Debunking mainstream economics

31 October, 2018 at 00:38 | Posted in Economics | Comments Off on Debunking mainstream economics

Heterodoxy and pluralism in economics

30 October, 2018 at 14:39 | Posted in Economics | Comments Off on Heterodoxy and pluralism in economics

Big-vs-SmallA sense of failure is, for all intents and purposes, being translated into a context of relative success requiring more limited changes – though these are still being seen as significant. Part of the reason that they are seen as significant is that changes from within mainstream economics do not have to be major in order to appear radical. It is our contention that heterodox economics is being marginalised in this process of ‘change’ and that this is to the detriment of the positive potential for transforming the discipline …

Marginalising heterodoxy creates problems for teaching economics as a discipline in which economists constructively disagree and can be in error. This is important because it is through a conformity that suppresses a continual and diverse critical awareness that economics becomes a dangerous discourse prone to lack of realism, complacency, and dogmatism. Marginalising heterodoxy reduces the potential realisation of the different components of economics one might expect to be transformed as part of a project to transform the discipline …

Highlighting the points we have may seem like simple griping by a special interest. But there is far more involved than that. Remember we are talking about the failure of a discipline and how it is to be transformed. The marginalisation of heterodoxy has real consequences. In a general sense the marginalisation creates manifest problems that hamper teaching economics in a plural and critically aware way. For example, the marginalisation promotes a Whig history approach. It is also important to bear in mind that heterodoxy is a natural home of pluralism and of critical thinking in economics … Unlike the mainstream, heterodoxy does not have to be made compatible with pluralism and with critical thinking; it is predisposed to these and is already a resource for their development. So, marginalising heterodoxy really does narrow the base by which the discipline seeks to be renewed. That narrowing contributes to restricting the potential for good teaching in economics (including the profoundly important matter of how economists disagree and how they can be in error).

The Association for Heterodox Economics

Sommar med Dilsa

29 October, 2018 at 16:31 | Posted in Politics & Society | 3 Comments

Sommar i P1 är en ärevördig tradition i svensk radio. Redan som barn brukade yours truly tillbringa långa sommardagar med att ligga på Ribban eller vid Luhrsjön och lyssna med medhavd transistorradio.

dilsaTyvärr har programmet med åren genomgått samma utveckling som public service i stort — bra har blivit dåligt, dåligt har blivit sämre, och sämre har blivit ren skit.

Visst glimmar det till ibland. Sture Linnér, Ingmar Bergman, Ingvar Carlsson, faller mig genast i minnet. Men mest är det fullständigt intetsägande och ointressanta tyckmyckentrutade media- och idrottkändisar som oftast har just inget av vikt att säga eller förmedla.

Det är långt mellan guldklimparna. Det bästa av alla sommarprogrammen sändes år 2011, då Dilsa Demirbag-Sten delgav oss sina kloka tankar och funderingar om hur det är att vara invandrare och — inte minst — hur viktigt det är för oss människor att alltid vara öppna för förändring. Lyssna här!

Kultur, identitet, etnicitet, genus, religiositet får  aldrig accepteras som grund för intolerans i politiska och medborgerliga hänseenden. I ett modernt demokratiskt samhälle måste människor som tillhör olika grupper kunna räkna med att samhället också skyddar dem mot intoleransens övergrepp. Alla medborgare måste ha friheten och rätten att också ifrågasätta och lämna den egna gruppen. Mot dem som inte accepterar den toleransen måste vi vara intoleranta. De som med hot, tvång eller våld försöker förhindra andra människor att förverkliga sina legitima mål, har förverkat sin rätt att mötas med tolerans.

Hedersrelaterade mord, kvinnoförtryck, lemlästningar, åsiktsförtryck, barnomskärelse, kroppsstympningar m m, ska inte åtnjuta vår tolerans bara för att de eventuellt äger rum i någon speciell ”kultur” eller grupp. I ett modernt demokratiskt samhälle måste ‘rule of law’ gälla – och gälla alla!

Mot dem som i vårt samhälle vill tvinga andra att leva efter deras egna religiösa, kulturella eller ideologiska trosföreställningar och tabun, ska samhället vara intolerant. Mot dem som vill tvinga samhället att anpassa lagar och regler till den egna religionens, kulturens eller gruppens tolkningar, ska samhället vara intolerant. Mot dem som i handling är intoleranta ska vi inte vara toleranta.

I allt tal om kulturella värden bör vi aldrig förlora ur sikte den frihetens kultur, som förmår att förena respekt för individen med hävdande av en medborgargemenskap som garanterar lika rättigheter för alla. Förnuft och frihet är inget att skämmas för. Förnuft och frihet är nu och i framtiden, liksom i det förflutna, de nödvändiga hörnstenarna för varje samhällsbygge värt respekt.

P Bauhn & Dilsa Demirbag-Sten, Till frihetens försvar, Norstedts, 2010

Alone together

29 October, 2018 at 10:33 | Posted in Varia | 3 Comments

 

Equality is a great thing …

29 October, 2018 at 10:12 | Posted in Politics & Society | Comments Off on Equality is a great thing …

equality

What we see happen in the US, the UK, Germany, Sweden, and elsewhere, is deeply disturbing. The rising inequality is outrageous – not the least since it has to a large extent to do with income and wealth increasingly being concentrated in the hands of a very small and privileged elite.

Societies where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implode. The cement that keeps us together erodes and in the end we are only left with people dipped in the ice cold water of egoism and greed.

Carpe diem (personal)

28 October, 2018 at 12:55 | Posted in Economics | 1 Comment

20181028_0947011269198879.jpg

Early morning walk with Hedda on our island today.

Economic reality — a virulent virus afflicting mainstream economics

28 October, 2018 at 11:11 | Posted in Economics | Comments Off on Economic reality — a virulent virus afflicting mainstream economics

The WHO today warned of a virulent new virus affecting vulnerable groups in the Mid‐West and Eastern USA. The outbreak, which began in the Mid‐West’s extensive Great Lakes “Freshwater” river system, has recently jumped the “Saltwater” barrier, meaning that the entire population of its target species—“Mainstream” economists—is now at risk.

suzukiSpeaking on behalf of the WHO, Dr Cahuc explained that the virus works by turning off the one genetic marker that distinguishes this species from the rest of its genus, the Human Race. This is the so‐called “Milton” gene (Friedman, 1953), which goes dormant in other Humans as they pass through puberty. Its inactivity reduces their imaginative capacity, making it impossible for them to continue believing in such endearing infantile fantasies as the Tooth Fairy and Santa Claus. While regrettable, this drop in imagination is necessary to prepare Humans for the adult phase of their existence.

“Professor Milton Friedman found a way to re‐activate this gene during PhD training, using his ‘as if’ gene splicing technique”, Dr Zylberberg elaborated. “This enabled a wonderful outpouring of imaginative beliefs by Mainstream Economists, which gave birth to concepts like NAIRU, Money Neutrality, Rational Expectations, and eventually even DSGE models. This wealth of imagination was regarded by Mainstream Economists as a more than sufficient compensation for returning to the child‐like phase of the Human species.”

Steve Keen

Looking at what famous mainstream economists — like e.g. Paul Samuelson and Gerard Debreu — have come up with, there is no indication at all they produce rigorous and successful explanations or predictions of real-world phenomena. In physics, it’s all different. There one has often been able to, by the use of mathematics, to produce both rigorous and successful explanations and predictions. But then, of course, the material world is something quite different from the social world …

Mainstream economic theory today is still in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. This mathematical modelling activity is considered useful and essential. Since fully-fledged experiments on a societal scale, as a rule, are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build mathematical models and make things happen in these ‘analogue-economy models’ rather than engineering things happening in real economies.

Formalistic mathematical-deductive ‘Glasperlenspiel’ can be very impressive and seductive. But in the realm of science, it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

Mainstream economists love to depict heterodox economists’ views on the use of mathematics as coming from sadly misinformed and misguided people who dislike and do not understand much of it. This is really a gross misapprehension. We do not misunderstand the crucial issues at stake — and many of us have spent decades on using mathematics and statistics in our research and teaching.  To be careful and cautious is not the same as to dislike. Quite the contrary. We know the crucial issues all too well — and are not satisfied with the validity and philosophical underpinning of the assumptions made for applying mathematical methods in economics.

Without strong evidence, all kinds of absurd claims and nonsense may pretend to be science.  Let us not forget what Paul Romer — someone I guess not even the most outré mainstreamer would call a heterodox economist — said in his masterful attack on ‘post-real’ economics a couple of years ago:

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

We have to demand more of a justification than rather watered-down versions of ‘anything goes’ when it comes to the main postulates on which mainstream economics is founded. If one proposes ‘efficient markets’ or ‘rational expectations’ one also has to support their underlying assumptions. As a rule, none is given, which makes it rather puzzling how things like ‘efficient markets’ and ‘rational expectations’ have become the standard modelling assumption made in much of modern macroeconomics. The reason for this sad state of ‘modern’ economics is that economists often mistake mathematical beauty for truth.

So — let’s hope the reality virus will keep on infecting mainstream economics!

Digitalisierung und Grundeinkommen

28 October, 2018 at 10:36 | Posted in Politics & Society | 1 Comment

 

In Britain austerity is changing everything

27 October, 2018 at 15:39 | Posted in Economics | 1 Comment

 

Antidotes to populism

27 October, 2018 at 10:09 | Posted in Politics & Society | 1 Comment

 

Räddaren i nöden (personal)

26 October, 2018 at 17:24 | Posted in Varia | Comments Off on Räddaren i nöden (personal)

Vad är det som räddar oss när själen är på väg att uppslukas av sorg och mörker?

Poesi. Ord som verkligen betyder något. Och musik. Musik som förmår tala till vårt innersta. Musik vi kanske inte förstår — men som förstår oss.

Jag tror på den ensamma människan,
på henne som vandrar ensam,
som inte hundlikt löper till vittring,
som inte varglikt flyr för mänskovittring:
På en gång människa och anti-människa.

Hur nå gemenskap?
Fly den övre och yttre vägen:
Det som är boskap i andra är boskap också i dig.
Gå den undre och inre vägen:
Det som är botten i dig är botten också i andra.

Svårt att vänja sig vid sig själv.
Svårt att vänja sig av med sig själv.

Den som gör det skall ändå aldrig bli övergiven.
Den som gör det skall ändå alltid förbli solidarisk.
Det opraktiska är det enda praktiska
i längden.

 

The epidemic of mobile addiction

26 October, 2018 at 15:16 | Posted in Politics & Society | Comments Off on The epidemic of mobile addiction

Manfred Spitzer hat ein Buch gegen die „Smartphone-Epidemie“ geschrieben. Er sagt, dass Bilderbücher besser sind als Bildschirme …

WELT: Besitzen Sie ein Smartphone?

cell-phones-make-you-stupidSpitzer: Klar, ich verteufele es auch gar nicht, wie mir immer vorgeworfen wird. Ich weise nur auf die negativen Auswirkungen bei Kindern und Jugendlichen hin.

WELT: Zum Beispiel Kurzsichtigkeit?

Spitzer: Das Smartphone ist das digitale Endgerät mit dem kleinsten Bildschirm. Wenn Sie mit fertig entwickelten Augen täglich draufstarren, passiert Ihnen nichts. Wohl aber, wenn Sie unter 25 Jahre alt sind und ihre Augen noch wachsen. Beim häufigen Blick in die Nähe werden Sie kurzsichtig. In Südkorea, dem Land, das die meisten Smartphones weltweit produziert, besitzen 100 Prozent aller Kinder und Jugendlichen ein Smartphone. Und 95 Prozent sind kurzsichtig …

Schüler werden besser, wenn man Smartphones verbietet. Eine große britische Studie an über 130.000 Schülern belegt genau das. Insbesondere lernschwache Schüler werden besser. Anders als der Branchenverband Bitkom behauptet, führt Digitalisierung nicht zu mehr, sondern zu weniger Bildungsgerechtigkeit.

Die Welt

Wren-Lewis — the flimflam anti-pluralist

26 October, 2018 at 09:38 | Posted in Economics | 4 Comments

Again and again, Oxford professor Simon Wren-Lewis rides out to defend orthodox macroeconomic theory against attacks from heterodox critics. In one of his latest attacks on heterodox economics and students demanding pluralist economics education he writes:

mainstreampluralismThe danger in encouraging plurality is that you make it much easier for politicians to select the advice they like, because there is almost certain to be a school of thought that gives the ‘right’ answers from the politicians point of view. The point is obvious once you make the comparison to medicine. Don’t like the idea of vaccination? Pick an expert from the anti-vaccination medical school. The lesson of the last seven years, in the UK in particular, is that we want mainstream economists to have more influence on politicians and the public, and not to dilute this influence through a plurality of schools of thought.

And  a couple of years ago he wrote the following:

Attacks [against mainstream economics] are far from progressive.

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

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

Replacing [mainstream economics] with schools of thought is not the progressive endeavor that some believe. It would just give you more idiotic policies …

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

I’ll be dipped!

flimflam

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

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

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

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

Berkson’s fallacy (wonkish)

26 October, 2018 at 09:12 | Posted in Statistics & Econometrics | Comments Off on Berkson’s fallacy (wonkish)

 

Simon Wren-Lewis’ warped view of ​modern macroeconomics

25 October, 2018 at 17:47 | Posted in Economics | 2 Comments

kThere is something that just does not sit very well with Oxford macroeconomist Simon Wren-Lewis’ view of modern macroeconomics. On more than one occasion has this self-proclaimed ‘New Keynesian’ macroeconomist approvingly written about the ‘impressive’ theoretical insights New Classical economics has brought to macroeconomics. In one of his latest blog posts he once again  shows how devoted  he is to the Chicago übereconomists and their modelling endeavours (emphasis added):

DSGE models are firmly entrenched in academic macroeconomics, and in pretty well every economist that has done a PhD, which is why the Bank of England’s core model is DSGE … Have a look at almost any macro paper in a top journal today, and compare it to a similar paper before the NCCR, and you can see we have been through a methodological revolution … If you are expecting me at this point to say that DSGE models where were macroeconomics went wrong, you will be disappointed … Moving to DSGE involved losses as well as gains. It inevitably made models less rich and moved them further away from the data in areas that were difficult but not impossible to model in a theoretically consistent way. The DSGE methodological revolution set out so clearly in Lucas and Sargent’s paper changed the focus of macroeconomics away from things we now know were of critical importance.

If moving to DSGE meant not being able to tackle things of “critical importance,” and makes economic models “less rich” and further away from real-world data, why still ultimately defend it? And does “consistency” really trump every other model​ consideration? You do, of course, expect that of New Classical Chicago economists. But a ‘Keynesian’ macroeconomist?

To Wren-Lewis the ‘New Keynesian’ acceptance of rational expectations, representative agents and microfounded DSGE models is, at the end of the day, something good, perhaps even a “gain.” Not all economists (yours truly included) share that view:

While one can understand that some of the elements in DSGE models seem to appeal to Keynesians at first sight, after closer examination, these models are in fundamental contradiction to Post-Keynesian and even traditional Keynesian thinking. The DSGE model is a model in which output is determined in the labour market as in New Classical models and in which aggregate demand plays only a very secondary role, even in the short run.

In addition, given the fundamental philosophical problems presented for the use of DSGE models for policy simulation, namely the fact that a number of parameters used have completely implausible magnitudes and that the degree of freedom for different parameters is so large that DSGE models with fundamentally different parametrization (and therefore different policy conclusions) equally well produce time series which fit the real-world data, it is also very hard to understand why DSGE models have reached such a prominence in economic science in general.

Sebastian Dullien

Neither New Classical nor ‘New Keynesian’ microfounded DSGE macro models have helped us foresee, understand or craft solutions to the problems of today’s economies.

If macroeconomic​ models – no matter of what ilk – 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. Macroeconomic theorists – regardless of being ‘New Monetarist’, ‘New Classical’ or ‘New Keynesian’ – ought to do some ontological reflection and heed Keynes’ warnings on using thought-models in economics

Wren-Lewis ought to be much more critical of the present state of macroeconomics — including ‘New Keynesian’ macroeconomics  — than he is.  Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists like Wren-Lewis there still are some real Keynesian macroeconomists to read. One of them — Axel Leijonhufvud — writes:

For many years now, the main alternative to Real Business Cycle Theory has been a somewhat loose cluster of models given the label of New Keynesian theory. New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy. The “New Keynesian” label refers back to the “rigid wages” brand of Keynesian theory of 40 or 50 years ago. Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it …

I conclude that dynamic stochastic general equilibrium theory has shown itself an intellectually bankrupt enterprise. But this does not mean that we should revert to the old Keynesian theory that preceded it (or adopt the New Keynesian theory that has tried to compete with it). What we need to learn from Keynes … are about how to view our responsibilities and how to approach our subject.

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

If there really is a proliferation of macromodels nowadays, it almost exclusively takes place as a kind of axiomatic variation within the standard DSGE modelling​ framework. And — no matter how many thousands of models economists like Wren-Lewis come up with, as long as they are just axiomatic variations of the same old mathematical-deductive ilk, they will not take us one single inch closer to giving us relevant and usable means to further our understanding and explanation of real economies.

When it really counts, Wren-Lewis shows what he is — a mainstream economist fanatically defending the insistence of using a Chicago-style axiomatic-deductive economic modelling​ strategy. To yours truly, this attitude is nothing but a late confirmation of Alfred North Whitehead’s complaint that ‘the self-confidence of learned people is the comic tragedy of civilization.’

Deutschlands Schulen brauchen eine grundlegende Reform

25 October, 2018 at 08:35 | Posted in Education & School | Comments Off on Deutschlands Schulen brauchen eine grundlegende Reform

 

Michael Hudson — life and thought of an MMT’er

24 October, 2018 at 20:56 | Posted in Economics, Politics & Society | 4 Comments

 

Absolutely fabulous. A must-watch.

Is democracy only for the rich?

24 October, 2018 at 20:50 | Posted in Politics & Society | 1 Comment

 

Wren-Lewis insults medical science

23 October, 2018 at 17:48 | Posted in Economics | 5 Comments

In a discussion today on twitter one discussant was questioning if economics really could be considered a science, adding that in physics — contrary to economics — “there are no different school of thoughts on ‘Newton’s Laws of Motion’. To this Simon Wren-Lewis answered:

Exactly the same is true of mainstream economics. There are also groups who cannot live with the mainstream who form schools of thought, like MMT. But mainstream economics is a science, like medicine.

But that is simply not true as Steve Keen also notes in a reply to Wren-Lewis. Economics is in no way a science similar to physics, Newtonian mechanics or medicine!

‘Laws’ in economics only hold ceteris paribus. That fundamentally means that these laws/regularities only hold when the right conditions are at hand for giving rise to them. Unfortunately, from an empirical point of view, those conditions are only at hand in artificially closed nomological models purposely designed to give rise to the kind of regular associations that economists want to explain. But, really, since these laws/regularities do not exist outside these ‘socio-economic machines,’ what’s the point in constructing these non-existent laws/regularities? When the almost endless list of narrow and specific assumptions necessary to allow the ‘rigorous’ deductions are known to be at odds with reality, what good do these models do?

Take ‘The Law of Demand.’

Although it may (perhaps) be said that mainstream economics had succeeded in establishing The Law – when the price of a commodity falls, the demand for it will increase — for single individuals, it soon turned out, in the Sonnenschein-Mantel-Debreu theorem, that it wasn’t possible to extend The Law to apply on the market level, unless one made ridiculously unrealistic assumptions such as individuals all having homothetic preferences – which actually implies that all individuals have identical preferences.

This could only be conceivable if there was in essence only one actor – the (in)famous representative actor. So, yes, it was possible to generalize The Law of Demand – as long as we assumed that on the aggregate level there was only one commodity and one actor. What generalization! Does this sound reasonable? Of course not. This is pure nonsense!

How has mainstream​ economics reacted to this devastating​ finding? Basically by looking the other way, ignoring it and hoping that no one sees that the emperor is naked.

Modern mainstream textbooks try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality. And – worse still – something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (197), Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equilibrium​ solution.

Of course one could say that it is too difficult on undergraduate levels to show why the procedure is right and to defer it to masters and doctoral courses. It could justifiably be reasoned that way – if what you teach your students is true​ if The Law of Demand is generalizable to the market level and the representative actor is a validmodelling​g abstraction! But in this case, it’s demonstrably known to be false, and therefore this is nothing but a case of scandalous intellectual dishonesty. It’s like telling your students that 2 + 2 = 5 and hope that they will never run into Peano’s axioms of arithmetics.

Or take ‘Revealed Preferences.’

timthumbThe experiment reported here was designed to reflect the fact that revealed preference theory is concerned with hypothetical choices rather than actual choices over time. In contrast to earlier experimental studies, the possibility that the different choices are made under different preference patterns can almost be ruled out. We find a considerable number of violations of the revealed preference axioms, which contradicts the neoclassical theory of the consumer maximising utility subject to a given budget constraint. We should therefore pay closer attention to the limits of this theory as a description of how people actually behave, i.e. as a positive theory of consumer behaviour. Recognising these limits, we economists should perhaps be a little more modest in our ‘imperialist ambitions’ of explaining non-market behaviour by economic principles.

Reinhard Sippel 

Reinhard Sippel’s classic experiment showed considerable violations of the revealed preference axioms and that from a descriptive point of view — as a theory of consumer behaviour — the revealed preference theory was of a very limited value.

Mainstream theory of consumer behaviour has been developed in great part as an attempt to justify the idea of a downward-sloping demand curve. What forerunners like e.g. Cournot (1838) and Cassel (1899) did was merely to assert this law of demand. The utility theorists tried to deduce it from axioms and postulates on individuals’ economic behaviour. Revealed preference theory — in the hands of Paul Samuelson and Hendrik Houthakker — tried to build a new theory and to put it in operational terms​ but ended up with just giving a theory logically equivalent to the old one. As such it also shares its shortcomings of being empirically non-falsifiable and of being based on unrestricted universal statements. The theory is nothing but an empty tautology.

These were just two examples exemplifying the non-science character of mainstream economics. ​Comparing​ economics to real sciences like physics or medicine is nothing but an insult!

Econometrics and causality

23 October, 2018 at 15:53 | Posted in Statistics & Econometrics | Comments Off on Econometrics and causality

Judea Pearl’s and Bryant Chen’s Regression and causation: a critical examination of six econometrics textbooks — published in Real-World Economics Review no. 65 — addresses two very important questions in the teaching of modern econometrics and its different textbooks — how is causality treated in general, and more specifically, to what extent they use a distinct causal notation.

causation

The authors have for years been part of an extended effort of advancing explicit causal modelling (especially graphical models) in applied sciences, and this article examines to what extent these endeavours have found their way into econometrics textbooks (and Pearl has later come back to the theme in his The Book of Why (2018))

Although the text partly is of a rather demanding ‘technical’ nature, yours truly definitely recommend it for reading, especially for social scientists with an interest in causality.

Pearl’s seminal contribution to this research field is well-known and indisputable, but on the ‘taming’ and ‘resolve’ of the issues, I, however, have to admit that — under the influence of especially David Freedman and Nancy Cartwright — I still have some doubts on the reach, especially in terms of ‘realism’ and ‘relevance, of these ‘solutions’ for social sciences in general and economics in specific (see here, here, here and here). And with regards to the present article I think that since the distinction between the ‘interventionist’ E[Y|do(X)] and the more traditional ‘conditional expectationist’ E[Y|X] is so crucial for the subsequent argumentation, a more elaborated presentation had been of value, not the least because then the authors could also more fully explain why the first is so important and if/why this (in my, Freedman’s and Cartwright’s view) can be exported from ‘engineer’ contexts where it arguably easily and universally apply, to ‘socio-economic’ contexts where ‘manipulativity,’ ‘stability,’ faithfulness,’ ‘invariance’ and ‘modularity’ are not perhaps so universally at hand. In real-world settings, interventions may affect variables in complex and non-deterministic ways. In socio-economic contexts, complexity and lack of control often make it impossible to treat change — and causality — in terms of easily identifiable ‘interventions.’

The value of getting at precise and rigorous conclusions about causality based on ‘tractability’ conditions that are seldom met in real life, is difficult to assess. Testing and constructing models is one thing, but we do also need guidelines for how to evaluate in which situations and contexts they are applicable. Formalism may help us a bit down the road, but we have to make sure it somehow also fits the world if it is going to be really helpful in navigating that world. In all of science, conclusions are never more certain than the assumptions on which they are founded. Epistemically convenient methods and models that work in ‘well-behaved’ systems need not work in other contexts.

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