Unforgettable

30 April, 2017 at 23:24 | Posted in Varia | Comments Off on Unforgettable

 

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Why Cramer’s rule works (student stuff)

30 April, 2017 at 20:34 | Posted in Economics | Comments Off on Why Cramer’s rule works (student stuff)

 

Nu lyfter vi från marken

30 April, 2017 at 15:22 | Posted in Varia | Comments Off on Nu lyfter vi från marken


Freddie Wadling (1951-2016)

Wiehe ska va president

30 April, 2017 at 12:56 | Posted in Varia | 1 Comment


Kom inte och säg att en cover aldrig kan vara bättre än originalet!

Hur återskapar vi förtroendet för nationalekonomin?

30 April, 2017 at 11:40 | Posted in Economics | Comments Off on Hur återskapar vi förtroendet för nationalekonomin?

varapport2009_3-724x1024Nationalekonomin som vetenskap har världen över förlorat otroligt mycket i prestige och status under senare år. Inte minst på grund av dess oförmåga att se den senaste finansiella krisen i antågande och på grund av dess avsaknad av konstruktiva och hållbara förslag på att ta oss ur krisen.

Hur återskapar vi förtroendet för nationalekonomin?

Fem förändringar är helt avgörande.

(1) Sluta låtsas som om vi har exakta och riktiga svar på allting. För det har vi inte. Vi bygger modeller och teorier där vi på hundradelars procent kan tala om vad värdet på räntan kommer att vara om trettio år. Vi kan kalkylera investeringsrisker och göra exakta framtidsprognoser. Men detta bygger vi på matematiska och statistiska antaganden som ofta har väldigt lite eller inget alls med verkligheten att göra. Genom att inte låtsas om den avgörande skillnaden mellan modell och verklighet invaggar vi människor i en falsk trygghet av att vi har koll på läget. Det har vi inte! Det var denna falska trygghet som aktivt medverkade till finanskrisen år 2008. Vi måste våga erkänna att vi ibland inte vet allt, utan att det finns saker som vi inte ens vet att vi inte vet. All osäkerhet går inte att reducera till kalkylerbar risk.

(2) Sluta upp med den barnsliga övertron på matematikens förmåga att ge svar på viktiga ekonomiska frågor. Matematik ger bara exakta svar på exakta frågor. Men de intressanta och relevanta frågor vi ställs inför på det ekonomiska området är sällan av det slaget. Frågor av typen “är 2 + 2 = 4?” lyser helt med sin frånvaro i verklighetens ekonomi. Istället för en i grunden förfelad tilltro till att abstrakta matematisk-axiomatiska modeller har något av substans att tillföra vår kunskap om samhällsekonomin, hade det varit bättre om vi ägnade oss åt relevanta empiriska studier och observationer.

(3) Sluta upp med tron att vi inom nationalekonomin rör oss med lagar. Med övertron på matematiken följer också en i grunden förfelad tro på att vi inom ekonomin ska och kan ställa upp universella och allmängiltiga lagar av den typen som finns inom exempelvis fysiken eller astronomin. Det kan vi inte. Ekonomi är inget slutet planetsystem eller fysiklab. I verkligheten är det mesta vi kan hoppas på inom ekonomins område att fastslå eventuella tendenser med varierande grad av generaliserbarhet.

(4) Sluta upp att betrakta alla andra samhällsvetenskaper som fattiga kusiner från landet. Nationalekonomin har länge lidit av kraftig hybris. Men “samhällsvetenskapernas drottning” klarar sig inte utan samverkan med andra vetenskaper. Inte minst andra mer evidensbaserade vetenskaper som ekonomisk historia och psykologi har mycket att tillföra nationalekonomin. Mångfald och vidsyn skulle berika en idag alltför autistisk nationalekonomi.

(5) Sluta på det ekonomisk-politiska området upp med att bygga modeller och prognoser på fullständigt verklighetsfrånvända “mikrofundament” med robotliknande “representativa aktörs”-imitationer av över tiden optimerande människor utrustade med “rationella förväntningar”. Detta är ren och skär nonsens. Vi måste bygga våra mikrofundament och makromodeller på antaganden som inte står i uppenbar kontrast till verkligheten. Och i det arbetet måste vi vara ödmjuka nog att inse att psykologi och andra beteendevetenskaper kan bidra med viktiga pusselbitar.

Conventional economics — a severe form of brain damage

30 April, 2017 at 10:38 | Posted in Economics | 4 Comments

 

I’m extremely fond of scientists like David Suzuki. With razor-sharp intellects they immediately go for the essentials. They have no time for bullshit. And neither should we.

The Conqueror

29 April, 2017 at 20:43 | Posted in Varia | Comments Off on The Conqueror


Pelle the Conqueror — based on Martin Andersen Nexö’s epic masterpiece — is a stunningly beautiful and painful movie. Bille August directed. Stefan Nilsson wrote the music. Max von Sydow made the performance of his life. And it breaks my heart every time I watch it.

Mainstream textbooks — full of utter nonsense!

29 April, 2017 at 14:22 | Posted in Economics | 1 Comment

51j8ZC7N3QL._SY400_The other day yours truly was sent a copy of the new edition of Chad Jones intermediate textbook Macroeconomics (4th ed, W W Norton, 2018). There’s much in the book I like, e. g. Jones’  combining of more traditional short-run macroeconomic analysis with an accessible coverage of the Romer model — the foundation of modern growth theory — and DSGE business cycle models.

Unfortunately it also contains some utter nonsense!

In chapter 7 — on “The Labor Market, Wages, and Unemployment” — Jones writes (p. 184):

The point of this experiment is to show that wage rigidities can lead to large movements in employment. Indeed, they are the reason John Maynard Keynes gave, in The General Theory of Employment, Interest, and Money (1936), for the high unemployment of the Great Depression.

But this is pure nonsense. A serious editor — who really checked the facts — would immediately find that although Keynes in General Theory devoted substantial attention to the subject of wage rigidities, he certainly did not hold the view that wage rigidities were “the reason … for the high unemployment of the Great Depression.”

Since unions/workers, contrary to classical assumptions, make wage-bargains in nominal terms, they will — according to Keynes — accept lower real wages caused by higher prices, but resist lower real wages caused by lower nominal wages. However, Keynes held it incorrect to attribute “cyclical” unemployment to this diversified agent behaviour. During the depression money wages fell significantly and — as Keynes noted — unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment.

In any specific labour market, lower wages could, of course, raise the demand for labour. But a general reduction in money wages would leave real wages more or less unchanged. The reasoning of the classical economists was, according to Keynes, a flagrant example of the “fallacy of composition.” Assuming that since unions/workers in a specific labour market could negotiate real wage reductions via lowering nominal wages, unions/workers in general could do the same, the classics confused micro with macro.

Lowering nominal wages could not — according to Keynes — clear the labour market. Lowering wages — and possibly prices — could, perhaps, lower interest rates and increase investment. But to Keynes it would be much easier to achieve that effect by increasing the money supply. In any case, wage reductions was not seen by Keynes as a general substitute for an expansionary monetary or fiscal policy.

Even if potentially positive impacts of lowering wages exist, there are also more heavily weighing negative impacts — management-union relations deteriorating, expectations of on-going lowering of wages causing delay of investments, debt deflation et cetera.

So, what Keynes actually did argue in General Theory, was that the classical proposition that lowering wages would lower unemployment and ultimately take economies out of depressions, was ill-founded and basically wrong.

To Keynes, flexible wages would only make things worse by leading to erratic price-fluctuations. The basic explanation for unemployment is insufficient aggregate demand, and that is mostly determined outside the labor market.

Unfortunately, Jones macroeconomics textbook is not the only one containing this kind of utter nonsense on Keynes. Similar distortions of Keynes’s views can be found in, e. g., the economics textbooks of  ‘New Keynesian’ economists like Greg Mankiw and Paul Krugman. How is this possible? Probably because these economists have but a very superficial acquaintance with Keynes’s own works, and rather depend on second-hand sources like Hansen, Samuelson, Hicks and the likes.

Fortunately there is a simple solution to the problem. Keynes’s books are still in print.

Read them!

The classical school [maintains that] while the demand for labour at the existing money-wage may be satisfied before everyone willing to work at this wage is employed, this situation is due to an open or tacit agreement amongst workers not to work for less, and that if labour as a whole would agree to a reduction of money-wages more employment would be forthcoming. If this is the case, such unemployment, though apparently involuntary, is not strictly so, and ought to be included under the above category of ‘voluntary’ unemployment due to the effects of collective bargaining, etc …

the-general-theory-of-employment-interest-and-money-original-imadd345yguuqecuThe classical theory … is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemploy-ment, which is in the above sense involuntary, cannot occur. Apparent unemployment must, therefore, be the result either of temporary loss of work of the ‘between jobs’ type or of intermittent demand for highly specialised resources or of the effect of a trade union ‘closed shop’ on the employment of free labour. Thus writers in the classical tradition, overlooking the special assumption underlying their theory, have been driven inevitably to the conclusion, perfectly logical on their assumption, that apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity …

Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment – if there be such a thing (and who will deny it?). The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. We need to throw over the second postulate of the classical doctrine and to work out the behaviour of a system in which involuntary unemployment in the strict sense is possible.

Nationalekonomins verkliga ansikte

29 April, 2017 at 09:05 | Posted in Economics | 5 Comments

Yours truly lyssnade för ett tag sedan på ett radioprogram där man diskuterade huruvida nationalekonomin verkligen är en vetenskap. För att ‘försvara’ nationalekonomin hade man bjudit in en av de få genuint vidsynta och tvärvetenskapligt orienterade ekonomiprofessorer vi har i landet. Vi hade så vitt jag kan bedöma — efter 40 års umgänge med svenska nationalekonomer — fått en mer rättvis bild av vad det svenska nationalekonomi-etablissemanget står för om man istället låtit den här mannen deltaga i debatten:

Cholesky decomposition (student stuff)

29 April, 2017 at 08:52 | Posted in Statistics & Econometrics | Comments Off on Cholesky decomposition (student stuff)

 

How the laws of physics lie

28 April, 2017 at 21:01 | Posted in Theory of Science & Methodology | 10 Comments

fmaill

Melvyn Bragg and guests — Nancy Cartwright, Mark Buchanan and Frank Close — discuss if there are any Laws of Nature. And if so — are they really ‘facts of life’?

Why political correctness is hopelessly incorrect

28 April, 2017 at 17:22 | Posted in Varia | 2 Comments

 

The dangers of neglecting methodology

28 April, 2017 at 15:21 | Posted in Economics | 1 Comment

rosenbergAlex Rosenberg — chair of the philosophy department at Duke University, renowned economic methodologist and author of Economics — Mathematical Politics or Science of Diminshing Returns? — had an interesting article up on What’s Wrong with Paul Krugman’s Philosophy of Economics some time ago. Writes Rosenberg:

Krugman writes: ‘So how do you do useful economics? In general, what we really do is combine maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both individual behavior and markets depart from this idealized case’ …

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics …

One thing that’s missing from Krugman’s treatment of economics is the explicit recognition of what Keynes and before him Frank Knight, emphasized: the persistent presence of enormous uncertainty in the economy … Why is uncertainty so important? Because the more of it there is in the economy the less scope for successful maximizing and the more unstable are the equilibria the economy exhibits, if it exhibits any at all …

There is a second feature of the economy that Krugman’s useful economics needs to reckon with, one that Keynes and after him George Soros, emphasized. Along with uncertainty, the economy exhibits pervasive reflexivity: expectations about the economic future tend to actually shift that future …

I think Rosenberg is on to something important here regarding Krugman’s — and other mainstream economists’ — neglect of methodological reflection.

As Rosenberg notes, Krugman works with a very simple modelling dichotomy — either models are complex or they are simple. For years now, self-proclaimed “proud neoclassicist” Paul Krugman has in endless harpings on the same old IS-LM string told us about the splendour of the Hicksian invention — so, of course, to Krugman simpler models are always preferred.

Krugman has repeatedly told us that ‘Keynesian’ macroeconomics has substantially contributed to making economics a science where the model is the message.

Sure, ‘New Keynesian’ economists like Krugman — and their forerunners, ‘Keynesian’ economists like Paul Samuelson and (young) John Hicks — certainly have contributed to making economics more mathematical and model-oriented.

wrong-tool-by-jerome-awBut if these math-is-the-message-modelers aren’t able to show that the mechanisms or causes that they isolate and handle in their mathematically formalized macromodels are stable in the sense that they do not change when we ‘export’ them to the real world, these mathematical models do only hold under ceteris paribus conditions and are consequently of limited value to our understandings, explanations or predictions of real economic systems.

When it comes to modeling philosophy, Paul Krugman has in an earlier piece defended his position in the following words (my italics):

I don’t mean that setting up and working out microfounded models is a waste of time. On the contrary, trying to embed your ideas in a microfounded model can be a very useful exercise — not because the microfounded model is right, or even better than an ad hoc model, but because it forces you to think harder about your assumptions, and sometimes leads to clearer thinking. In fact, I’ve had that experience several times.

The argument is hardly convincing. If people put that enormous amount of time and energy that they do into constructing macroeconomic models, then they really have to be substantially contributing to our understanding and ability to explain and grasp real macroeconomic processes. They don’t, and so why waste time on them?

Krugman’s explications on this issue is interesting also because they shed light on a kind of inconsistency in his art of argumentation. For years now  Krugman has in more than one article criticized mainstream economics for using too much (bad) mathematics and axiomatics in their model-building endeavours. But when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models. In his End This Depression Now — just to take one example — Paul Krugman maintains that although he doesn’t buy “the assumptions about rationality and markets that are embodied in many modern theoretical models, my own included,” he still find them useful “as a way of thinking through some issues carefully.”

When it comes to methodology and assumptions, Krugman obviously has a lot in common with the kind of model-building he otherwise criticizes.

A gadget is just a gadget — and brilliantly silly simple models — IS-LM included — do not help us working with the fundamental issues of modern economies any more than brilliantly silly complicated models — calibrated DSGE and RBC models included. And as Rosenberg rightly notices:

When he accepts maximizing and equilibrium as the (only?) way useful economics is done Krugman makes a concession so great it threatens to undercut the rest of his arguments against New Classical economics.

MindYourDecisions (personal)

27 April, 2017 at 16:36 | Posted in Varia | 1 Comment

Bedridden with a severe cold, it’s easy to get restless. Solving fun math problems is my way of enduring …


 

Shostakovich

27 April, 2017 at 11:51 | Posted in Varia | Comments Off on Shostakovich

 

keats-thing-of-beauty1-500x224

The Ricardian Vice (II)

26 April, 2017 at 10:22 | Posted in Economics | 1 Comment

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty.9780333009420-us-300That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners. For professional economists … were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;— a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts.

The Ricardian Vice (I)

26 April, 2017 at 09:05 | Posted in Economics | 1 Comment

77645Ricardo’s … interest was in the clear-cut result of direct, practical significance. In order to get this he cut that general system to pieces, bundled up as large parts of it as possible, and put them in cold storage — so that as many things as possible should be frozen and ‘given.’ He then piled one simplifying assumption upon another until, having really settled everything by theses assumptions, he was left with only a few aggregative variables between which, he set up simple one-way relations so that, in the end, the desired results emerged almost as tautologies … It is an excellent theory that can never be refuted and lacks nothing save sense. The habit of applying results of this character to the solution of practical problems we shall call the Ricardian Vice.

Sounds familiar, doesn’t it?

Only difference is that today it’s seen as a virtue rather than a vice …

Gimme Some Lovin’ (personal)

25 April, 2017 at 22:08 | Posted in Varia | 2 Comments

 

Steve Winwood’s voice still, after fifty years, gives me goose pimples.

Absolutely fabulous.

The benefits of free trade — a fallacy based on a fantasy

25 April, 2017 at 08:29 | Posted in Economics | 10 Comments

Plenty of people will try to convince you that globalization and free trade could benefit everyone, if only the gains were more fairly shared …

trade-copyThis belief is shared by almost all politicians … and it’s an article of faith for the economics profession.

You are right to reject it …

It’s a fallacy based on a fantasy, and it has been ever since David Ricardo dreamed up the idea of “Comparative Advantage and the Gains from Trade” two centuries ago. The best way to prove that is to apply real-world scepticism to the original argument in favour of free trade …

Ricardo’s model assumed that you could produce wine or cloth with only labour, but of course you can’t. You need machines as well, and machinery is specific to each industry. The essential machinery for making wine can’t be used to make anything else, if its use becomes unprofitable. It is either scrapped, sold at a large loss, or shipped overseas. Ditto a spinning jenny, or a steel mill: if making steel becomes unprofitable, the capital involved in its production is effectively destroyed …

Ricardo’s little shell and pea trick is therefore like most conventional economic theory: it’s neat, plausible, and wrong. It’s the product of armchair thinking by people who never put foot in the factories that their economic theories turned into rust buckets.

Steve Keen

As always with Keen — thought-provoking and interesting. But I think he misses the most powerful argument against the Ricardian paradigm — what counts to day is not comparative advantage, but absolute advantage.

David_RicardoWhat has changed since Ricardo’s days is that the assumption of internationally immobile factors of production has been made totally untenable in our globalised world. When our modern corporations maximize their profits they do it by moving capital and technologies to where it is cheapest to produce. So we’re actually in a situation today where absolute — not comparative — advantages rules the roost when it comes to free trade.

And in that world, what is good for corporations is not necessarily good for nations.

Ricardian trade theory — how is this still a thing?

24 April, 2017 at 09:40 | Posted in Economics | 2 Comments

On Saturday, April 19th 1817, David Ricardo published The Principles of Political Economy and Taxation, where he laid out the idea of comparative advantage, which since has become the foundation of neoclassical, ‘mainstream’ international trade theory …

This week we saw lots of praise of Ricardo, by the likes of The Economist, CNN, Forbes and Vox. Mainstream economists today tend to see the rejection of free trade implicit in Trump and Brexit as populist nonsense by people who don’t understand the complicated theory of comparative advantage …

class_th_of_int_trade_-_lecture_4_7However, there are fundamental problems with the assumptions embedded in Ricardo’s theory and there’s little evidence, if any, to back up the Ricardian claim that free trade leads to benefits for all …

Perhaps the most fundamental assumption behind Ricardo’s theory is that a country’s terms of trade adjust to ensure balanced trade. This assumption is problematic on several accounts. First of all, a change in the terms of trade can have conflicting effects. Relatively low export prices means that each unit of export contributes less to the trade balance. At the same time, a lower price can lead to higher export volumes. In other words, the total value of exports can fall, remain the same, or rise, depending on the strengths of these conflicting effects. It is not given what will happen as the result of a change in the terms of trade, as it will depend on the price elasticity of the exports and imports …

There is a range of unrealistic assumptions underpinning Ricardian trade theory that are common to neoclassical economic theories. For example free mobility of capital and labor, perfect competition, and full utilization of domestic resources …

It can be difficult to understand why so many people are still staunch supporters of Ricardian trade theory, when it has seemingly been disproved. To understand it, we must first consider the obvious global dominance of neoclassical economics in classrooms, textbooks, academic journals and universities. It is not that difficult to understand why the basic tenets of Ricardo’s trade theory are still so widely respected, when we consider that alternative explanations are excluded from mainstream textbooks, journals and syllabi.

Ingrid Kvangraven

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