Rocker ohne amputiertes Gehirn (personal)

18 August, 2017 at 19:27 | Posted in Varia | 3 Comments


Wenn ich 64 bin (personal)

18 August, 2017 at 19:11 | Posted in Economics | 1 Comment


Dutch books and money pumps

18 August, 2017 at 17:32 | Posted in Economics | 1 Comment

dutchdirectmemeMainstream neoclassical economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules (preferably the ones axiomatized by Ramsey (1931), de Finetti (1937) or Savage (1954)) – that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately – via some ‘Dutch book’ or ‘money pump’ argument – susceptible to being ruined by some clever ‘bookie.’

Bayesianism reduces questions of rationality to questions of internal consistency (coherence) of beliefs, but – even granted this questionable reductionism – do rational agents really have to be Bayesian? As I have been arguing elsewhere (e. g. here and here) there is no strong warrant for believing so, but in this post, I want to make a point on the informational requirement that the economic ilk of Bayesianism presupposes.

In many of the situations that are relevant to economics one could argue that there is simply not enough of adequate and relevant information to ground beliefs of a probabilistic kind and that in those situations it is not really possible, in any relevant way, to represent an individual’s beliefs in a single probability measure.

Say you have come to learn (based on own experience and tons of data) that the probability of you becoming unemployed in Sweden is 10%. Having moved to another country (where you have no own experience and no data) you have no information on unemployment and a fortiori nothing to help you construct any probability estimate on. A Bayesian would, however, argue that you would have to assign probabilities to the mutually exclusive alternative outcomes and that these have to add up to 1, if you are rational. That is, in this case – and based on symmetry – a rational individual would have to assign probability 10% to becoming unemployed and 90% of becoming employed.

That feels intuitively wrong though, and I guess most people would agree. Bayesianism cannot distinguish between symmetry-based probabilities from information and symmetry-based probabilities from an absence of information. In these kinds of situations, most of us would rather say that it is simply irrational to be a Bayesian and better instead to admit that we ‘simply do not know’ or that we feel ambiguous and undecided. Arbitrary an ungrounded probability claims are more irrational than being undecided in face of genuine uncertainty, so if there is not sufficient information to ground a probability distribution it is better to acknowledge that simpliciter, rather than pretending to possess a certitude that we simply do not possess.

I think this critique of Bayesianism is in accordance with the views of John Maynard Keynes’s A Treatise on Probability (1921) and General Theory (1936). According to Keynes we live in a world permeated by unmeasurable uncertainty – not quantifiable stochastic risk – which often forces us to make decisions based on anything but rational expectations. Sometimes we ‘simply do not know.’ Keynes would not have accepted the view of Bayesian economists, according to whom expectations “tend to be distributed, for the same information set, about the prediction of the theory.” Keynes, rather, thinks that we base our expectations on the confidence or ‘weight’ we put on different events and alternatives. To Keynes, expectations are a question of weighing probabilities by ‘degrees of belief,’ beliefs that have precious little to do with the kind of stochastic probabilistic calculations made by the rational agents modelled by Bayesian economists.

Modern macroeconomics — totally messed up

17 August, 2017 at 16:39 | Posted in Economics | 3 Comments

Until a few years ago, economists of all persuasions confidently proclaimed that the Great Depression would never recur. In a way, they were right. After the financial crisis of 2008 erupted, we got the Great Recession instead. Governments managed to limit the damage by pumping huge amounts of money into the global economy and slashing interest rates to near zero. But, having cut off the downward slide of 2008-2009, they ran out of intellectual and political ammunition.


Economic advisers assured their bosses that recovery would be rapid. And there was some revival; but then it stalled in 2010. Meanwhile, governments were running large deficits – a legacy of the economic downturn – which renewed growth was supposed to shrink. In the eurozone, countries like Greece faced sovereign-debt crises as bank bailouts turned private debt into public debt.

Attention switched to the problem of fiscal deficits and the relationship between deficits and economic growth. Should governments deliberately expand their deficits to offset the fall in household and investment demand? Or should they try to cut public spending in order to free up money for private spending?

Depending on which macroeconomic theory one held, both could be presented as pro-growth policies. The first might cause the economy to expand, because the government was increasing public spending; the second, because they were cutting it. Keynesian theory suggests the first; governments unanimously put their faith in the second.

The consequences of this choice are clear. It is now pretty much agreed that fiscal tightening has cost developed economies 5-10 percentage points of GDP growth since 2010. All of that output and income has been permanently lost. Moreover, because fiscal austerity stifled economic growth, it made the task of reducing budget deficits and national debt as a share of GDP much more difficult. Cutting public spending, it turned out, was not the same as cutting the deficit, because it cut the economy at the same time.

Robert Skidelsky

Indeed, there are many kinds of useless economics held in high regard within the mainstream economics establishment today. Few are less deserved than the post-real macroeconomic theory — mostly connected with Finn Kydland, Robert Lucas, Edward Prescott and Thomas Sargent — called Real Business Cycle theory (RBC).

In Chicago economics, one is cultivating the view that scientific theories have nothing to do with truth. Constructing theories and building models is not even considered an activity with the intent of approximating truth. For Chicago economists, it is only an endeavour to organize their thoughts in a ‘useful’ manner.

What a handy view of science!

What these defenders of scientific storytelling ‘forget’ 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 — not even after having put ‘New Keynesian’ sticky-price DSGE lipstick on the RBC pig.

Truth is an important concept in real science — and models based on meaningless calibrated ‘facts’ and ‘assumptions’ with unknown truth value are poor substitutes.

Economists — people being paid for telling stories justifying inequality

15 August, 2017 at 10:26 | Posted in Economics | 1 Comment

If economics was an honest profession, economists would focus their efforts on documenting the waste associated with protectionist barriers for professionals. They devoted endless research studies to estimating the cost to consumers of tariffs on products like shoes and tires. It speaks to the incredible corruption of the economics profession that there are not hundreds of studies showing the loss to consumers from the barriers to trade in physicians’ services. If trade could bring down the wages of physicians in the United States just to European levels, it would save consumers close to $100 billion a year.

But economists are not rewarded for studying the economy. That is why almost everyone in the profession missed the $8 trillion housing bubble, the collapse of which stands to cost the country more than $7 trillion in lost output according to the Congressional Budget Office (that comes to around $60,000 per household).

Few if any economists lost their 6-figure paychecks for this disastrous mistake. But most economists are not paid for knowing about the economy. They are paid for telling stories that justify giving more money to rich people. Hence we can look forward to many more people telling us that all the money going to the rich was just the natural workings of the economy. When it comes to all the government rules and regulations that shifted income upward, they just don’t know what you’re talking about.

Dean Baker

In case you’re in doubt, you might better have a look at e. g. what Harvard economist and George Bush advisor Greg Mankiw writes on the rising inequality we have seen for the last 30 years in both the US and elsewhere in Western societies:

Even if the income gains are in the top 1 percent, why does that imply that the right story is not about education?

I then realized that Paul [Krugman] is making an implicit assumption–that the return to education is deterministic. If indeed a year of schooling guaranteed you precisely a 10 percent increase in earnings, then there is no way increasing education by a few years could move you from the middle class to the top 1 percent.

But it may be better to think of the return to education as stochastic. Education not only increases the average income a person will earn, but it also changes the entire distribution of possible life outcomes. It does not guarantee that a person will end up in the top 1 percent, but it increases the likelihood. I have not seen any data on this, but I am willing to bet that the top 1 percent are more educated than the average American; while their education did not ensure their economic success, it played a role.

To me, this is nothing but really one big evasive story-telling attempt at trying to explain away a very disturbing structural shift that has taken place in our societies. And change that has very little to do with stochastic returns to education. Those were in place also 30 or 40 years ago. At that time they meant that a CEO earned 10-12 times what “ordinary” people earn. Today it means that they earn 100-200 times what “ordinary” people earn.

A question of education? No way! It is a question of income and wealth increasingly being concentrated in the hands of a small privileged elite, greed and a lost sense of a common project of building a society for everyone and not only for the chosen few.

But once, we were here (personal)

13 August, 2017 at 18:31 | Posted in Varia | 2 Comments


In loving memory of my brother, Peter ‘Uncas’ Pålsson.

Keynes vs. Wicksell — the loanable funds theory

13 August, 2017 at 17:06 | Posted in Economics | 7 Comments

WicksellThe fundamental difference between Keynes and Wicksell and in general the
supporters of the LFT [Loanable Funds Theory] lies in the specification of the consequences of the presence of bank money. Introducing the distinction between the natural rate of interest and interest rate on money, Wicksell and the LFT supporters state that an economy that uses bank money converges towards the equilibrium position that characterises an economy without banks, in which there is no credit market, but just a capital market where the resources not consumed by savers are exchanged. The presence of bank money does not alter the structure of the economic system; the only element that distinguishes a pure credit economy is the presence of an adjustment mechanism that drives the rate of interest on money, determined within the credit market, towards the natural rate of interest. The working of a pure credit economy can therefore be described using a theory that applies to a world without banks.

In contrast, Keynes states that the spread of a fiat money such as bank money changes the structure of the economic system. He underscores this point by introducing the distinction between a real exchange economy and a monetary economy. As is well known, Keynes uses the former term to refer to an economy in which money is merely a tool to reduce the cost of exchange and whose presence does not alter the structure of the economic system, which remains substantially a barter economy. Keynes notes that the classical economists formulated an explanation of how the real-exchange economy works, convinced that this explanation could be easily applied to a monetary economy. He believed that this conviction was unfounded …

Giancarlo Bertocco

Habermas and Rorty on intersubjectivity and truth

12 August, 2017 at 12:30 | Posted in Theory of Science & Methodology | 4 Comments

We teachers do our best to be Socratic, to get our job of re-education, secularization, and liberalization done by conversational exchange. That is true up to a point, but what about assigning books like Black Boy, The Diary of Anne Frank, and Becoming a Man? The racist or fundamentalist parents of our students say that in a truly democratic society the students should not be forced to read books by such people – black people, Jewish people, homosexual people. They will protest that these books are being jammed down their children’s throats. I cannot see how to reply to this charge without saying something like “There are credentials for admission to our democratic society, credentials which we liberals have been making more stringent by doing our best to excommunicate racists, male chauvinists, homo-phobes, and the like. tolerance-does-not-mean-tolerating-intoleranceYou have to be educated in order to be a citizen of our society, a participant in our conversation, someone with whom we can envisage merging our horizons. So we are going to go right on trying to discredit you in the eyes of your children, trying to strip your fundamentalist religious community of dignity, trying to make your views seem silly rather than discussable. We are not so inclusivist as to tolerate intolerance such as yours.”

I have no trouble offering this reply, ​since I do not claim to make the distinction between education and conversation on the basis of anything except my loyalty to a particular community, a community whose interests required re-educating the Hitler Youth in 1945 and required re-educating the bigoted students of Virginia in 1993. I don’t see anything herrschaftsfrei about my handling of my fundamentalist students. Rather, I think those students are lucky to find themselves under the benevolent Herrschaft of people like me, and to have escaped the grip of their frightening, vicious, dangerous parents.

Richard Rorty

Although Rorty’s view is pointing in the right direction re handling intolerance, his epistemization of the concept of truth makes the persuasive force of the argumentation weaker than necessary. Jürgen Habermas gives the reason why:

As soon as the concept of truth is eliminated in favor of a context-dependent epistemic validity-for-us, the normative reference point necessary to explain why a proponent should endeavor to seek agreement for ‘p’ beyond the boundaries of her own group is missing. The information that the agreement of an increasingly large audience gives us increasingly less reason to fear that we will be refuted presupposes the very interest that has to be explained: the desire for “as much intersubjective agreement as possible.” If something is ‘true’ if and only if it is recognized as justified “by us” because it is good “for us,” there is no rational motive for expanding the circle of members. No reason exists for the decentering expansion of the justification community especially since Rorty defines “my own ethnos” as the group in front of which I feel obliged to give an account of myself.

Here I think one can also invoke Adam Smith’s ‘impartial spectator’ to reduce the risk of making public decisions based solely on history, vested interests, and cultural or religious traditions. The decisions we as ‘reasonable persons’ make for building a ‘good’ society must be justifiable from more than one perspective.

Reasoning and intellectual probing are our most important allies when evaluating different ‘cultural’ and ‘religious’ claims. There is no other justifiable way than the ‘path of reason.’ Even those who don’t want to follow that path have to give reasons for why.

In a global world, we have to go beyond local perspectives and prejudices by taking a ‘view from nowhere.’ Building a just and open society in such a world, considerations of universality and impartiality are always necessary.

Framtidens universitetsutbildning

12 August, 2017 at 11:42 | Posted in Education & School | 1 Comment

I Universitetsläraren kunde man för inte alls så länge sedan — apropå den pågående debatten om studentgenomströmningen på våra universitet och högskolor —  läsa följande i sanning intressanta påpekande från en universitetslektor vid Luleå tekniska universitet:

För högskolans del gäller det att lägga energin på de studenter vi faktiskt har och acceptera att de inte är som vi själva var som studenter.

Att ingen tänkt på detta! Så enkelt. Så elegant. Det borde ju vem som helst kunnat räkna ut med röven och en bit krita. Logiken är glasklar — och videon nedan belyser på ett föredömligt sätt hur den kan omsättas i en framtida universitetsutbildning …

Jetzt kommt das Wirtschaftswunder

11 August, 2017 at 10:46 | Posted in Varia | 1 Comment


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