It’s high time to bury Milton Friedman’s natural rate hypotheis

31 January, 2018 at 17:23 | Posted in Economics | 1 Comment

Fifty years ago Milton Friedman wrote an (in)famous article arguing that (1) the natural rate of unemployment was independent of monetary policy and that (2) trying to keep the unemployment rate below the natural rate would only give rise to higher and higher inflation.

The hypothesis has always been controversial, and much theoretical and empirical work has questioned the real-world relevance of the ideas that unemployment really is independent of monetary policy and that there is no long-run trade-off between inflation and unemployment.

In the latest issue of Journal of Economic Perspectives there are three articles — by Greg Mankiw/Ricardo Reis, Robert Hall/Tom Sargent, and Olivier Blanchard — on Friedman’s natural rate hypothesis.

The first two articles are of the nowadays common Chicago-New Keynesian mumbo jumbo ilk and will not be further commented on here.

Although Blanchard has his doubts — after having played around with a ‘toy model’ and looked at the data — he lands on the following advice:

iwf-chefvolkswirt-olivierWhere does this leave us? It would be good to have a sense of … the specific channels at work. The empirical part of this paper has shown that we are still far from it. Thus, the general advice must be that central banks should keep the natural rate hypothesis (extended to mean positive but low values of b and a) as their baseline, but keep an open mind and put some weight on the alternatives. For example, given the evidence on labor force participation and on the stickiness of inflation expectations presented earlier, I believe that there is a strong case, although not an overwhelming case, to allow U.S. output to exceed potential for some time, so as to reintegrate some of the workers who left the labor force during the last ten years.

My own view on the subject is that the natural rate hypothesis does not hold water simply because the relations it describes have never actually existed.

The only thing that amazes yours truly is that although this is pretty ‘common knowledge,’  so-called ‘New Keynesian’ macroeconomists still today use it — and its cousin the Phillips curve — as a fundamental building block in their models. Why? Because without it ‘New Keynesians’ have to give up their (again and again empirically falsified) neoclassical view of the long-run neutrality of money and the simplistic idea of inflation as an excess-demand phenomenon.

The natural rate hypothesis approach (NRH) is not only of theoretical interest. Far from it.

The real damage done is that policymakers that take decisions based on NRH models systematically implement austerity measures and kill off economic expansion. The unnecessary and costly unemployment that this self-inflicted and flawed illusion eventuates, is something its New Classical and ‘New Keynesian’ advocates should always be kept accountable for.

 74-7495-LTNQ100ZIf the [NRH] and rational expectations are both true simultaneously, a plot of decade averages of inflation against unemployment should reveal a vertical line at the natural rate of unemployment … This prediction fails dramatically.

There is no tendency for the points to lie around a vertical line and, if anything, the long-run Phillips is upward sloping, and closer to being horizontal than vertical. Since it is unlikely that expectations are systematically biased over decades, I conclude that the  [NRH] is false …

Roger Farmer

It is definitely time to bury the natural rate hypothesis!

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Trump’s bogus claims on the economy

31 January, 2018 at 10:07 | Posted in Politics & Society | 1 Comment

 

Stat och politiker har svikit landets alla skolelever

30 January, 2018 at 19:53 | Posted in Education & School | 1 Comment

Sedan länge är det känt och påtalat att många av de utbildningar som bedrivs vid landets högskolor och universitet idag har en mager kost att leva på. Resultatet blir därefter – få lärarledda föreläsningar i rekordstora studentgrupper.

130608_okx6abTill detta kommer explosionen av nya studentgrupper som går vidare till universitetsstudier. Detta är på ett sätt klart glädjande. Idag har vi lika många doktorander i vårt utbildningssystem som vi hade gymnasister på 1950-talet! Men denna utbildningsexpansion har tyvärr i mycket skett till priset av försämrade möjligheter för studenterna att tillgodogöra sig högskoleutbildningens kompetenskrav. Många har fallit till föga och sänkt kraven.

Tyvärr är de studenter vi får till universitet och högskolor över lag allt sämre rustade för sina studier. Omstruktureringen av skolan i form av decentralisering, avreglering och målstyrning har tvärtemot politiska utfästelser inte levererat. Den pålagda professionaliseringen av lärarkåren har snarare resulterat i deprofessionalisering i takt med att resurser minskat och uppgifter och ansvarsområden ökat.

I takt med den eftergymnasiala utbildningsexpansionen har en motsvarande kunskapskontraktion hos stora studentgrupper ägt rum. Den skolpolitik som lett till denna situation slår hårdast mot dem den utger sig för att värna – de med litet eller inget ”kulturkapital” i bagaget hemifrån.

Kanske är de här trenderna och problemen speciellt tydliga inom den del av vårt universitets- och högskoleväsende som ägnar sig åt lärarutbildning.

Lärarstudenter rekryteras i dag i allt större utsträckning från studieovana hem. Lärarstudenters betyg och resultat på högskoleprov har också minskat under en längre tid. Samtidigt som rekryteringen av lärarstudenter med höga studieresultat således försvårats, har det i allt högre grad ställts krav på lärarutbildningens akademiska nivå. Hur vi med knappare resursramar ska kunna lösa dilemmat med högre krav på meritmässigt allt mer svagpresterande studenter är svårt att se.

Enligt Högskoleverkets egen statistik har lärarprogrammen genomgående lågt söktryck med i genomsnitt knappt över en sökande per plats, vilket självklart återspeglas i betygskraven. Detta innebär också att studenter med högre betyg saknar utmaningar och söker sig till andra utbildningar.

Lärarnas relativlöner har minskat under en längre tid. För 50 år sedan tjänade en folkskollärare i genomsnitt nästan lika mycket som en ingenjör. Idag är en grundskolelärarlön i snitt 65 procent av en civilingenjörslön. För 50 år sedan tjänade en läroverkslärare i genomsnitt 35 procent mer än en ingenjör. Idag är en gymnasielärarlön i snitt 75 procent av en civilingenjörslön.

Den allmänna lärarlönenivån måste öka. Men detta är bara möjligt om kommunernas kamrerarattityd till skolan blir ett minne blott och staten också är beredd att satsa på det som på sikt ger högre tillväxt och välfärd i ett kunskapssamhälle – kunskap! Ingen kan ta del av modern utbildningspolitisk forskning utan att inse hur huvudlös de senaste decenniernas skolpolitik varit när det gäller dessa fundamenta. Skolans problem går i grunden inte att lösa utan att höja lärares relativlöner och ge dem drägliga arbetsvillkor. Detta är inte möjligt att uppnå med kommunalt huvudmannaskap. Historien förskräcker.

Egentligen är det märkligt att lärarlönetappet ohämmat fått fortgå så länge. Få åtgärder torde ha större långsiktig avkastning än att satsa på att få duktiga lärare som kan förmedla kunskaper till nästkommande generationer.

Här har vi så klart också ett av huvudskälen till de problem som svensk skola brottas med i dag. Varför skulle högpresterande studenter annat än undantagsvis välja att söka sig till en utbildning som leder in i ett yrke som idag kännetecknas av låg lön och avsaknad av all prestige och status? Före kommunaliseringen av skolan skulle man kanske kunna hävda att lärares arbetsvillkor delvis kunde kompensera för dessa brister. Men nu när fyra av tio yrkesverksamma lärare på grund av låga löner och bristande arbetsvillkor överväger att byta till arbete utanför skolan, finns inga sådana motverkande kompensationer.

I detta läge behövs rejäla mediciner. Och då räcker tyvärr inte – i och för sig vällovliga — åtgärder som införande av lärarlegitimering och fler gymnasielektorer. Anledningen är helt enkelt att dessa åtgärder inte berör de fundamentala problem som jag här har berört.

Låt oss tala och tala tydligt! Det vi idag kan se av kommunaliseringens och friskolornas konsekvenser borde leda till krav på att staten tar ett större ansvar för svensk skola. Om förstatligande är svårt att svälja, borde man åtminstone kunna återgå till det system av öronmärkta statliga pengar till skolan som fanns fram till år 1993. Och ge lärare bättre lön och arbetsvillkor så kommer också bättre studenter att söka sig till lärarutbildningarna. Först då kan vi få en skola som är bäst i klassen.

Kjell-Olof Feldts och finansdepartementets ekonomistiska perspektiv var tillsammans med Ingvar Carlssons och Göran Perssons vision om en kommunaliserad skola med om att på 1980-talet driva fram ett beslut som flera socialdemokrater idag erkänner har resulterat i att en lång svensk tradition inom arbetarrörelsen kring skapande av en likvärdig skola idag fullständigt kapsejsat.

Om jag inte missminner mig var det en viss finansminister som satt i riksdagen för trettiofem år sedan och rimmade på temat ”ett jävla skit” som man ”baxat ända hit”. Samma sak kan sägas om kommunaliseringen av svensk skola. Det är dags att sätta stopp nu. Den kommunaliserade skolan har baxat färdigt!

The problem with charter schools? They don’t work!

30 January, 2018 at 16:58 | Posted in Education & School | Comments Off on The problem with charter schools? They don’t work!

 

Trump’s Nixon Moment getting closer

30 January, 2018 at 13:33 | Posted in Politics & Society | Comments Off on Trump’s Nixon Moment getting closer

 

What is (wrong with) neoclassical economics?

30 January, 2018 at 10:30 | Posted in Economics | 1 Comment

If you want to know what is “neoclassical economics” and turn to Wikipedia you are told that

neoclassical-economicsneoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory.

The basic problem with this definition of neoclassical economics — arguing that  the differentia specifica of neoclassical economics is its use of demand and supply, utility maximization and rational choice — is that it doesn’t get things quite right. As we all know, there is an endless list of mainstream models that more or less distance themselves from one or the other of these characteristics. So the heart of neoclassical economic theory lies elsewhere.

The essence of neoclassical economic theory is its almost exclusive use of a deductivist methodology. A methodology that is more or less used without a smack of argument to justify its relevance.

The theories and models that neoclassical economists construct describe imaginary worlds using a combination of formal sign systems such as mathematics and ordinary language. The descriptions made are extremely thin and to a large degree disconnected to the specific contexts of the targeted system than one (usually) wants to (partially) represent. This is not by chance. These closed formalistic-mathematical theories and models are constructed for the purpose of being able to deliver purportedly rigorous deductions that may somehow by be exportable to the target system. By analyzing a few causal factors in their “laboratories” they hope they can perform “thought experiments” and observe how these factors operate on their own and without impediments or confounders.

Unfortunately, this is not so. The reason for this is that economic causes never act in a socio-economic vacuum. Causes have to be set in a contextual structure to be able to operate. This structure has to take some form or other, but instead of incorporating structures that are true to the target system, the settings made in economic models are rather based on formalistic mathematical tractability. In the models they appear as unrealistic assumptions, usually playing a decisive role in getting the deductive machinery deliver “precise” and “rigorous” results. This, of course, makes exporting to real world target systems problematic, since these models – as part of a deductivist covering-law tradition in economics – are thought to deliver general and far-reaching conclusions that are externally valid. But how can we be sure the lessons learned in these theories and models have external validity, when based on highly specific unrealistic assumptions? As a rule, the more specific and concrete the structures, the less generalizable the results. Admitting that we in principle can move from (partial) falsehoods in theories and models to truth in real world target systems does not take us very far, unless a thorough explication of the relation between theory, model and the real world target system is made. If models assume 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. To have a deductive warrant for things happening in a closed model is no guarantee for them being preserved when applied to an open real world target system.

Henry Louis Mencken once wrote that “there is always an easy solution to every human problem – neat, plausible and wrong.” And neoclassical economics has indeed been wrong. Its main result, so far, has been to demonstrate the futility of trying to build a satisfactory bridge between formalistic-axiomatic deductivist models and real world target systems. Assuming, for example, perfect knowledge, instant market clearing and approximating aggregate behaviour with unrealistically heroic assumptions of representative actors, just will not do. The assumptions made, surreptitiously eliminate the very phenomena we want to study: uncertainty, disequilibrium, structural instability and problems of aggregation and coordination between different individuals and groups.

The punch line is that most of the problems that neoclassical economics is wrestling with, issues from its attempts at formalistic modeling per se of social phenomena. Reducing microeconomics to refinements of hyper-rational Bayesian deductivist models is not a viable way forward. It will only sentence to irrelevance the most interesting real world economic problems. And as someone has so wisely remarked, murder is unfortunately the only way to reduce biology to chemistry – reducing macroeconomics to Walrasian general equilibrium microeconomics basically means committing the same crime.

If scientific progress in economics – as Robert Lucas and other latter days neoclassical economists seem to think – lies in our ability to tell “better and better stories” without considering the realm of imagination and ideas a retreat from real world target systems reality, one would of course think our economics journal being filled with articles supporting the stories with empirical evidence. However, I would argue that the journals still show a striking and embarrassing paucity of empirical studies that (try to) substantiate these theoretical claims. Equally amazing is how little one has to say about the relationship between the model and real world target systems. It is as though thinking explicit discussion, argumentation and justification on the subject not required. Neoclassical economic theory is obviously navigating in dire straits.

If the ultimate criteria of success of a deductivist system is to what extent it predicts and coheres with (parts of) reality, modern neoclassical economics seems to be a hopeless misallocation of scientific resources. To focus scientific endeavours on proving things in models, is a gross misapprehension of what an economic theory ought to be about. Deductivist models and methods disconnected from reality are not relevant to predict, explain or understand real world economic target systems. These systems do not conform to the restricted closed-system structure the neoclassical modeling strategy presupposes.

Neoclassical economic theory still today consists mainly in investigating economic models. It has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in neoclassical economic theory, where models largely function as substitutes for empirical evidence.

What is wrong with neoclassical economics is not that it employs models per se, but that it employs poor models. They are poor because they do not bridge to the real world target system in which we live. Hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on mathematical deductivist modeling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

Minimum wage à la Germany

30 January, 2018 at 09:16 | Posted in Economics | Comments Off on Minimum wage à la Germany

Trotz der auch im Jahr 2016 noch anhaltenden deutlichen Lohnsteigerungen im Niedriglohnbereich gibt es nach wie vor ein Problem mit weitverbreiteten Umgehungen des gesetzlichen Mindestlohns. Werden bei der Stundenlohn-Berechnung die vertragliche Arbeitszeit und bezahlte Überstunden des Vormonats zugrunde gelegt, erhalten 9,8% der Beschäftigten den Mindestlohn nicht, obwohl sie einen Anspruch darauf hätten. In absoluten Zahlen entspricht dies 2,7 Mio. abhängig Beschäftigten …

deutschland-hat-den-mindestlohn-dran-bleibenBesonders häufig wird der Mindestlohn im Hotel- und Gaststättengewerbe nicht eingehalten, wo ca. 38% der (anspruchsberechtigten) Beschäftigten nicht den Mindestlohn erhalten, gefolgt vom Einzelhandel mit ca. 20% Mindestlohn-Umgehungen (Abb. 2). Auch ca. 43% der Beschäftigten in privaten Haushalten (bspw. Minijobs für die Haushaltsführung oder zum Babysitting) bleibt der Mindestlohn verwehrt. Hier dürfte die Einhaltung des Mindestlohns mit am schwierigsten zu kontrollieren sein. Allerdings sind Mindestlohn-Umgehungen nicht auf den Dienstleistungssektor beschränkt. So ist die Quote z. B. in der Nahrungsmittelindustrie mit ca. 17% überdurchschnittlich hoch. Auch in der überwiegend durch Tarifbindung geprägten metallverarbeitenden Industrie erhalten ca. 7% der Beschäftigten nicht den Mindestlohn, der ihnen per Gesetz zusteht.

Toralf Pusch/WSI

Truth and knowledge

28 January, 2018 at 11:50 | Posted in Varia | 1 Comment

minima-moralia_341121The relation of knowledge to power is one not only of servility but of truth. Much knowledge, if out of pro­portion to the disposition of forces, is invalid, however formally correct it may be.If an émigré doctor says: ‘For me … is a patological case’, his pronouncement may ultimately be con­firmed by clinical findings, but its incongruity with the objective calamity visited on the world in the name of that paranoiac renders the diagnosis ridiculous, mere professional preening. Perhaps … is ‘in-himself’ a pathological case, but certainly not ‘for-him’. The vanity and poverty of many of the declarations against … by émigrés is connected with this. People thinking in the forms of free, detached, disinterested appraisal were unable to accommodate with­ in those forms the experience of violence which in reality annuls such thinking. The almost insoluble task is to let neither the power of others, nor our own powerlessness, stupefy us.

Why are women paid less than men?

28 January, 2018 at 00:22 | Posted in Economics | Comments Off on Why are women paid less than men?

 

On probabilism and statistics

27 January, 2018 at 16:51 | Posted in Statistics & Econometrics | 1 Comment

‘Mr Brown has exactly two children. At least one of them is a boy. What is the probability that the other is a girl?’ What could be simpler than that? After all, the other child either is or is not a girl. I regularly use this example on the statistics courses I give to life scientists working in the pharmaceutical industry. They all agree that the probability is one-half.

dicing-with-death-chance-risk-and-healthSo they are all wrong. I haven’t said that the older child is a boy. The child I mentioned, the boy, could be the older or the younger child. This means that Mr Brown can have one of three possible combinations of two children: both boys, elder boy and younger girl, elder girl and younger boy, the fourth combination of two girls being excluded by what I have stated. But of the three combinations, in two cases the other child is a girl so that the requisite probability is 2/3 …

This example is typical of many simple paradoxes in probability: the answer is easy to explain but nobody believes the explanation. However, the solution I have given is correct.

Or is it? That was spoken like a probabilist. A probabilist is a sort of mathematician. He or she deals with artificial examples and logical connections but feel no obligation to say anything about the real world. My demonstration, however, relied on the assumption that the three combinations boy–boy, boy–girl and girl–boy are equally likely and this may not be true. The difference between a statistician and a probabilist is that the latter will define the problem so that this is true, whereas the former will consider whether it is true and obtain data to test its truth.

Statistical reasoning certainly seems paradoxical to most people.

Take for example the well-known Simpson’s paradox.

From a theoretical perspective, Simpson’s paradox importantly shows that causality can never be reduced to a question of statistics or probabilities, unless you are — miraculously — able to keep constant all other factors that influence the probability of the outcome studied.

To understand causality we always have to relate it to a specific causal structure. Statistical correlations are never enough. No structure, no causality.

Simpson’s paradox is an interesting paradox in itself, but it can also highlight a deficiency in the traditional econometric approach towards causality. Say you have 1000 observations on men and an equal amount of  observations on women applying for admission to university studies, and that 70% of men are admitted, but only 30% of women. Running a logistic regression to find out the odds ratios (and probabilities) for men and women on admission, females seem to be in a less favourable position (‘discriminated’ against) compared to males (male odds are 2.33, female odds are 0.43, giving an odds ratio of 5.44). But once we find out that males and females apply to different departments we may well get a Simpson’s paradox result where males turn out to be ‘discriminated’ against (say 800 male apply for economics studies (680 admitted) and 200 for physics studies (20 admitted), and 100 female apply for economics studies (90 admitted) and 900 for physics studies (210 admitted) — giving odds ratios of 0.62 and 0.37).

Econometric patterns should never be seen as anything else than possible clues to follow. From a critical realist perspective it is obvious that behind observable data there are real structures and mechanisms operating, things that are  — if we really want to understand, explain and (possibly) predict things in the real world — more important to get hold of than to simply correlate and regress observable variables.

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

Paul Romer

Purple rain

26 January, 2018 at 17:46 | Posted in Varia | Comments Off on Purple rain

 

English for beginners

26 January, 2018 at 17:04 | Posted in Varia | 3 Comments

 

A night at the Roxbury

26 January, 2018 at 16:48 | Posted in Varia | Comments Off on A night at the Roxbury

 

Jordan Peterson lecturing an incompetent journalist on gender inequality

26 January, 2018 at 06:56 | Posted in Politics & Society | Comments Off on Jordan Peterson lecturing an incompetent journalist on gender inequality

When discussing things it is definitely good to know what you are talking about. A good rule that certainly also applies to journalists …
 

Paul Romer leaves the World Bank

25 January, 2018 at 11:00 | Posted in Economics | 1 Comment

Outspoken chief economist Paul Romer is leaving the World Bank “effective immediately” after just 15 months on the job, the bank’s president told staff on Wednesday in an internal announcement seen by the Financial Times.

aaa-paul-romerworld-bankMr Romer, one of the US’s most celebrated economists, had been engaged in a running battle with staff economists at the bank almost since his high-profile arrival in October 2016. Areas of dispute have included everything from Mr Romer’s diktats on grammar and brevity in reports to serious questions about methodology …

In a message to staff sent on Wednesday, Jim Yong Kim, the World Bank’s president, said Mr Romer had told him he had decided to step down and return to his position as a professor at New York University.

Financial Times

Romer is one of the pioneers of endogenous growth theory and has for years now been mentioned in discussions of possible candidates for the ‘Nobel Prize’ in economics.

After having delivered the following attack against mainstream economics establishment, his chances of receiving that price, however, hasn’t exactly increased …

A key part of the solution to the identification problem that Lucas and Sargent (1979) seemed to offer was that mathematical deduction could pin down some parameters in a simultaneous system. But solving the identification problem means feeding facts with truth values that can be assessed, yet math cannot establish the truth value of a fact. Never has. Never will.

blah_blahIn practice, what math does is let macroeconomists locate the FWUTVs [facts with unknown truth values] farther away from the discussion of identification … Relying on a micro-foundation lets an author say, “Assume A, assume B, …  blah blah blah …. And so we have proven that P is true. Then the model is identified.” …

Distributional assumptions about error terms are a good place to bury things because hardly anyone pays attention to them. Moreover, if a critic does see that this is the identifying assumption, how can she win an argument about the true expected value the level of aether? If the author can make up an imaginary variable, “because I say so” seems like a pretty convincing answer to any question about its properties.

Paul Romer

Getting inflation wrong

25 January, 2018 at 09:32 | Posted in Politics & Society | 1 Comment

Jerome H. Powell sailed to Senate confirmation on Tuesday to become the 16th chairman of the Federal Reserve with a final vote of 84 to 13 …

8rpnglThe bipartisan support for Mr. Powell was a sharp break from another Fed hearing earlier on Tuesday, when Mr. Brown and other Democrats questioned the qualifications of Marvin Goodfriend, a conservative economist nominated by Mr. Trump for a seat on the Fed’s board.

Mr. Goodfriend repeatedly predicted after the 2008 financial crisis that the Fed’s actions were about to unleash higher inflation. That did not happen. Inflation has consistently remained below 2 percent.

At a confirmation hearing Tuesday, Mr. Goodfriend was flustered by questions about his predictions. He conceded that some had been wrong, but defended others and declined to explain his thinking.

Senator Elizabeth Warren, Democrat of Massachusetts, said, “I think based on the kind of judgment you have demonstrated, American families are very lucky that you weren’t on the Fed board over the last several years.”

Binyamin Appelbaum/NYT

Branko Milanovic and the hypocrites of the World Economic Forum

25 January, 2018 at 00:13 | Posted in Politics & Society | Comments Off on Branko Milanovic and the hypocrites of the World Economic Forum

Thousands of people will gather next week in Davos. Their combined wealth will reach several hundred billion dollars, perhaps even close to a trillion. Never in world history will be the amount of wealth per square foot so high. And this year, for the sixth or seventh consecutive time, what would be one of the principal topics addressed by these captains of industry, billionaires, employers of thousands of people across the four corners of the globe: inequality…

quote-the-only-vice-that-cannot-be-forgiven-is-hypocrisy-the-repentance-of-a-hypocrite-is-itself-william-hazlitt-81795Only in passing, and probably on the margins of the official program, will they get into the tremendous monopoly and monopsony power of their companies, ability to play one jurisdiction against another in order to avoid taxes, how to ban organized labor in their companies, how to use government ambulance services to carry workers who have fainted from extra heat (to save expense of air conditioning), how to make their workforce complement its wage through private charity donations, or perhaps how to pay the average tax rate between 0 and 12% …

Still poverty and inequality which are, as we know, the defining issues of our time will be permanently on their minds.

It is just that somehow they never succeeded to find enough money, or time, or perhaps willing lobbyists to help with the policies they will all agree, during the official sessions, should be done: to increase taxes on the top 1% and on large inheritances, to provide decent wages or not to impound salaries, to reduce gaps between CEO and average pay, to spend more money on public education …

They are loath to pay a living wage, but they will fund a philharmonic orchestra. They will ban unions, but they will organize a workshop on transparency in government.

So in a year, they will be back in Davos and perhaps a new record in dollar wealth per square foot will be achieved, but the topics, in the conference halls and on the margins, will be again the same. And it will go on like this … until it does not.

Branko Milanovic

Wren-Lewis on internal consistency

24 January, 2018 at 19:31 | Posted in Economics | 4 Comments

The example is the derivation of a benevolent policy maker’s preferences from the utility function of the representative consumer assumed as part of the model, a line of research initiated by Michael Woodford.

-consistency-36616Before getting on to the values point, let me note that it is a good example of the primacy of internal consistency in microfoundations rather than the Lucas critique. Before Woodford’s work, microfoundations macroeconomists were embarrassed that they typically assumed an ad hoc objective function for the policy maker choosing between the bads of deviations in inflation from target or deviations of output from its natural rate. Typically, results were presented with alternative values for the policy maker’s preferences between the two. But if the policy maker was benevolent and the model is internally consistent, shouldn’t this objective function reflect the utility function of the representative consumer in the model? What Woodford showed was how this could be done, and better still how it implied the form of objective function, quadratic, that had previously been used on an ad hoc basis. The preference between output and inflation deviations was now an implication of the model.

It was, it is important to admit, an exciting breakthrough. We could now tell policymakers that, if this is the utility function of the representative consumer, and the model was a good representation of reality (yes, I know), this is how you should be trading off output and inflation losses. It was a literature I participated in with colleagues. The derivations were hard and tedious to do, and could take pages of algebra, but within a year every macro paper of this kind had switched from ad hoc objective functions to derived objective functions. If you were doing macro and wanted the paper published in a good journal, this is what you had to do.

Simon Wren-Lewis

Wooh. We’ve put a lot of work and time into modelling this in an internally consistent way into our macromodels, so it sure has to be an exciting and interesting breakthrough …

I’ll be dipped!

This is, of course, basically a question of methodology. And it shows the danger of neglecting methodological issues — issues mainstream economists regularly have almost put an honour in neglecting.

Being able to model a credible world, a world that somehow could be considered somehow ‘similar’ to the real world is not the same as investigating the real world.  The minimalist demand on models in terms of ‘credibility’ and ‘consistency’ has to give away to stronger epistemic demands. Claims in a ‘consistent’ model do not per se give a warrant for exporting the claims to real-world target systems.

Questions of external validity are important more specifically also when it comes to microfounded macromodels. It can never be enough that these models somehow are regarded as internally consistent. One always also has to pose questions of consistency with the data. Internal consistency without external validity is worth nothing.

Yours truly and people like Tony Lawson have for many years been urging economists to pay attention to the ontological foundations of their assumptions and models. Sad to say, economists have not paid much attention — and so modern economics has become increasingly irrelevant to the understanding of the real world.

Within mainstream economics — to which Wren-Lewis and his New Keynesian ‘consistent’ macromodelling certainly belong — internal validity is still everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!

To have ‘consistent’ models and ‘valid’ evidence is not enough. What economics needs are real-world relevant models and sound evidence.  Aiming only for ‘consistency’ and ‘validity’ is setting the economics aspirations level too low for developing a realist and relevant science.

Economics is not mathematics or logic. It’s about society. The real world. Forgetting that, economics is really in dire straits.

9781138851023 Economic models often comprise not single, but sets of, equations, each of which is notoriously found to have little relation to what happens in the real world. One question that nevertheless keeps economists occupied with such unrealistic models is whether the equations formulated are mutually consistent in the sense that there ‘exists’ a vector of values of some variable, say one labelled ‘prices’, that is consistent with each and all the equations … As such the notion is not at all a claim about the world but merely a (possible) property that a set of equations may or may not be found to possess.

RBC methodology — three decades of intellectual regress

24 January, 2018 at 18:06 | Posted in Economics | Comments Off on RBC methodology — three decades of intellectual regress

Neoclassical economics is known for its illicit use of garbled language which hides and convolutes instead of explains … An interesting example is the chapter by Edward Prescott, titled ‘RBC Methodology and the Development of Aggregate Economic Theory’ (ungated version). Let’s first give the floor to him (emphasis added), mind that ‘leisure’ means ‘measured unemployment’.:

fubar1-2“What turned out to be the big breakthrough was the use of growth theory to study business cycle fluctuations … based on micro theory reasoning, dynamic economic theory was viewed as being useless in understanding business cycle fluctuations. This view arose because, cyclically, leisure and consumption moved in opposite directions. Being that these goods are both normal goods and there is little cyclical movement in their relative price, micro reasoning leads to the conclusion that leisure should move procyclically when in fact it moves strongly countercyclically. Another fact is that labor productivity is a procyclical variable; this runs counter to the prediction of micro theory that it should be countercyclical, given the aggregate labor input to production. Micro reasoning leads to the incorrect conclusion that these aggregate observations violated the law of diminishing returns. In order to use growth theory to study business cycle fluctuations, the investment-consumption decision and the labor-leisure decision must be endogenized. Kydland and Prescott (1982) introduced an aggregate household to accomplish this. We restricted attention to the household utility function for which the model economies had a balanced growth path, and this balanced growth path displayed the growth facts. With this extension, growth theory and business cycle theory were integrated. It turned out that the predictions of dynamic aggregate theory were consistent with the business cycle facts that ran counter to the conclusion of those using microeconomic reasoning”

Translation: “Depressions are caused because people want to work less. Yes, we measure unemployment and it goes up when spending declines. But by assuming a ‘balanced growth path’ we define this away: the growth path is by assumption balanced so no unemployment exists and what we measure is leisure, not unemployment. People (sorry, ‘the representative consumer’) sometimes suddenly want to work a lot less, hence 25% unemployment (sorry, leisure) in countries like Greece and Spain and during the Great Depression in the USA. Hey, problem solved (and f*** the statistics)!”

Merijn Knibbe

Identitätspolitik– eine Analyse

23 January, 2018 at 16:48 | Posted in Politics & Society | Comments Off on Identitätspolitik– eine Analyse

 

New Keynesian ‘tweaking’ won’t do the job

22 January, 2018 at 19:44 | Posted in Economics | 5 Comments

Whereas the Great Depression of the 1930s produced Keynesian economics, and the stagflation of the 1970s produced Milton Friedman’s monetarism, the Great Recession has produced no similar intellectual shift.

This is deeply depressing to young students of economics, who hoped for a suitably challenging response from the profession. Why has there been none?

tweakKrugman’s answer is typically ingenious: the old macroeconomics was, as the saying goes, “good enough for government work”  … Krugman is a New Keynesian, and his essay was intended to show that the Great Recession vindicated standard New Keynesian models. But there are serious problems with Krugman’s narrative …

The New Keynesian models did not offer a sufficient basis for maintaining Keynesian policies once the economic emergency had been overcome, they were quickly abandoned …

The problem for New Keynesian macroeconomists is that they fail to acknowledge radical uncertainty in their models, leaving them without any theory of what to do in good times in order to avoid the bad times. Their focus on nominal wage and price rigidities implies that if these factors were absent, equilibrium would readily be achieved …

Without acknowledgement of uncertainty, saltwater economics is bound to collapse into its freshwater counterpart. New Keynesian “tweaking” will create limited political space for intervention, but not nearly enough to do a proper job.

Robert Skidelsky

Skidelsky’s article shows why we all ought to be sceptic of the pretences and aspirations of ‘New Keynesian’ macroeconomics. So far it has been impossible to see that it has yielded very much in terms of realist and relevant economic knowledge. And — as if that wasn’t enough — there’s nothing new or Keynesian about it!

counterfeit‘New Keynesianism’ doesn’t have its roots in Keynes. It has its intellectual roots in Paul Samuelson’s ill-founded ‘neoclassical synthesis’ project, whereby he thought he could save the ‘classical’ view of the market economy as a (long run) self-regulating market clearing equilibrium mechanism, by adding some (short run) frictions and rigidities in the form of sticky wages and prices.

But — putting a sticky-price lipstick on the ‘classical’ pig sure won’t do. The ‘New Keynesian’ pig is still neither Keynesian nor new.

The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide that ‘New Keynesians’ cannot give supportive evidence for their considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, yours truly cannot but conclude that ‘New Keynesian’ macroeconomics, on the whole, has not delivered anything else than ‘as if’ unreal and irrelevant models.

The purported strength of New Classical and ‘New Keynesian’ macroeconomics is that they have firm anchorage in preference-based microeconomics, and especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ 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. It is as if these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world.

And then, of course, there is that weird view on unemployment that makes you wonder on which planet those ‘New Keynesians’ live …

Pornography and infidelity — moderation and mediation in SPSS

22 January, 2018 at 17:25 | Posted in Statistics & Econometrics | 1 Comment


One of the things yours truly appreciates with Andy and his book Discovering statistics using SPSS is the thought-provoking examples used …

Reward work, not wealth

22 January, 2018 at 13:37 | Posted in Economics | 2 Comments

Eighty-two​ percent of the wealth generated last year went to the richest one percent of the global population, while the 3.7 billion people who make up the poorest half of the world saw no increase in their wealth, according to a new Oxfam report released today …

170103-Inequality-graphics-862x456Billionaire wealth has risen by an annual average of 13 percent since 2010 – six times faster than the wages of ordinary workers, which have risen by a yearly average of just 2 percent. The number of billionaires rose at an unprecedented rate of one every two days between March 2016 and March 2017.

It takes just four days for a CEO from one of the top five global fashion brands to earn what a Bangladeshi garment worker will earn in her lifetime. In the US, it takes slightly over one working day for a CEO to earn what an ordinary worker makes in a year.

Oxfam

The immorality of lying

22 January, 2018 at 00:15 | Posted in Varia | 1 Comment

21924557-mmmainThe immorality of lying does not consist in the offence against sacrosanct truth​. An appeal to truth​ is scarcely a prerogative of a society which dragoons its members to own up the better to hunt them down. It ill befits universal untruth to insist on particular truth, while immediately converting it into its opposite … Nobody believes anybody, everyone is in the know. Lies are told only to convey to someone that one has no need either of him or his good opinion. The lie, once a​ liberal means of communication, has today become one of the techniques​ of insolence enabling each individual to spread around him the glacial atmosphere in whose shelter he can thrive.

Theodor Adorno

Memento

21 January, 2018 at 20:50 | Posted in Varia | 1 Comment

220px-Minima_Moralia,_German_editionA first​ precaution for writers: in every text, every piece, every paragraph to check whether the central motif stands out clearly enough. Anyone wishing to express something is so carried away by it that he ceases to reflect on it. Too close to his intention, ‘in his thoughts’, he forgets to say what he wants to say.
No improvement is too small or trivial to be worthwhile. Of a hundred alterations each may seem trifling or pedantic by itself; together they can raise the text to a new level …

The thicket is no sacred grove. There is a duty to clarify all difficulties that result merely from esoteric complacency. Between the desire for a compact style adequate to the depth of its subject matter, and the temptation to recondite and pretentious sloven­liness, there is no obvious distinction: suspicious probing is always salutary. Precisely the writer most unwilling to make concessions to drab common sense must guard against draping ideas, in them­selves banal, in the appurtenances of style …

In his text, the writer sets up house. Just as he trundles papers, books, pencils, documents untidily from room to room, he creates the same disorder in his thoughts … For a man who no longer has a homeland, writing becomes a place to live.

Trump — the worst president ever

21 January, 2018 at 11:43 | Posted in Politics & Society | 1 Comment

Mr. Trump’s first year has been an unremitting parade of disgraces that have demeaned him as well as the dignity of his office, and he has shown that this is exactly how he believes he should govern.

1e9b5y Most important, he is the first president to fail to defend the nation from an attack on our democracy by a hostile foreign power — and to resist the investigation of that attack. He is the first to enrich his private interests, and those of his family, directly and openly.

He is the first president to denounce the press not simply as unfair but as “the enemy of the American people.” He is the first to threaten his defeated political opponent with imprisonment. He is the first to have denigrated friendly countries and allies as well as a whole continent with racist vulgarities.

George Washington warned that the actions of a president “may have great and durable consequences from their having been established at the commencement of a new general government” … Mr. Trump’s first year portends a very unhappy ending.

Sean Wilentz

Online teaching hurts the weakest​ students

21 January, 2018 at 11:14 | Posted in Education & School | 1 Comment

Online-Teaching-690x350A single teacher can reach thousands of students in an online course, opening up a world of knowledge to anyone with an internet connection. This limitless reach also offers substantial benefits for school districts that need to save money, by reducing the number of teachers.

But in high schools and colleges, there is mounting evidence that the growth of online education is hurting a critical group: the less proficient students who are precisely those most in need of skilled classroom teachers.

Online courses can be broken down into several categories, and some are more effective than others.

In “blended” courses, for example, students don’t do their work only online: They also spend time in a classroom with a flesh-and-blood teacher. Research suggests that students — at nearly all levels of achievement — do just as well in these blended classes as they do in traditional classrooms. In this model, online resources supplement traditional instruction but don’t replace it.

In the fully online model, on the other hand, a student may never be in the same room with an instructor. This category is the main problem. It is where less proficient students tend to run into trouble. After all, taking a class without a teacher requires high levels of self-motivation, self-regulation and organization. Yet in high schools across the country, students who are struggling in traditional classrooms are increasingly steered into online courses.

For example, in so-called credit recovery programs, many students who have flunked a course in an old-fashioned classroom retake the class online. The negative consequences may not be obvious at first, because the pass rates in these courses are very high and students who take them tend to graduate from high school instead of flunking out. What could be wrong with that?

But there is something wrong with it. In reality, students who complete these courses tend to do quite poorly on subsequent tests of academic knowledge. This suggests that these online recovery courses often give students an easy passing grade without teaching them very much.

Susan Dynarski

Why you should​ distrust the twisted ‘identity politics’ ideology

20 January, 2018 at 22:46 | Posted in Politics & Society | Comments Off on Why you should​ distrust the twisted ‘identity politics’ ideology

 

Mainstream economics gets the priorities wrong

20 January, 2018 at 17:46 | Posted in Theory of Science & Methodology | Comments Off on Mainstream economics gets the priorities wrong

There is something about the way economists construct their models nowadays that obviously doesn’t sit right.

significance_cartoonThe one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics still has not given way to methodological pluralism based on ontological considerations (rather than formalistic tractability). In their search for model-based rigour and certainty, ‘modern’ economics has turned out to be a totally hopeless project in terms of real-world relevance

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 model-based conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged to real-world target systems, are obviously non-justifiable. Incompatibility between actual behaviour and the behaviour in macroeconomic models building on representative actors and rational expectations microfoundations shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality. As Robert Gordon once had it:

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.

Für Lennart in memoriam

19 January, 2018 at 05:16 | Posted in Varia | Comments Off on Für Lennart in memoriam

 

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