Pólya urn models mathematics

27 Feb, 2019 at 09:11 | Posted in Statistics & Econometrics | Comments Off on Pólya urn models mathematics

 

It’s a Man’s Man’s Man’s World

26 Feb, 2019 at 18:32 | Posted in Varia | Comments Off on It’s a Man’s Man’s Man’s World

 

Krugman vs Kelton on the fiscal-monetary tradeoff

26 Feb, 2019 at 16:01 | Posted in Economics | 18 Comments

stefPaul Krugman is back again telling us that he doesn’t really want to spend time on arguing about MMT — and then goes on complaining that well-known MMTer Stephanie Kelton says things “obviously indefensible.” What has especially irritated the self-proclaimed ‘conventional’ Keynesian is that Kelton “seems to claim that expansionary fiscal policy … will lead to lower, not higher interest rates.”

Now, the logic behind Krugman’s “conventional Keynesian” loanable-funds-IS-LM-theory is that if the government is going to pursue an expansionary fiscal policy it will have to borrow money and thereby increase the demand for loanable funds which will — “other things equal” — lead to higher interest rates and less private investment.

The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credits set by banks and determined by supply and demand in the same way as the price of cars and raincoats.

It is a beautiful fairy tale, but the problem is that banks are not barter institutions that transfer pre-existing loanable funds from depositors to borrowers. Why? Because, in the real world, there simply are no pre-existing loanable funds. Banks create new funds — credit — only if someone has previously got into debt! Banks are monetary institutions, not barter vehicles.

In the traditional loanable funds theory — as presented in Krugman’s own textbooks — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate.

The loanable funds theory in the ‘New Keynesian’ approach means that the interest rate is endogenized by assuming that Central Banks can (try to) adjust it in response to an eventual output gap. This, of course, is essentially nothing but an assumption of Walras’ law being valid and applicable, and that a fortiori the attainment of equilibrium is secured by the Central Banks’ interest rate adjustments. From a Keynes-Minsky-MMT point of view, this can’t be considered anything else than a belief resting on nothing but sheer hope.

The traditional loanable funds theory is that it assumes that saving and investment can be treated as independent entities. This is seriously wrong:

gtThe classical theory of the rate of interest [the loanable funds theory] seems to suppose that, if the demand curve for capital shifts or if the curve relating the rate of interest to the amounts saved out of a given income shifts or if both these curves shift, the new rate of interest will be given by the point of intersection of the new positions of the two curves. But this is a nonsense theory. For the assumption that income is constant is inconsistent with the assumption that these two curves can shift independently of one another. If either of them shifts​, then, in general, income will change; with the result that the whole schematism based on the assumption of a given income breaks down … In truth, the classical theory has not been alive to the relevance of changes in the level of income or to the possibility of the level of income being actually a function of the rate of the investment.

Savers and investors have different liquidity preferences and face different choices — and their interactions usually only take place intermediated by financial institutions. This, importantly, also means that there is no ‘direct and immediate’ automatic interest mechanism at work in modern monetary economies. What happens at the microeconomic level is not always compatible with the macroeconomic outcome. The ‘atomistic fallacy’ has many faces — loanable funds is one of them.

We have to free ourselves from the loanable funds theory — and scholastic gibbering about ZLB — and start using good old Keynesian fiscal policies. Keynes — as did Lerner, Kaldor, Kalecki, and Robinson — showed that it was possible to promote economic growth with an “appropriate size of the budget deficit.” The stimulus a well-functioning fiscal policy aimed at full employment may have on investment and productivity does not necessarily have to be offset by higher interest rates.

That’s the right spirit!

26 Feb, 2019 at 07:34 | Posted in Varia | Comments Off on That’s the right spirit!

 

What’s wrong with MMT? Nothing!

25 Feb, 2019 at 19:17 | Posted in Economics | 47 Comments

kelt MMTists often like to position themselves as the only ones to properly understand the ‘operational realities’ of modern monetary systems. Ironically, many of the claims made by MMTists on this topic are misleading at best. One common rhetorical tactic that I’ve noticed they employ, which often catches their critics out, is to use the term ‘government’ in a way that’s different typically from how it is used in mainstream economics. When they say ‘government’, they tend to include basically any institution that is an agent of the state, including the central bank — hence the ‘government’ here includes consolidating the treasury and the central bank into one entity, effectively ignoring or assuming away any independence the central bank may have.

Upholding Economics

mmyEffectively “ignoring or assuming away any independence the central bank may have”? That is strange indeed: Last — just to take one example — I had a look in L. Randall Wray’s Modern Money Theory there were more than fifty pages devoted to “technical details of central bank and treasury coordination” and diverse fiscal operations of the Fed and the Treasury. Guess we have to go looking for bad monetary crankery somewhere else …

What makes collective action more likely?

25 Feb, 2019 at 18:09 | Posted in Theory of Science & Methodology | Comments Off on What makes collective action more likely?

Notte di Luce

25 Feb, 2019 at 14:31 | Posted in Varia | Comments Off on Notte di Luce

 

Respiro il silenzio
Dei tuoi pensieri
Un giorno sarai
Tutto quello che speri

Werewolves of London

25 Feb, 2019 at 14:07 | Posted in Varia | Comments Off on Werewolves of London

 

Abba Lerner and the true nature of public debt

24 Feb, 2019 at 21:01 | Posted in Economics | 6 Comments

national debt5One of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external. It is owed by one person to others. That is what makes it burdensome. Because it is interpersonal the proper analogy is not to national debt but to international debt … But this does not hold for national debt which is owed by the nation to citizens of the same nation. There is no external creditor. We owe it to ourselves.

A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.

Abba Lerner The Burden of the National Debt (1948)

Equilibrium — an assumption making many theories inaccurate

23 Feb, 2019 at 17:42 | Posted in Economics | 2 Comments

For the learning rules we study, the players never converge to any sort of “intertemporal equilibrium”, in the sense that their expectations do not match the outcomes of the game even in a statistical sense …

moAre these results relevant for macroeconomics? Can we expect insights that hold at the small scale of strategic interactions between two players to also be valid at much larger scales?

While our theory does not directly map to more general settings, many economic scenarios – buying and selling in financial markets, innovation strategies in competing firms, supply chain management – are complicated and competitive. This raises the possibility that some important theories in economics may be inaccurate. Challenges to the behavioral assumption of equilibrium also challenge the predictions of the model. In this case, new approaches are required that explicitly simulate the behavior of economic agents and take into account the fact that real people are not good at solving complicated problems.

Marco Pangallo & Torsten Heinrich & J Doyne Farmer

Les actes antisémites en hausse en France

23 Feb, 2019 at 10:51 | Posted in Politics & Society | 1 Comment

couv-le-monde-marianne-1_675_450Après deux années de baisse, les actes antisémites en France sont en très forte hausse (+ 69 %) sur les neuf premiers mois de 2018, s’alarme le premier ministre Edouard Philippe dans une tribune publiée vendredi 9 novembre sur Facebook.

« Chaque agression perpétrée contre un de nos concitoyens parce qu’il est juif résonne comme un nouveau bris de cristal », affirme le chef du gouvernement dans cette tribune publiée exactement quatre-vingts ans après la funeste Nuit de cristal et ses exactions nazies contre les juifs en Allemagne, le 9 novembre 1938. « Pourquoi rappeler, en 2018, un aussi pénible souvenir ? Parce que nous sommes très loin d’en avoir fini avec l’antisémitisme », écrit l’ancien maire du Havre, évoquant les chiffres « implacables » des actes antisémites en France sur la partie écoulée de 2018.

Le Monde

The limits of probabilistic reasoning

23 Feb, 2019 at 08:45 | Posted in Statistics & Econometrics | 2 Comments

Almost a hundred years after John Maynard Keynes wrote his seminal A Treatise on Probability (1921), it is still very difficult to find statistics books that seriously try to incorporate his far-reaching and incisive analysis of induction and evidential weight.

keynesreadingbookThe standard view in statistics — and the axiomatic probability theory underlying it — is to a large extent based on the rather simplistic idea that more is better. But as Keynes argues — more of the same is not what is important when making inductive inferences. It’s rather a question of “more but different.”

Variation, not replication, is at the core of induction. Finding that p(x|y) = p(x|y & w) doesn’t make w irrelevant. Knowing that the probability is unchanged when w is present gives p(x|y & w) another evidential weight. Running 10 replicative experiments do not make you as sure of your inductions as when running 10 000 varied experiments — even if the probability values happen to be the same.

According to Keynes we live in a world permeated by unmeasurable uncertainty — not quantifiable stochastic risk — which often forces us to make decisions based on anything but ‘rational expectations.’ Keynes rather thinks that we base our expectations on the confidence or ‘weight’ we put on different events and alternatives. To Keynes, expectations are a question of weighing probabilities by ‘degrees of belief,’ beliefs that often have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents as modelled by modern social sciences. And often we “simply do not know.”

Science according to Keynes should help us penetrate to “the true process of causation lying behind current events” and disclose “the causal forces behind the apparent facts.” Models can never be more than a starting point in that endeavour. He further argued that it was inadmissible to project history on to the future. Consequently, we cannot presuppose that what has worked before, will continue to do so in the future. That statistical models can get hold of correlations between different variables is not enough. If they cannot get at the causal structure that generated the data, they are not really ‘identified.’

How strange that economists and other social scientists, as a rule, do not even touch upon these aspects of scientific methodology that seems to be so fundamental and important for anyone trying to understand how we learn and orient ourselves in an uncertain world. An educated guess on why this is a fact would be that Keynes’ concepts are not possible to squeeze into a single calculable numerical probability. In the quest for quantities one puts a blind eye to qualities and looks the other way — but Keynes ideas keep creeping out from under the statistics carpet.

The validity of the inferential models we as scientists use ultimately depends on the assumptions we make about the entities to which we apply them. Applying the traditional calculus of probability presupposes far-reaching ontological presuppositions. If we are prepared to assume that societies and economies are like urns filled with coloured balls in fixed proportions, then fine. But — really — who could earnestly believe in such an utterly ridiculous analogy?

In a real world full of ‘unknown unknowns’ and genuine non-ergodic uncertainty, urns are of little avail.

Human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.

J M Keynes

Added: Tom Hickey — as always — has some interesting comments on this post here.

Malmö i litteraturen

22 Feb, 2019 at 17:19 | Posted in Varia | Comments Off on Malmö i litteraturen

top51) Hemstaden Jacques Werup (1981)

2) Underdog Torbjörn Flygt (2001)

3) De ensamma pojkarna Mats Olsson (1995)

4) Stuv Malmö, kom! Fredrik Ekelund (1984)

5) Yarden Kristian Lundberg (2009)

Monismus in der ökonomischen Hochschullehre

22 Feb, 2019 at 13:49 | Posted in Economics | 1 Comment

Eine Reihe von Studien des Forschungsinstituts für gesellschaftliche Weiterentwicklung hat in den letzten Jahren den Zustand der Ökonomik in Deutschland untersucht. Dabei wurde unter anderem gefragt welche Lehrbücher verwendet werden, wie plural sie sind, und was eigentlich der wissenschaftliche Nachwuchs über sein Fach denkt.

Netzwerk_Plurale_Ökonomik_LogoInsgesamt bestätigen die Studierenden der Stichprobe die Kritikpunkte der Pluralismus-Debatte: Sie nehmen im Lehralltag kaum Bezüge zu angrenzenden Disziplinen wahr, wie z. B. Geschichte, Psychologie oder Soziologie. Dabei stimmt der Großteil der Befragten (74,2%) der Aussage zu, dass Erkenntnisse aus anderen Fächern notwendig seien, um ökonomische Sachverhalte verstehen zu können. Stattdessen sei das VWL-Studium praxisfern (55%) und von einer starken mathematischen Grundausrichtung geprägt.

Dies zeigt sich besonders in den vermittelten Methoden: Es dominieren Gleichgewichts- (93,5%) und aggregierte ma­kroökono­mische Modelle (92,4%) sowie Regressions- bzw. Zeitreihenanalysen (78,6%). Andere sozialwissenschaftliche Zugänge wie Fallstudien (27,5%), Experimente (22,4%), Umfragen (11,4%) oder Diskurs- (8,4%) bzw. Netzwerkanalysen (3,0%) würden dagegen kaum in den ersten vier Semestern vermittelt. Dies gilt ebenso für Neuerungen innerhalb der VWL, wie z.B. die Bereiche Neuroökonomik (2,4%) und Ökonophysik (0,6%) …

Das Auseinanderdriften zwischen Wissenschaft und Gesellschaft und die wahrgenommenen Einseitigkeiten in der ökonomischen Hochschullehre führen allerdings nicht dazu, dass sich die Studierenden verstärkt für eine Erneuerung ihres Faches einsetzen. Zwar hat der Großteil der Befragten schon von der Pluralismus-Debatte gehört. Nur wenige verfolgen diese jedoch intensiv und allein ein Bruchteil ist persönlich engagiert, etwa über die Teilnahme an entsprechenden Veranstaltungsreihen oder durch die Mitarbeit in lokalen Initiativen.

Eva Schweitzer-Krah & Tim Engartner

MMT — Krugman still does not get it!

21 Feb, 2019 at 20:47 | Posted in Economics | 41 Comments

mmtKrugman complains that Lerner was too “cavalier” in his discussion of monetary policy since he called for the interest rate to be set at the level that produces “the most desirable level of investment” without saying exactly what that rate should be.

It’s an odd critique, since Krugman himself subscribes to the idea that monetary policy should target an invisible “neutral rate,” a so-called r-star that exists when the economy is neither depressed nor overheating. For what it’s worth, research suggests the neutral rate “may be flat-out wrong,” and Fed Chairman Jerome Powell has admitted that the Fed has been too cavalier in relying “on variables that cannot be measured directly and which can only be estimated with great uncertainty.”

But Lerner wasn’t trying to use interest rates to optimize the economy. That was a job for fiscal policy. He argued that the government should be prepared to spend whatever is necessary to sustain full employment without raising taxes or borrowing …

Krugman’s other objection is that Lerner “didn’t fully address the limitations, both technical and political, on tax hikes/or spending cuts” as a means of fighting inflation.

In fact, Lerner actually had quite a lot to say about this. Here’s the opening sentence to an entire chapter on the subject in his 1951 book “The Economics of Employment”: “We have now concluded our treatment of the economics of employment, but a word or two must be added on the politics and the administration of employment policies in general and of Functional Finance in particular” (emphasis in original) …

Where does that leave us? Paul Krugman and I agree on a great many things, but we come at certain questions from a fundamentally different place.

He believes there are inherent tradeoffs between fiscal and monetary policy. Outside of the so-called liquidity trap, Krugman adopts the standard line that budget deficits crowd out private investment because deficits compete with private borrowing for a limited supply of savings.

The MMT framework rejects this, since government deficits are shown to be a source (not a use!) of private savings. Some careful studies show that crowding-out can occur, but that it tends to happen in countries where the government is not a currency issuer with its own central bank.

This seems like a disagreement we should be able to resolve either empirically or intuitively. But who knows? As Lerner wrote, “a man convinced against his will retains the same opinion still.”

Stephanie Kelton

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.

But the truth is that public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others have to pay the taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt cancel itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren repay the national debt these payments will be made to our children and grandchildren.

To both Keynes and Lerner, it was evident that the state has the ability to promote full employment and a stable price level – and that it should use its powers to do so. If that means that it has to take on debt and (more or less temporarily) underbalance its budget – so let it be! Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals – full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity and balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

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