Why governments should run deficits

10 februari, 2017 kl. 11:09 | Publicerat i Economics | 10 kommentarer

 

Lynn Parramore: Do you think there are lessons in what has happened in the Eurozone for students of economics and the way the subject is taught?

darling-let-s-get-deeply-into-debtMario Seccareccia: Yes, indeed. Ever since the establishment of the modern nation-state in the late eighteenth and nineteenth centuries, the creation of the euro was perhaps the first significant experiment in modern times in which there was an attempt to separate money from the state, that is, to denationalize currency, as some right-wing ideologues and founders of modern neoliberalism, such as Friedrich von Hayek, had defended. What the Eurozone crisis teaches is that this perception of how the monetary system works is quite wrong, because, in times of crisis, the democratic state must be able to spend money in order to meet its obligations to its citizens. The denationalization or “supra-nationalization” of money with the establishment that happened in the Eurozone took away from elected national governments the capacity to meaningfully manage their economies. Unless governments in the Eurozone are able to renegotiate a significant control and access money from their own central banks, the system will be continually plagued with crisis and will probably collapse in the longer term.

Lynn Parramore

Factoring polynomials the Californian way (personal)

9 februari, 2017 kl. 20:14 | Publicerat i Varia | 1 kommentar

 

And I thought I had seen them all …

The Swedish model is dying

8 februari, 2017 kl. 21:59 | Publicerat i Economics | 4 kommentarer

The 2017 OECD Economic Survey of Sweden — presented today in Stockholm by OECD Secretary-General Angel Gurría and Sweden’s Minister of Finance Magdalena Andersson — points out that income inequality in Sweden has been rising since the 1990s.

sweden-2017-oecd-economic-survey-growing-moreequal-12-638

inequalities-have-widened

I would say that what we see happen in Sweden is deeply disturbing. The rising inequality is outrageous – not the least since it has to a large extent to do with income and wealth increasingly being concentrated in the hands of a very small and privileged elite.

gini sweden 1980to2012
Source: Statistics Sweden and own calculations

A society where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implodes. The cement that keeps us together erodes.

The development in Sweden is going in the wrong direction. The main difference compared to UK and US is really that the increasing inequality in Sweden (going on continuously for 30 years now) started from a lower starting point.

The OECD survey confirms that Sweden is no longer the model country it once was, in the heydays of the 60s and 70s. It’s no longer the country of Olof Palme. Just as in so many other OECD countries, neoliberal ideologies, economists and politicians have crushed the Swedish dream that once was.

It’s sad. But it’s a fact.

News media and knowledge

8 februari, 2017 kl. 09:09 | Publicerat i Varia | Kommentarer inaktiverade för News media and knowledge


Hans Rosling (1948-2017)
RIP

Why not make macroeconomics a science?

7 februari, 2017 kl. 15:51 | Publicerat i Economics | 2 kommentarer

The trouble is, too many theorists — especially in the mainstream of the discipline — have drifted far from the real world. Their ambition has been to build mathematically elegant and internally consistent models of the economy, even if that requires wholly unrealistic assumptions. Granted, just as maps have to simplify complex terrain, theoretical models must ignore aspects of reality to be any use. But there’s a line between simplification and gross distortion, and modern macroeconomics has crossed it.

64f5d94d9836c6a09b5d2009f0d4634a845bb2d7ba56bbaa16176c2fd0e958c0Before the 2008 financial crisis, for example, the standard models more or less ignored finance. No banks, no indebtedness, no leverage. As a result, they couldn’t make sense of the worst global recession since the 1930s …

Given such spectacular failures, you’d think the profession would have gone back to the drawing board. It hasn’t …

Whenever an economist says “in our model,” beware. Demand to know what assumptions the model makes, and question those assumptions as severely as the theorists test for valid inference — because valid inference from bogus assumptions is useless. Where possible, and in the same spirit, pay closest attention to empirical and historical research.

In just about every branch of science, theoretical research has been crucial to achieving breakthroughs. In macroeconomics, it has held progress back. To stop the discipline fading into irrelevance, this will have to change.

Bloomberg View Editorial Board

The editors of Bloomberg View are, of course, absolutely right.

Unfortunately, there are many kinds of useless ‘post-real’ economics held in high regard within the mainstream economics establishment today. Few — if any — are less deserved than the macroeconomic theory/method called calibration.

In physics it may possibly not be straining credulity too much to model processes as ergodic – where time and history do not really matter – but in social and historical sciences it is obviously ridiculous. If societies and economies were ergodic worlds, why do econometricians fervently discuss things such as structural breaks and regime shifts? That they do is an indication of the unrealisticness of treating open systems as analyzable with ergodic concepts.

The future is not reducible to a known set of prospects. It is not like sitting at the roulette table and calculating what the future outcomes of spinning the wheel will be. Reading Lucas, Sargent, Prescott, Kydland and other calibrationists one comes to think of Robert Clower’s apt remark that

much economics is so far removed from anything that remotely resembles the real world that it’s often difficult for economists to take their own subject seriously.

Or as Paul Romer put it in his masterful attack on ‘post-real’ economics last year:

Math cannot establish the truth value of a fact. Never has. Never will.

So instead of assuming calibration and rational expectations to be right, one ought to confront the hypothesis with the available evidence. It is not enough to construct models. Anyone can construct models. To be seriously interesting, models have to come with an aim. They have to have an intended use. If the intention of calibration and rational expectations  is to help us explain real economies, it has to be evaluated from that perspective. A model or hypothesis without a specific applicability is not really deserving our interest.

Without strong evidence all kinds of absurd claims and nonsense may pretend to be science. We have to demand more of a justification than rather watered-down version of “anything goes” when it comes to rationality postulates. If one proposes rational expectations one also has to support its underlying assumptions. None is given, which makes it rather puzzling how rational expectations has become the standard modeling assumption made in much of modern macroeconomics. Perhaps the reason is that economists often mistake mathematical beauty for truth.

But I think another reason is that calibration economists are not particularly interested in empirical examinations of how real choices and decisions are made in real economies. In the hands of Lucas, Prescott and Sargent, rational expectations has been transformed from an – in principle – testable hypothesis to an irrefutable proposition. Believing in a set of irrefutable propositions may be comfortable – like religious convictions or ideological dogmas – but it is not  science.

So where does this all lead us? What is the trouble ahead for economics? Putting a sticky-price DSGE lipstick on the calibrationists’ Real Business Cycle pig sure won’t do. Neither will just looking the other way and pretend it’s raining. The biggest problem in macroeconomics today is that macroeconomists don’t care about facts. As long as they can build consistent mathematical models they’re happy. If the consistency is applicable to the real-world doesn’t seem to bother them.

If macroeconomic models – no matter of what ilk –  build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Trying to represent real-world target systems with models flagrantly at odds with reality is futile. And if those models are New Classical Real Business Cycle calibrations  or ‘New Keynesian’ makes very little difference.

No matter how brilliantly silly DSGE models mainstream macroeconomists come up with, they do not help us working with the fundamental issues of modern economies. Using that kind of models only confirms Robert Gordon‘s  dictum that 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.

As the Bloomberg View editors say — ”this will have to change.” Until then we have to continue  wonder what is the raison d’être of macroeconomics if it has nothing to say about the real world and the economic problems out there?

Why reading newspapers makes you stupid

7 februari, 2017 kl. 12:19 | Publicerat i Politics & Society | 1 kommentar

Lydon: You say newspapers make us stupid, and I’m not quite clear why.

Taleb: Because they always give you an explanation to events so that you have the feeling that you know what’s going on. They tell you the stock market went down, because of fear of a recession, and that’s false causation with uncertainty there. They check their facts, but you can’t check their causes. So, you have the feeling of over-causation from newspapers. That’s number one, the first one.

The second one: newspapers aren’t going to tell you “we had 280 deaths on the roads today in America”. They’re going to tell you about the plane crash killing 14 people. So, you have misrepresentation of the math of risks. They are driven by the sensational. And the statistical and the sensational are not the same in our modern world.

cw5is4bxeaa6kziThere’s a third thing about newspapers. Supplying someone with news reduces his understanding of the world. It’s more complicated than I can go into here, but let me tell you how I cope with it. I don’t mind knowing the news, but I go by a social filter. I eat lunch and dinner with other people. (I try to. I still have people who won’t eat lunch or dinner with me, even after writing the Black Swan). And I make sure. You can eavesdrop on conversations and stuff like that. I can tell if something is going on.

If there’s an event of significance, I know about it. And then I go to the web, or go buy a paper sometimes, or something like that.

Christopher Lydon interview with Nassim Nicholas Taleb

Uncertainty and the pretty, polite techniques of economics

6 februari, 2017 kl. 18:13 | Publicerat i Economics | 2 kommentarer

All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface.

check-your-assumptionsPerhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the marketplace, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.

I dare say that a classical economist would readily admit this. But, even so, I think he has overlooked the precise nature of the difference which his abstraction makes between theory and practice, and the character of the fallacies into which he is likely to be led.

This is particularly the case in his treatment of Money and Interest.

John Maynard Keynes

A Swedish giant has left us

5 februari, 2017 kl. 20:28 | Publicerat i Varia | Kommentarer inaktiverade för A Swedish giant has left us

Sad, sad, sad, news reached us today. One of Sweden’s greatest actors ever — Björn Granath — passed away today, aged 70. He made many great performances, but the one that has stayed with me more than any other is the portrait of the rebel Erik in Pelle the Conqueror (1987).

”We’ll set out and conquer the world.”

Why economists don’t know what every baby knows about scientific methods

5 februari, 2017 kl. 16:04 | Publicerat i Economics | Kommentarer inaktiverade för Why economists don’t know what every baby knows about scientific methods

scientificmethod__92804.1338919332.1280.1280

Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we “export” them to our “target systems”, we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems.

Our admiration for technical virtuosity should not blind us to the fact that we have to have a cautious attitude towards probabilistic inferences in economic contexts. Science should help us penetrate to the causal process lying behind events and disclose the causal forces behind what appears to be simple facts. We should look out for causal relations, but econometrics can never be more than a starting point in that endeavour, since econometric (statistical) explanations are not explanations in terms of mechanisms, powers, capacities or causes. Firmly stuck in an empiricist tradition, econometrics is only concerned with the measurable aspects of reality. But there is always the possibility that there are other variables – of vital importance and although perhaps unobservable and non-additive, not necessarily epistemologically inaccessible – that were not considered for the model. Those who were can hence never be guaranteed to be more than potential causes, and not real causes. A rigorous application of econometric methods in economics really presupposes that the phenomena of our real world economies are ruled by stable causal relations between variables. A perusal of the leading econom(etr)ic journals shows that most econometricians still concentrate on fixed parameter models and that parameter-values estimated in specific spatio-temporal contexts are presupposed to be exportable to totally different contexts. To warrant this assumption one, however, has to convincingly establish that the targeted acting causes are stable and invariant so that they maintain their parametric status after the bridging. The endemic lack of predictive success of the econometric project indicates that this hope of finding fixed parameters is a hope for which there really is no other ground than hope itself.

Real world social systems are not governed by stable causal mechanisms or capacities. The kinds of “laws” and relations that econometrics has established, are laws and relations about entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made “nomological machines” they are rare, or even non-existant. Unfortunately that also makes most of the achievements of econometrics – as most of contemporary endeavours of mainstream economic theoretical modeling – rather useless.

Let’s take an example to illustrate my point. Say we have a diehard neoclassical model (assuming the production function is homogeneous of degree one and unlimited substitutability) such as the standard Cobb-Douglas production function (with A a given productivity parameter, and k the ratio of capital stock to labor, K/L) y = Akα , with a constant investment λ out of output y and a constant depreciation rate δ of the “capital per worker” k, where the rate of accumulation of k, Δk = λy– δk, equals Δk = λAkα– δk. In steady state (*) we have λAk*α = δk*, giving λ/δ = k*/y* and k* = (λA/δ)1/(1-α). Putting this value of k* into the production function, gives us the steady state output per worker level y* = Ak*α= A1/(1-α)(λ/δ))α/(1-α). Assuming we have an exogenous Harrod-neutral technological progress that increases y with a growth rate g (assuming a zero labour growth rate and with y and k a fortiori now being refined as y/A and k/A respectively, giving the production function as y = kα) we get dk/dt = λy – (g + δ)k, which in the Cobb-Douglas case gives dk/dt = λkα– (g + δ)k, with steady state value k* = (λ/(g + δ))1/(1-α) and capital-output ratio k*/y* = k*/k*α = λ/(g + δ). If using a model with output and capital given net of depreciation, we have to change the final expression into k*/y* = k*/k*α = λ/(g + λδ). Let’s say we have δ = 0.03, λ = 0.1 and g = 0.03 initially. This gives a capital-output ratio of around 3. If g falls to 0.01 it rises to around 7.7. We reach analogous results if we use a basic CES production function with an elasticity of substitution σ > 1. With σ = 1.5, the capital share rises from 0.2 to 0.36 if the wealth-income ratio goes from 2.5 to 5, which according to some economists is what actually has happened in rich countries during the last forty years.

Being able to show that you can get these results using one or another of the available standard neoclassical growth models is of course — from a realist point of view — of very limited value. As usual — the really interesting thing is how in accord with reality are the assumptions you make and the numerical values you put into the model specification.

Kids — somehow — seem to be more in touch with real science than can-opener-assuming economists …

A physicist, a chemist, and an economist are stranded on a desert island. One can only imagine what sort of play date went awry to land them there. Anyway, they’re hungry. Like, desert island hungry. And then a can of soup washes ashore. Progresso Reduced Sodium Chicken Noodle, let’s say. Which is perfect, because the physicist can’t have much salt, and the chemist doesn’t eat red meat.

Campbell's_Soup_with_Can_OpenerBut, famished as they are, our three professionals have no way to open the can. So they put their brains to the problem. The physicist says “We could drop it from the top of that tree over there until it breaks open.” And the chemist says “We could build a fire and sit the can in the flames until it bursts open.”

Those two squabble a bit, until the economist says “No, no, no. Come on, guys, you’d lose most of the soup. Let’s just assume a can opener.”

Die Mauer ist weg

5 februari, 2017 kl. 12:17 | Publicerat i Varia | 1 kommentar

 

CEZ7_cGWIAAZRNb Anything you can say about the Berlin Wall is — to paraphrase one of my intellectual heroes — at the same time both too much and not enough.

Proving 0 = 1

5 februari, 2017 kl. 11:14 | Publicerat i Varia | 2 kommentarer

 

True face of Marine Le Pen

4 februari, 2017 kl. 14:01 | Publicerat i Politics & Society | Kommentarer inaktiverade för True face of Marine Le Pen

 

Dick Harrison — rätt för en gångs skull

3 februari, 2017 kl. 19:59 | Publicerat i Education & School | Kommentarer inaktiverade för Dick Harrison — rätt för en gångs skull

bildDick Harrison är en tyckmyckentrutad, pompös, och mediekåt professorskollega för vilken jag har hyser en nästintill obefintlig uppskattning.

Men här — i Eric Schüldts fina SVT programserie Idévärlden — har han helt rätt i sin beskrivning av dagens anti-bildningselände i svensk universitetsvärld. Bra rutet Dick!

Alternative facts — the latest Newspeak invention

3 februari, 2017 kl. 18:36 | Publicerat i Politics & Society | Kommentarer inaktiverade för Alternative facts — the latest Newspeak invention

The US is today run by a president that thinks he can get away with never ending lies by simply calling them ” alternative facts.”

That’s of course nothing but Orwellian Newspeak — and George Orwell himself described the dangers of this postmodern mumbo jumbo truth-relativism already seventy-five years ago:

inconvenient-truthI know it is the fashion to say that most of recorded history is lies anyway. I am willing to believe that history is for the most part inaccurate and biased, but what is peculiar to our own age is the abandonment of the idea that history could be truthfully written. In the past, people deliberately lied, or they unconsciously colored what they wrote, or they struggled after the truth, well knowing that they must make many mistakes; but in each case they believed that “the facts” existed and were more or less discoverable. And in practice there was always a considerable body of fact which would have been agreed to by almost anyone … A British and a German historian would disagree deeply on many things, even on fundamentals, but there would still be a body of, as it were, neutral fact on which neither would seriously challenge the other. It is just this common basis of agreement with its implication that human beings are all one species of animal, that totalitarianism destroys. Nazi theory indeed specifically denies that such a thing as “the truth” exists. There is, for instance, no such thing as “Science”. There is only “German Science,” “Jewish Science,” etc. The implied objective of this line of thought is a nightmare world in which the Leader, or some ruling clique, controls not only the future but the past. If the Leader says of such and such an event, “It never happened” — well, it never happened. If he says that two and two are five — well two and two are five. This prospect frightens me much more than bombs …

RBC models — nonsense on stilts

3 februari, 2017 kl. 16:40 | Publicerat i Economics | 2 kommentarer

tobin_2049712cThey try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

James Tobin

Real business cycle theory basically says that economic cycles are caused by technology-induced changes in productivity. It says that employment goes up or down because people choose to work more when productivity is high and less when it’s low. This is of course nothing but pure nonsense, and how on earth the guys that have promoted this theory — Thomas Sargent et consortes — could be awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is really beyond comprehension.

In yours truly’s History of Economic Theories (4th ed, 2007, p. 405) it was concluded that

ekthe problem is that it has turned out to be very difficult to empirically verify the theory’s view on economic fluctuations as being effects of rational actors’ optimal intertemporal choices … Empirical studies have not been able to corroborate the assumption of the sensitivity of labour supply to changes in intertemporal relative prices. Most studies rather point to expected changes in real wages having only rather little influence on the supply of labour.

Rigorous models lacking relevance is not to be taken seriously. Or as Keynes had it — ”it is better to be vaguely right than precisely wrong.”

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