Mainstream economics — an obscurantist waste of time

30 November, 2017 at 12:54 | Posted in Economics | 4 Comments

One may perhaps, distinguish between obscure writers and obscurantist writers. The former aim at truth, but do not respect the norms for arriving at truth, such as focusing on causality, acting as the Devil’s Advocate, and generating falsifiable hypotheses. The latter do not aim at truth, and often scorn the very idea that there is such a thing as the truth …

obscurant-1The authors I have singled out are far from marginal, and in fact are at the core of the profession. Their numerous awards testify to this fact.

These writings have in common a somewhat uncanny combination of mathematical sophistication on the one hand and conceptual naiveté and empirical sloppiness on the other. The mathematics, which could have been a tool, is little more than toy. The steam engine was invented by Hero of Alexandria in the first century A. D., but he considered it mainly as a toy, not as a tool that could be put to productive use. He did apparently use it, though, for opening temple doors, so his engine wasn’t completely idling. Hard obscurantist models, too, may have some value as tools, but mostly they are toys.

I have pointed to the following objectionable practices:

2. Adopting huge simplifications that make the empirical relevance of the results essentially nil …

3. Assuming that the probabilities in a stochastic process are known to the agents … or even in some sense optimal …

7. Assuming that agents can choose optimal preferences …

11. Adhering to the instrumental Chicago-style philosophy of explanation, which emphasizes as-if rationality and denies that the realism of assumptions is a relevant issue.

Jon Elster

It’s hard not to agree with Elster’s critique of mainstream economics and its practice of letting models and procedures become ends in themselves, without considerations of their lack of explanatory value as regards real-world phenomena. For more on modern mainstream economics and this kind of wilfully silly obscurantism, yours truly self-indulgently recommend reading this article on RBC or this article on mainstream axiomatics.

Many mainstream economists working in the field of economic theory think that their task is to give us analytical truths. That is great — from a mathematical and formal logical point of view. In science, however, it is rather uninteresting and totally uninformative! The framework of the analysis is too narrow. Even if economic theory gives us ‘logical’ truths, that is not what we are looking for as scientists. We are interested in finding truths that give us new information and knowledge of the world in which we live.

Scientific theories are theories that ‘refer’ to the real-world, where axioms and definitions do not take us very far. To be of interest for an economist or social scientist that wants to understand, explain, or predict real-world phenomena, the pure theory has to be ‘interpreted’ — it has to be ‘applied’ theory. An economic theory that does not go beyond proving theorems and conditional ‘if-then’ statements — and do not make assertions and put forward hypotheses about real-world individuals and institutions — is of little consequence for anyone wanting to use theories to better understand, explain or predict real-world phenomena.

Mainstream theoretical economics has no empirical content whatsoever. And it certainly has no relevance whatsoever to a scientific endeavour of expanding real-world knowledge. This should come as no surprise. Building theories and models on unjustified patently ridiculous assumptions we know people never conform to, does not deliver real science. Real and reasonable people have no reason to believe in ‘as-if’ models of ‘rational’ robot-imitations acting and deciding in a Walt Disney-world characterised by ‘common knowledge,’ ‘full information,’ ‘rational expectations,’ zero  transaction costs, given stochastic probability distributions, risk-reduced genuine uncertainty, and other laughable nonsense assumptions of the same ilk. Science fiction is not science.

austerity22For decades now, economics students have been complaining about the way economics is taught. Their complaints are justified. Force-feeding young and open-minded people with unverified and useless autistic mainstream neoclassical theories and models cannot be the right way to develop a relevant and realistic economic science.

Much work done in mainstream theoretical economics is devoid of any explanatory interest. And not only that. Seen from a strictly scientific point of view, it has no value at all. It is a waste of time. And as so many have been experiencing in modern times of austerity policies and market fundamentalism — a very harmful waste of time.

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The real harm done by Bayesianism

30 November, 2017 at 09:02 | Posted in Theory of Science & Methodology | 2 Comments

419Fn8sV1FL._SY344_BO1,204,203,200_The bias toward the superficial and the response to extraneous influences on research are both examples of real harm done in contemporary social science by a roughly Bayesian paradigm of statistical inference as the epitome of empirical argument. For instance the dominant attitude toward the sources of black-white differential in United States unemployment rates (routinely the rates are in a two to one ratio) is “phenomenological.” The employment differences are traced to correlates in education, locale, occupational structure, and family background. The attitude toward further, underlying causes of those correlations is agnostic … Yet on reflection, common sense dictates that racist attitudes and institutional racism must play an important causal role. People do have beliefs that blacks are inferior in intelligence and morality, and they are surely influenced by these beliefs in hiring decisions … Thus, an overemphasis on Bayesian success in statistical inference discourages the elaboration of a type of account of racial disadavantages that almost certainly provides a large part of their explanation.

For all scholars seriously interested in questions on what makes up a good scientific explanation, Richard Miller’s Fact and Method is a must read. His incisive critique of Bayesianism is still unsurpassed.

wpid-bilindustriella-a86478514bOne of yours truly’s favourite ‘problem situating lecture arguments’ against Bayesianism goes something like this: Assume you’re a Bayesian turkey and hold a nonzero probability belief in the hypothesis H that “people are nice vegetarians that do not eat turkeys and that every day I see the sunrise confirms my belief.” For every day you survive, you update your belief according to Bayes’ Rule

P(H|e) = [P(e|H)P(H)]/P(e),

where evidence e stands for “not being eaten” and P(e|H) = 1. Given that there do exist other hypotheses than H, P(e) is less than 1 and a fortiori P(H|e) is greater than P(H). Every day you survive increases your probability belief that you will not be eaten. This is totally rational according to the Bayesian definition of rationality. Unfortunately — as Bertrand Russell famously noticed — for every day that goes by, the traditional Christmas dinner also gets closer and closer …

For more on my own objections to Bayesianism, see my Bayesianism — a patently absurd approach to science and One of the reasons I’m a Keynesian and not a Bayesian.

The first speculative bubble

28 November, 2017 at 14:29 | Posted in Economics | 6 Comments

 

Carmina Burana

27 November, 2017 at 18:40 | Posted in Varia | Leave a comment

 

Chicago economics delirium VSOP

26 November, 2017 at 13:24 | Posted in Economics | 3 Comments

2011-10-26-dumb_and_dumber-533x299

lucasbob-1Macroeconomics was born as a distinct field in the 1940s (sic!), as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

Robert Lucas (2003)

In the past, I think you have been quoted as saying that you don’t even believe in the possibility of bubbles.

eugeneEugene Fama: I never said that. I want people to use the term in a consistent way. For example, I didn’t renew my subscription to The Economist because they use the world bubble three times on every page. Any time prices went up and down—I guess that is what they call a bubble. People have become entirely sloppy. People have jumped on the bandwagon of blaming financial markets. I can tell a story very easily in which the financial markets were a casualty of the recession, not a cause of it.

That’s your view, correct?

Fama: Yeah.

John Cassidy

The purported strength of Chicago — New Classical — macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially that the decisions are taken by inter-temporal utility maximizing ‘forward-loooking’ individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations — without ever presenting neither ontological nor epistemological justifications for this claim — has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations.

That anyone should take that kind of stuff seriously is totally and unbelievably ridiculous. Or as Robert Solow has it:

4703325Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous – that is, by laughing at it – so as not to fall into the trap of taking it seriously and passing on to matters of technique.

Robert Solow

Chicago economics delirium

26 November, 2017 at 10:48 | Posted in Economics | 1 Comment

I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis. That hypothesis has been tested and, with very few exceptions, found consistent with the data in a wide variety of markets …

Michael Jensen

I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.

Robert Lucas

La discipline économique et le mirage de la ‘vraie science’

26 November, 2017 at 10:05 | Posted in Economics | Leave a comment

canguilLe mirage de la « vraie science », dont la puissance fantasmatique est immense chez les économistes, met sur la voie d’une autre catégorie canguilhemienne, qui permet peut-être de donner sa qualification la plus précise à la situation épistémologique de l’économie : il s’agit de la catégorie « d’idéologie scientifique » … La catégorie d’idéologie scientifique est d’abord purement interne au registre de l’histoire et de la philosophie des sciences, et désigne «l’ambition explicite d’être science à l’imitation de quelque modèle de science déjà constituée (…) L’idéologie scientifique (…) est une croyance qui louche du côté d’une science déjà instituée, dont elle reconnaît le prestige et dont elle cherche à imiter le style.»

Cette formidable intuition conceptuelle est d’ailleurs presque en dessous de la vérité s’agissant des économistes standard, dont bon nombre ne se contentent pas de se croire des physiciens de l’économie, mais croient bien sincèrement y voir plus droit que la science sur laquelle ils louchent – après tout, la théorie économique n’est-elle pas parfaitement unifiée et ne saisit-elle pas dans son modèle unique aussi bien les marchés de produits dérivés de Chicago, les comportements productifs des agriculteurs subsahariens ou bien l’économie des comportements criminels et addictifs, là où la physique, la pauvrette, peine encore à unifier mécanique quantique et relativité générale.

Au-delà même de ce que Georges Canguilhem avait imaginé, l’économie ne fait donc pas que bigler : elle y ajoute le délire. Or, sans vouloir trop jouer de la paronymie, c’est dans le désir, ou dans un certain désordre du désir, qu’il faut chercher l’origine du délire — en l’occurrence dans le désir caractéristique d’une idéologie scientifique : le désir de faire science. On comprend dans le cas de l’économie qu’il ait mal tourné — en fait à proportion de ce qu’il a été excité. Car l’économie a été soumise comme aucune autre science sociale au démon de la tentation galiléenne : n’est-elle pas par excellence science social du quantitatif et science des rapports sociaux nombrés ? C’est du fait d’être fondamentalement monétaire que l’économie tient d’avoir un substrat immédiatement quantifiable. Aussi s’est-elle laissé aller à croire que la quantité épuisait l’être économique pour en conclure plus vite que son domaine de faits était légalisable en principe, c’est-à-dire que les nombres de l’économie pouvaient être saisis dans la structure universelle de leurs rapports fonctionnels — alias les « lois de l’économie » : s’il y a du quantifiable, il y a du mathématisable, et s’il y a du mathématisable, il y a du légalisable, tel a été le fantasme galiléen de la science économique.

Frédéric Lordon

Richard Thaler et les fausses mouches imprimées

26 November, 2017 at 09:16 | Posted in Economics | 2 Comments

urinal fly Richard Thaler … part de l’idée que si les individus sont incapables pour tout un tas de «biais cognitifs» et culturels de prendre les meilleures décisions, il faut les y aider en les accompagnant dans leurs choix de «tous les jours». D’où son idée d’imposer aux individus des décisions tout en leur faisant croire qu’ils conservent leur pleine liberté de choix. Son application la plus connue citée dans l’ouvrage est celle des fausses mouches imprimées, au début des années 2000, dans les urinoirs de l’aéroport d’Amsterdam afin d’inciter ses usagers à viser juste de manière à réduire les dépenses de nettoyage. Et elles le furent de 80% ! Ces techniques de «paternalisme libertaire» ont alors été appliquées dans les pays anglo-saxons avec la création d’une «Nudge Squad» en 2009 par l’administration Obama suivie d’une «Nudge Unit» en 2010 en Angleterre par le Premier ministre David Cameron, sous la houlette de Richard Thaler.

Thaler explique par exemple que lorsque Barack Obama a mis en place un coup de pouce fiscal aux contribuables afin d’inciter les ménages à consommer après la crise de 2008, il avait le choix entre verser une prime de 1 200 dollars une seule fois dans l’année ou l’étaler, à raison de 100 dollars par mois. «Dans un monde d’Econs [d’individus rationnels, ndlr], ce choix serait sans importance. Mais si l’on considère que les contribuables de la classe moyenne dépensent déjà tout leur salaire chaque mois, en leur versant une seule fois par an cette prime, ils seront plus enclins à l’épargner ou à s’en servir pour payer leurs dettes. Comme l’objectif de cette réduction d’impôt était destiné à stimuler la dépense, l’administration a fait un choix judicieux en optant pour son étalement» …

Richard Thaler donnait un autre exemple par l’absurde de la manière dont nous devrions nous comporter si nous étions tous, comme le croient encore bon nombre d’économistes, «des Econs, ces êtres très intelligents capables de se livrer en toutes circonstances aux calculs les plus complexes mais totalement dénués d’affects». «Un Econ, écrit-il, ne s’attendrait pas par exemple à recevoir un cadeau le jour de son anniversaire. Quel intérêt à célébrer cette date arbitraire ? Un Econs serait même perplexe à l’idée de recevoir un cadeau et à choisir, il préférerait recevoir directement du cash car c’est ce qui permettra de satisfaire le mieux ce qui est optimal pour lui. Mais à moins que vous ne soyez marié à un(e) économiste, je ne vous conseille pas de vous contenter de faire un virement à votre conjoint(e) le jour de son anniversaire.» Et pour Richard Thaler, bien que les économistes savent très bien que personne ne se comporte de cette manière dans la vraie vie, cela ne les a pas empêchés de pondre des tonnes de théories basées sur ce type de raisonnements pendant des décennies.

Christophe Alix

Honour him

25 November, 2017 at 19:47 | Posted in Varia | Leave a comment

 

Swedish housing bubble soon to burst

25 November, 2017 at 14:59 | Posted in Economics | 4 Comments

High and rising household indebtedness poses the greatest risk to the Swedish economy. Household indebtedness has been increasing in Sweden since the mid- 1990s. Home ownership financed by high levels of mortgage debt with variable interest rates makes households vulnerable to falling house prices and increasing interest rates …

swedish-household-debt-as-perc-of-disp-income-to-2013In the present Economic Commentary, we extend the earlier analysis by using updated data covering the period up to September 2017 … Our main findings can be summarised as follows:

1. Household debt continues to increase faster than income. The average DTI ratio increased from 326 per cent in September 2016 to 338 per cent in September 2017.
2. More households have high debts relative to their income. In 2017, 260 000 households had a DTI ratio exceeding 600 per cent. This is an increase of 27 000 households compared to 2016.
3. Household indebtedness is increasing for all income groups and age groups.

Sveriges Riksbank

House prices are increasing fast in EU. And more so in Sweden than in any other member state. Sweden’s house price boom started in mid-1990s, and looking at the development of real house prices during the last three decades there are reasons to be deeply worried. As even The Riksbank now admits, the indebtedness of the Swedish household sector has risen to alarmingly high levels.

Yours truly has been trying to argue with ‘very serious people’ that it’s really high time to ‘take away the punch bowl.’ Mostly I have felt like the voice of one calling in the desert.

Housing-bubble-markets-flatten-a-bit-530

The Swedish housing market is living on borrowed time. It’s really high time to take away the punch bowl. What is especially worrying is that although the aggregate net asset position of the Swedish households is still on the solid side, an increasing proportion of those assets is illiquid. When the inevitable drop in house prices hits the banking sector and the rest of the economy, the consequences will be enormous.

It hurts when bubbles burst …

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