LARS P. SYLL

Master class

Elzbieta Towarnicka — with a totally unbelievable and absolutely fabulous voice.

This is as good as it gets in the world of music.

Probability and economics

Modern mainstream (neoclassical) economics relies to a large degree on the notion of probability.

To at all be amenable to applied economic analysis, economic observations allegedly have to be conceived as random events that are analyzable within a probabilistic framework.

But is it really necessary to model the economic system as a system where randomness can only be analyzed and understood when based on an a priori notion of probability?

When attempting to convince us of the necessity of founding empirical economic analysis on probability models,  neoclassical economics actually forces us to (implicitly) interpret events as random variables generated by an underlying probability density function.

This is at odds with reality. Randomness obviously is a fact of the real world. Probability, on the other hand, attaches (if at all) to the world via intellectually constructed models, and a fortiori is only a fact of a probability generating (nomological) machine or a well constructed experimental arrangement or ‘chance set-up.’

Just as there is no such thing as a ‘free lunch,’ there is no such thing as a ‘free probability.’

To be able at all to talk about probabilities, you have to specify a model. If there is no chance set-up or model that generates the probabilistic outcomes or events – in statistics one refers to any process where you observe or measure as an experiment (rolling a die) and the results obtained as the outcomes or events (number of points rolled with the die, being e. g. 3 or 5) of the experiment – there strictly seen is no event at all.

Probability is a relational element. It always must come with a specification of the model from which it is calculated. And then to be of any empirical scientific value it has to be shown to coincide with (or at least converge to) real data generating processes or structures – something seldom or never done.

And this is the basic problem with economic data. If you have a fair roulette-wheel, you can arguably specify probabilities and probability density distributions. But how do you conceive of the analogous nomological machines for prices, gross domestic product, income distribution etc? Only by a leap of faith. And that does not suffice. You have to come up with some really good arguments if you want to persuade people into believing in the existence of socio-economic structures that generate data with characteristics conceivable as stochastic events portrayed by probabilistic density distributions.

We simply have to admit that the socio-economic states of nature that we talk of in most social sciences – and certainly in economics – are not amenable to analyze as probabilities, simply because in the real world open systems there are no probabilities to be had!

The processes that generate socio-economic data in the real world cannot just be assumed to always be adequately captured by a probability measure. And, so, it cannot be maintained that it even should be mandatory to treat observations and data – whether cross-section, time series or panel data – as events generated by some probability model. The important activities of most economic agents do not usually include throwing dice or spinning roulette-wheels. Data generating processes – at least outside of nomological machines like dice and roulette-wheels – are not self-evidently best modeled with probability measures.

If we agree on this, we also have to admit that much of modern neoclassical economics lacks sound foundations.

When economists and econometricians – uncritically and without arguments — simply assume that one can apply probability distributions from statistical theory on their own area of research, they are really skating on thin ice.

Mathematics (by which I shall mean pure mathematics) has no grip on the real world ; if probability is to deal with the real world it must contain elements outside mathematics ; the meaning of ‘ probability ‘ must relate to the real world, and there must be one or more ‘primitive’ propositions about the real world, from which we can then proceed deductively (i.e. mathematically). We will suppose (as we may by lumping several primitive propositions together) that there is just one primitive proposition, the ‘probability axiom’, and we will call it A for short. Although it has got to be true, A is by the nature of the case incapable of deductive proof, for the sufficient reason that it is about the real world  …

We will begin with the … school which I will call philosophical. This attacks directly the ‘real’ probability problem; what are the axiom A and the meaning of ‘probability’ to be, and how can we justify A? It will be instructive to consider the attempt called the ‘frequency theory’. It is natural to believe that if (with the natural reservations) an act like throwing a die is repeated n times the proportion of 6’s will, with certainty, tend to a limit, p say, as n goes to infinity … If we take this proposition as ‘A’ we can at least settle off-hand the other problem, of the meaning of probability; we define its measure for the event in question to be the number p. But for the rest this A takes us nowhere. Suppose we throw 1000 times and wish to know what to expect. Is 1000 large enough for the convergence to have got under way, and how far? A does not say. We have, then, to add to it something about the rate of convergence. Now an A cannot assert a certainty about a particular number n of throws, such as ‘the proportion of 6’s will certainly be within p +- e for large enough n (the largeness depending on e)’. It can only say ‘the proportion will lie between p +- e with at least such and such probability (depending on e and n*) whenever n>n*’. The vicious circle is apparent. We have not merely failed to justify a workable A; we have failed even to state one which would work if its truth were granted. It is generally agreed that the frequency theory won’t work. But whatever the theory it is clear that the vicious circle is very deep-seated: certainty being impossible, whatever A is made to state can only be in terms of ‘probability ‘.

John Edensor Littlewood 

This importantly also means that if you cannot show that data satisfies all the conditions of the probabilistic nomological machine, then the statistical inferences made in mainstream economics lack sound foundations!

Mainstream flimflam defender Wren-Lewis gets it wrong — again!

Again and again, Oxford professor Simon Wren-Lewis rides out to defend orthodox macroeconomic theory against attacks from heterodox critics.

A couple of years ago, it was rational expectations, microfoundations, and representative agent modeling he wanted to save.

And now he is back with new flimflamming against heterodox attacks and pluralist demands from economics students all over the world:

Attacks [against mainstream economics] are far from progressive.

[D]evoting a lot of time to exposing students to contrasting economic frameworks (feminist, Austrian, post-Keynesian) to give them a range of ways to think about the economy, as suggested here, means cutting time spent on learning the essential tools that any economist needs … [E]conomics is a vocational subject, not a liberal arts subject …

This is the mistake that progressives make. They think that by challenging mainstream economics they will somehow make the economic arguments for regressive policies go away. They will not go away. Instead all you have done is thrown away the chance of challenging those arguments on their own ground, using the strength of an objective empirical science …

Economics, as someone once said, is a separate and inexact science. That it is a science, with a mainstream that has areas of agreement and areas of disagreement, is its strength. It is what allows economists to claim that some things are knowledge, and should be treated as such. Turn it into separate schools of thought, and it degenerates into sets of separate opinions. There is plenty wrong with mainstream economics, but replacing it with schools of thought is not the progressive endeavor that some believe. It would just give you more idiotic policies …

Mainstream economics is here depicted by Wren-Lewis as nothing but “essential tools that any economist needs.” Not a theory among other competing theories. Not a “separate school of thoughts,” but an “objective empirical science” capable of producing “knowledge.”

I’ll be dipped!

Reading that kind of nonsense one has to wonder if this guy is for real!

Wren-Lewis always tries hard to give a picture of modern macroeconomics as a pluralist enterprise. But the change and diversity that gets Wren-Lewis approval only takes place within the analytic-formalistic modeling strategy that makes up the core of mainstream economics. You’re free to take your analytical formalist models and apply it to whatever you want — as long as you do it with a modeling methodology that is acceptable to the mainstream. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. If you haven’t modeled your thoughts, you’re not in the economics business. But this isn’t pluralism. It’s a methodological reductionist straightjacket.

Validly deducing things from patently unreal assumptions — that we all know are purely fictional — makes most of the modeling exercises pursued by mainstream macroeconomists rather pointless. It’s simply not the stuff that real understanding and explanation in science is made of. Had mainstream economists like Wren-Lewis not been so in love with their models, they would have perceived this too. Telling us that the plethora of models that make up modern macroeconomics are not right or wrong, but just more or less applicable to different situations, is nothing short of hand waving.

Wren-Lewis seems to have no problem with the lack of fundamantal diversity — not just path-dependent elaborations of the mainstream canon — and vanishingly little real world relevance that characterize modern mainstream macroeconomics. And he obviously shares the view that there is nothing basically wrong with ‘standard theory.’ As long as policy makers and economists stick to ‘standard economic analysis’ everything is just fine. Economics is just a common language and method that makes us think straight,  reach correct answers, and produce ‘knowledge.’

Just as his mainstream colleagues Paul Krugman and Greg Mankiw, Wren-Lewis is a mainstream neoclassical economist fanatically defending the insistence of using an axiomatic-deductive economic modeling strategy. To yours truly, this attitude is nothing but a late confirmation of Alfred North Whitehead’s complaint that “the self-confidence of learned people is the comic tragedy of civilization.”

Contrary to what Wren-Lewis seems to argue, I would say the recent economic and financial crises and the fact that mainstream economics has had next to nothing to contribute in understanding them, shows that mainstream economics is a degenerative research program in dire need of replacement.

No matter how precise and rigorous the analysis is, and no matter how hard one tries to cast the argument in modern ‘the model is the message’ form, mainstream economists like Wren-Lewis do not push economic science forwards one millimeter since they simply do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside their mainstream models are, they do not per se say anything about real world economies.

Added March 27: Brad DeLong isn’t too happy either about  some of Wren-Lewis’ dodgings :

Simon needs to face that fact squarely, rather than to dodge it. The fact is that the “mainstream economists, and most mainstream economists” who were heard in the public sphere were not against austerity, but rather split, with, if anything, louder and larger voices on the pro-austerity side. (IMHO, Simon Wren-Lewis half admits this with his denunciations of “City economists”.) When Unlearning Economics seeks the destruction of “mainstream economics”, he seeks the end of an intellectual hegemony that gives Reinhart and Rogoff’s very shaky arguments a much more powerful institutional intellectual voice by virtue of their authors’ tenured posts at Harvard than the arguments in fact deserve. Simon Wren-Lewis, in response, wants to claim that strengthening the “mainstream” would somehow diminish the influence of future Reinharts and Rogoffs in analogous situations. But the arguments for austerity that turned out to be powerful and persuasive in the public sphere came from inside the house!

Heterodoxy — necessary for the renewal of economics

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

Analogue economies and reality

Modelling by the construction of analogue economies is a widespread technique in economic theory nowadays … As Lucas urges, the important point about analogue economies is that everything is known about them … and within them the propositions we are interested in ‘can be formulated rigorously and shown to be valid’ … For these constructed economies, our views about what will happen are ‘statements of verifiable fact.’

The method of verification is deduction … We are however, faced with a trade-off: we can have totally verifiable results but only about economies that are not real …

How then do these analogue economies relate to the real economies that we are supposed to be theorizing about? … My overall suspicion is that the way deductivity is achieved in economic models may undermine the possibility to teach genuine truths about empirical reality.

Trumponomics: causes and consequences

Real-world economics review issue no. 78 22 March 2017

Trumponomics: causes and consequences

Trumponomics: everything to fear including fear itself? 3
Jamie Morgan

Can Trump overcome secular stagnation? 20
James K. Galbraith

Trump through a Polanyi lens: considering community well-being 28
Anne Mayhew

Trump is Obama’s legacy. Will this break up the Democratic Party? 36
Michael Hudson

Causes and consequences of President Donald Trump 44
Ann Pettifor

Explaining the rise of Donald Trump 54
Marshall Auerback

Class and Trumponomics 62
David F. Ruccio

Trump’s Growthism: its roots in neoclassical economic theory 86
Herman Daly

Trumponomics: causes and prospects 98
L. Randall Wray

The fall of the US middle class and the hair-raising ascent of Donald Trump 112
Steven Pressman

Mourning in America: the corporate/government/media complex 125
Neva Goodwin

How the Donald can save America from capital despotism 132
Stephen T. Ziliak

Prolegomenon to a defense of the City of Gold 141
David A. Westbrook

Trump’s bait and switch: job creation in the midst of welfare state sabotage 148
Pavlina R. Tcherneva

Can ‘Trumponomics’ extend the recovery? 159
Stephanie Kelton

Your model is consistent? So what!

In the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

There is a difference between having evidence for some hypothesis and having evidence for the hypothesis relevant for a given purpose. The difference is important because scientific methods tend to be good at addressing hypotheses of a certain kind and not others: scientific methods come with particular applications built into them … The advantage of mathematical modelling is that its method of deriving a result is that of mathematical proof: the conclusion is guaranteed to hold given the assumptions. However, the evidence generated in this way is valid only in abstract model worlds while we would like to evaluate hypotheses about what happens in economies in the real world … The upshot is that valid evidence does not seem to be enough. What we also need is to evaluate the relevance of the evidence in the context of a given purpose.

Even if some people think that there has been a kind of empirical revolution in economics lately, I would still argue that empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. The one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics, still roosts the roost.

But mainstream economists’ belief that theories and models being ‘consistent with’ data will somehow make the theories and models a success story, is nothing but an empty hope. Mere consistency with the facts is never sufficient to prove models or theories true. The fact that US presently has a president named Donald Trump, is ‘consistent with’ US being a democracy — but that  doesn’t in any way whatsoever explain why a witless clown came to be elected to a post previously held by people like George Washington and Thomas Jefferson.

Theories and models are always ‘under-determined’ by facts. So a good way to help us choose between different ‘consistent’ theories and models is to actually look at what happens out there in the economy and why it happens.

History and good ordinary social science can also help us. And if we’re not to busy doing the things we do, but once in a while take a brake and do some methodological reflection on why we do what we do — well, that takes us a long way too.

The man who crushed the mathematical dream

Gödel’s incompleteness theorems raise important questions about the foundations of mathematics.

The most important concerns the question of how to select the specific systems of axioms that mathematics are supposed to be founded on. Gödel’s theorems irrevocably show that no matter what system is chosen, there will always have to be other axioms to prove previously unproved truths.

This, of course, ought to be of paramount interest for those mainstream economists who still adhere to the dream of constructing a deductive-axiomatic economics with analytic truths that do not require empirical verification. Since Gödel showed that any complex axiomatic system is undecidable and incomplete, any such deductive-axiomatic economics will always consist of some undecidable statements. When not even being able to fulfil the dream of a complete and consistent axiomatic foundation for mathematics, it’s totally incomprehensible that some people still think that could be achieved for economics.

To be a good economist one cannot only be an economist

The master-economist must possess a rare combination of gifts …. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.

John Maynard Keynes

Economics students today are complaining more and more about the way economics is taught. The lack of fundamantal diversity — not just path-dependent elaborations of the mainstream canon — and narrowing of the curriculum, dissatisfy econ students all over the world. The frustrating lack of real world relevance has led many of them to demand the discipline to start develop a more open and pluralistic theoretical and methodological attitude.

There are many things about the way economics is taught today that worry yours truly. Today’s students are force-fed with mainstream neoclassical theories and models. That lack of pluralism is cause for serious concern.

However, I find the most salient deficiency in ‘modern’ economics education in the total absence of courses in the history of economic thought and economic methodology. That is deeply worrying since a science that doesn’t self-reflect and ask important methodological and science-theoretical questions about the own activity, is a science in dire straits.

Methodology is about how we do economics, how we evaluate theories, models and arguments. To know and think about methodology is important for every economist. Without methodological awareness it’s really impossible to understand what you are doing and why you’re doing it. Dismissing methodology is dismissing a necessary and vital part of science.

For someone who has spent forty years in the economics academia, it’s hopeful to see all these young economics students that want to see a real change in economics and the way it’s taught. Never give up. Never give in!