and are trying to implement programmes based on the ideas that have come to be called market fundamentalism … Good science recognises its limitations, but the prophets of rational expectations have usually shown no such modesty.

Joseph Stiglitz

Economics — non-ideological and valuefree? I’ll be dipped!

27 October, 2016 at 21:29 | Posted in Economics | 3 Comments

jp-imgresI’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.

David Card

Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economics textbooks — have increased relative to Pennsylvania. However, when economists David Card and Alan Krueger gathered information on fast food restaurants in the two states, it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream demand theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …

buchC6The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.

James M. Buchanan in Wall Street Journal (April 25, 1996)

Economics — non-ideological and valuefree? I’ll be dipped!

What is truth in economics?

27 October, 2016 at 15:11 | Posted in Economics | 3 Comments

28mptoothfairy_jpg_1771152eIn my view, scientific theories are not to be considered ‘true’ or ‘false.’ In constructing such a theory, we are not trying to get at the truth, or even to approximate to it: rather, we are trying to organize our thoughts and observations in a useful manner.

Robert Aumann

What a handy view of science.

How reassuring for all of you who have always thought that believing in the tooth fairy make you understand what happens to kids’ teeth. Now a ‘Nobel prize’ winning economist tells you that if there are such things as tooth fairies or not doesn’t really matter. Scientific theories are not about what is true or false, but whether ‘they enable us to organize and understand our observations’!

What Aumann and other defenders of scientific storytelling ‘forgets’ is that potential explanatory power achieved in thought experimental models is not enough for attaining real explanations. Model explanations are at best conjectures, and whether they do or do not explain things in the real world is something we have to test. To just believe that you understand or explain things better with thought experiments is not enough. Without a warranted export certificate to the real world, model explanations are pretty worthless. Proving things in models is not enough.

Truth ought to be as important a concept in economics as it is in real science.

The perils of calling your pet cat a dog …

27 October, 2016 at 11:05 | Posted in Statistics & Econometrics | 1 Comment

Since econometrics doesn’t content itself with only making optimal predictions, but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — most important of these are additivity and linearity. Important, simply because if they are not true, your model is invalid and descriptively incorrect.  And when the model is wrong — well, then it’s wrong.

The assumption of additivity and linearity means that the outcome variable is, in reality, linearly related to any predictors … and that if you have several predictors then their combined effect is best described by adding their effects together …

catdogThis assumption is the most important because if it is not true then even if all other assumptions are met, your model is invalid because you have described it incorrectly. It’s a bit like calling your pet cat a dog: you can try to get it to go in a kennel, or to fetch sticks, or to sit when you tell it to, but don’t be surprised when its behaviour isn’t what you expect because even though you’ve called it a dog, it is in fact a cat. Similarly, if you have described your statistical model inaccurately it won’t behave itself and there’s no point in interpreting its parameter estimates or worrying about significance tests of confidence intervals: the model is wrong.

Andy Field

Svensk universitetsutbildning i fritt fall (II)

26 October, 2016 at 18:02 | Posted in Education & School | Leave a comment

Jag sprang nyligen på en sammanställning av genusdoktorsavhandlingar från 2014. Många godbitar. Men en av dem var särskilt anmärkningsvärd, nämligen nummer 19 i uppräkningen. Det handlar om doktorsavhandlingen “Rum, rytm och resande” från Linköpings universitet (pdf). Sammanställningen sammanfattar:

“Avhandlingen undersöker järnvägstationer som fysiska platser och sociala rum ur könsperspektiv. Kimstad pendeltågsstation, Norrköpings järnvägsstation och Stockholms Centralstation ingår i studien. Resultaten visar att järnvägsstationerna reproducerar könsmaktsordningen och att detta påverkar både män som kvinnor som vistas där.”

krylboEn doktorand har alltså ägnat minst 4-5 år och flera miljoner skattekronor åt att besöka järnvägsstationer och komma fram till att “järnvägsstationerna reproducerar könsmaktsordningen”. Doktorandens chef har planerat detta arbete och chefens chefer har godkänt det. Dessutom har en betygskommitté med externa granskare bedömt och skrivit under på att doktorsavhandlingen håller måttet.

Det var katten. Men det blir värre.

Doktorsavhandlingen sammanfattas på engelska. Det börjar med:

“Results from the study show that individuals in different ways are affected by gendered power relations that dwell in rhythms of collective believes and in shape of materialized objects that encounter the commuters when visiting the railway station. While the rhythms of masculine seriality contains believes of males as potentially violent, as defenders and as bread winners, the rhythms of female seriality contains believes of women as primary mothers and housewives, of women as primary victim of sexual violence and of objectification of women’s bodies as either decent or as sexually available to heterosexual men”.

Rytmer av könsmaktsordningen. Poetiskt.


Ja, inför sådant tyckmyckentrutat pseudo-vetenskapligt blaj kan man inte annat än taga sig för pannan.

Mitt eget favoritexempel på detta ‘vetenskapliga’ skojeri är hämtat ur ett nummer av Pedagogisk Forskning i Sverige (2-3 2014) där författaren till artikeln “En pedagogisk relation mellan människa och häst. På väg mot en pedagogisk filosofisk utforskning av mellanrummet” ger följande intressanta ‘programförklaring:

Med en posthumanistisk ansats belyser och reflekterar jag över hur både människa och häst överskrider sina varanden och hur det öppnar upp ett mellanrum med dimensioner av subjektivitet, kroppslighet och ömsesidighet.

elite-daily-sleeping-studentOch så säger man att svensk universitetsutbildning är i kris. Undrar varför …

What it takes to make economics a real science

26 October, 2016 at 09:23 | Posted in Economics | 1 Comment

What is science? One brief definition runs: “A systematic knowledge of the physical or material world.” Most definitions emphasize the two elements in this definition: (1) “systematic knowledge” about (2) the real world. Without pushing this definitional question to its metaphysical limits, I merely want to suggest that if economics is to be a science, it must not only develop analytical tools but must also apply them to a world that is now observable or that can be made observable through improved methods of observation and measurement. Or in the words of the Hungarian mathematical economist Janos Kornai, “In the real sciences, the criterion is not whether the proposition is logically true and tautologically deducible from earlier assumptions. The criterion of ‘truth’ is, whether or not the proposition corresponds to reality” …


One of our most distinguished historians of economic thought, George Stigler, has stated that: “The dominant influence upon the working range of economic theorists is the set of internal values and pressures of the discipline. The subjects of study are posed by the unfolding course of scientific developments.” He goes on to add: “This is not to say that the environment is without influence …” But, he continues, “whether a fact or development is significant depends primarily on its relevance to current economic theory.” What a curious relating of rigor to relevance! Whether the real world matters depends presumably on “its relevance to current economic theory.” Many if not most of today’s economic theorists seem to agree with this ordering of priorities …

Today, rigor competes with relevance in macroeconomic and monetary theory, and in some lines of development macro and monetary theorists, like many of their colleagues in micro theory, seem to consider relevance to be more or less irrelevant … The theoretical analysis in much of this literature rests on assumptions that also fly in the face of the facts … Another related recent development in which theory proceeds with impeccable logic from unrealistic assumptions to conclusions that contradict the historical record, is the recent work on rational expectations …

I have scolded economists for what I think are the sins that too many of them commit, and I have tried to point the way to at least partial redemption. This road to salvation will not be an easy one for those who have been seduced by the siren of mathematical elegance or those who all too often seek to test unrealistic models without much regard for the quality or relevance of the data they feed into their equations. But let us all continue to worship at the altar of science. I ask only that our credo be: “relevance with as much rigor as possible,” and not “rigor regardless of relevance.” And let us not be afraid to ask — and to try to answer the really big questions.

Robert A. Gordon

Svensk universitetsutbildning i fritt fall

25 October, 2016 at 17:48 | Posted in Education & School | Leave a comment

Samtidigt som urholkningen av högskolan fortsätter finns det ett politiskt tryck på fler utbildningsplatser. Men ensidiga satsningar på fler platser gynnar varken samhället, högskolorna eller de studenter som får utbildning av tvivelaktig kvalitet. I nuläget måste högskolans begränsade budgetutrymme användas till att stärka utbildningens kvalitet, inte till att bygga ut högskolan ytterligare …

qualityKvaliteten på högskolan är i dag ifrågasatt. Den tveksamma kvaliteten syns bland annat i Universitetskanslersämbetets kvalitetsutvärderingar, där nästan var femte utbildning underkändes. En bidragande orsak till den bristande kvaliteten kan vara att antalet studenter har ökat snabbare än resurserna tillåter. Dessutom har det skett en urholkning av resurserna, då ersättningsbeloppen inte räknas upp med de faktiska kostnadsökningarna och dessutom minskas genom ett produktivitetsavdrag.

Samtidigt visar IFAU (Institutet för arbetsmarknadspolitisk utvärdering) att utbyggnaden av högskolan medfört sämre studentkvalitet. Detta är en naturlig följd av att övergången till högre studier redan är hög bland ungdomar i de högsta betygsintervallen. Det finns inte något överskott av högpresterande studenter som kan antas när fler platser tillkommer. Detta medför att studenter med allt sämre förkunskaper kommer in när högskolan växer. Dessutom är grundskolan och gymnasiets kvalitet ifrågasatt generellt. Lärarna måste lägga allt mer tid på att hjälpa studenterna genom utbildningarna vilket tar resurser från övrig undervisning. Det går inte heller att utesluta att kraven på studenterna sänks. Ökad genomströmning ger mer resurser till högskolan. Dagens resurssystem ger tyvärr incitament till högskolorna att godkänna studenter som inte når upp till kraven för godkänt.

Göran Arrius  Håkan Regnér  Linda Simonsen

2989556_1200_675Bra rutet! Svenska universitet och högskolor brottas idag med många problem. Två av de mer akuta är hur man ska hantera en situation med krympande ekonomi och att allt fler av studenterna är dåligt förberedda för högskolestudier.

Varför har det blivit så här? Yours truly har vid upprepade tillfällen blivit approcherad av media apropå dessa frågor, och har då utöver ‘the usual suspects’ också försökt lyfta en problematik som sällan — av rädsla för att inte vara ‘politiskt korrekt’ — lyfts i debatten.

De senaste femtio åren har vi haft en fullständig explosion av nya studentgrupper som går vidare till universitets- och högskolestudier. Detta är på ett sätt klart glädjande. Idag har vi lika många doktorander i vårt utbildningssystem som vi hade gymnasister på 1950-talet. Men denna utbildningsexpansion har tyvärr i mycket skett till priset av försämrade möjligheter för studenterna att tillgodogöra sig högskoleutbildningens kompetenskrav. Många utbildningar har fallit till föga och sänkt kraven.

Tyvärr är de studenter vi får till universitet och högskolor över lag allt sämre rustade för sina studier. Omstruktureringen av skolan i form av decentralisering, avreglering och målstyrning har tvärtemot politiska utfästelser inte levererat. I takt med den eftergymnasiala utbildningsexpansionen har en motsvarande kunskapskontraktion hos stora studentgrupper ägt rum. Den skolpolitik som lett till denna situation slår hårdast mot dem den utger sig för att värna — de med litet eller inget ‘kulturkapital’ i bagaget hemifrån.

Mot denna bakgrund är det egentligen anmärkningsvärt att man inte i större utsträckning problematiserat vad utbildningsexplosionen i sig kan leda till.

gaussEftersom vi för femtio år sedan vid våra universitet utbildade enbart en bråkdel av befolkningen, är det ingen djärv gissning — under antagande av att ‘begåvning’ i en population är åtminstone approximativt normalfördelad — att lejonparten av dessa studenter ‘begåvningsmässigt’ låg till höger om mittpunkten på normalfördelningskurvan. Om vi idag tar in fem gånger så många studenter på våra högskolor och universitet kan vi — under samma antagande — knappast räkna med att en lika stor del av dessa utgörs av individer som ligger till höger om normalfördelningskurvans mittpunkt. Rimligen torde detta — ceteris paribus — innebära att i takt med att proportionen av befolkningen som går vidare till högskola och universitet ökar, så ökar svårigheterna för många av dessa att uppnå traditionellt högt ställda akademiska kravnivåer.

Här borde i så fall statsmakterna ha ytterligare en stark anledning till att öka resurserna till högskola och universitet, istället för att som idag bedriva utbildningar på mager kost och med få lärarledda föreläsningar i rekordstora studentgrupper. Med nya kategorier av studenter, som i allt större utsträckning rekryteras från studieovana hem, är det svårt att se hur vi med knappare resursramar ska kunna lösa dilemmat med högre krav på meritmässigt allt mer svagpresterande studenter.

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