Federal Job Guarantee or Universal Basic Income — pros and cons

30 Apr, 2019 at 17:57 | Posted in Politics & Society | Comments Off on Federal Job Guarantee or Universal Basic Income — pros and cons

 

Publishing ‘hacked’ p-values — the chocolate hoax

30 Apr, 2019 at 17:19 | Posted in Statistics & Econometrics | Comments Off on Publishing ‘hacked’ p-values — the chocolate hoax

 

Veckans dumstrut

30 Apr, 2019 at 15:02 | Posted in Economics | 3 Comments

mag Först har vi neoklassisk mikroteori … I sin mest radikala form, som den formulerades av den så kallad österrikiska skolan — med utgångspunkt från Karl Menger och andra kända namn som Karl Wieser, Eugen von Böhm-Bawerk och Friedrich von Hayek …

Friedman hade fört fram sina idéer i polemik med den keynesianskt inspirerade så kallade Phillipskurvan … Friedman menade dock att denna teori var felaktig eftersom ekonomiska aktörer i förväg kalkylerar till exempel med en viss inflation när de gör sina val. De har rationella förväntningar om framtiden, vilket skapar hög osäkerhet om vad en viss ekonomisk politik egentligen leder till.

Yours truly började läsa den här boken med förhoppning om att få ta del av något nytt och spännande från forskningsfronten kring finanskriser. Efter att ha kommit till sidan 22 insåg jag att det var ett hopp för vilket det inte fanns någon annan grund än hoppet självt …

Friedrich von Wieser var en känd österrikisk ekonom.

Robert Lucas har byggt sin makroekonomiska teori på antagandet om rationella förväntningar. Milton Friedman däremot talade om adaptiva förväntningar.

Man kunde väl ändå förvänta sig att en ekonomihistoriker och ledamot i Kungliga Vetenskapsakademien skulle känna till detta — speciellt om man nu får för sig att skriva en bok …

Revisiting the foundations of randomness and probability

30 Apr, 2019 at 14:17 | Posted in Statistics & Econometrics, Theory of Science & Methodology | 5 Comments

dudeRegarding models as metaphors leads to a radically different view regarding the interpretation of probability. This view has substantial advantages over conventional interpretations …

Probability does not exist in the real world. We must search for her in the Platonic world of ideals. We have shown that the interpretation of probability as a metaphor leads to several substantial changes in interpretations and justifications for conventional frequentist procedures. These changes remove several standard objections which have been made to these procedures. Thus our model seems to offer a good foundation for re-building our understanding of how probability should be interpreted in real world applications. More generally, we have also shown that regarding scientific models as metaphors resolves several puzzles in the philosophy of science.

Asad Zaman

Although yours truly has to confess of not being totally convinced that redefining​ probability as a metaphor is the right way to go forward on these foundational issues, Zaman’s article​ sure raises some very interesting questions on the way the concepts of randomness and probability are used in economics.

Modern mainstream economics relies to a large degree on the notion of probability. To at all be amenable to applied economic analysis, economic observations have to be conceived as random events that are analyzable within a probabilistic framework. But is it really necessary to model the economic system as a system where randomness can only be analyzed and understood when based on an a priori notion of probability?

slide_1When attempting to convince us of the necessity of founding empirical economic analysis on probability models,  mainstream economics actually forces us to (implicitly) interpret events as random variables generated by an underlying probability density function.

This is at odds with reality. Randomness obviously is a fact of the real world (although I’m not sure Zaman agrees but rather puts also randomness in ‘the Platonic world of ideals’). Probability, on the other hand, attaches (if at all) to the world via intellectually constructed models, and a fortiori is only a fact of a probability generating (nomological) machine or a well constructed experimental arrangement or ‘chance set-up.’

Just as there is no such thing as a ‘free lunch,’ there is no such thing as a ‘free probability.’

To be able at all to talk about probabilities, you have to specify a model. If there is no chance set-up or model that generates the probabilistic outcomes or events — in statistics one refers to any process where you observe or measure as an experiment (rolling a die) and the results obtained as the outcomes or events (number of points rolled with the die, being e. g. 3 or 5) of the experiment — there strictly seen is no event at all.

Probability is a relational element. It always must come with a specification of the model from which it is calculated. And then to be of any empirical scientific value it has to be shown to coincide with (or at least converge to) real data generating processes or structures — something seldom or never done.

And this is the basic problem with economic data. If you have a fair roulette-wheel, you can arguably specify probabilities and probability density distributions. But how do you conceive of the analogous nomological machines for prices, gross domestic product, income distribution etc? Only by a leap of faith. And that does not suffice. You have to come up with some really good arguments if you want to persuade people into believing in the existence of socio-economic structures that generate data with characteristics conceivable as stochastic events portrayed by probabilistic density distributions.

We simply have to admit that the socio-economic states of nature that we talk of in most social sciences — and certainly in economics — are not amenable to analyze as probabilities, simply because in the real world open systems there are no probabilities to be had!

The processes that generate socio-economic data in the real world cannot just be assumed to always be adequately captured by a probability measure. And, so, it cannot be maintained that it even should be mandatory to treat observations and data — whether cross-section, time series or panel data — as events generated by some probability model. The important activities of most economic agents do not usually include throwing dice or spinning roulette-wheels. Data generating processes — at least outside of nomological machines like dice and roulette-wheels — are not self-evidently best modelled with probability measures.

If we agree on this, we also have to admit that much of modern neoclassical economics lacks sound foundations.

When economists and econometricians — often uncritically and without arguments — simply assume that one can apply probability distributions from statistical theory on their own area of research, they are really skating on thin ice.

This importantly also means that if you cannot show that data satisfies all the conditions of the probabilistic nomological machine, then the statistical inferences made in mainstream economics lack sound foundations!​

Why do women still earn less than men?

29 Apr, 2019 at 16:09 | Posted in Economics | Comments Off on Why do women still earn less than men?

Spending the morning going through Francine Blau’s and Lawrence Kahn’s JEL survey of modern research on the gender wage gap, yours truly was struck almost immediately how little that research really has accomplished in terms of explaining gender wage discrimination. With all the heavy regression and econometric alchemy used, wage discrimination is somehow more or less conjured away …

Trying to reduce the risk of having established only ‘spurious relations’ when dealing with observational data, statisticians and econometricians standardly add control variables. The hope is that one thereby will be able to make more reliable causal inferences. But — as Keynes showed already back in the 1930s when criticizing statistical-econometric applications of regression analysis — if you do not manage to get hold of all potential confounding factors, the model risks producing estimates of the variable of interest that are even worse than models without any control variables at all. Conclusion: think twice before you simply include ‘control variables’ in your models!

That women are working in different areas than men, and have other educations than men, etc., etc., are not only the result of ‘free choices’ causing a gender wage gap, but actually to a large degree itself the consequence of discrimination.

The gender pay gap is a fact that, sad to say, to a non-negligible extent is the result of discrimination. And even though many women are not deliberately discriminated against, but rather ‘self-select’ (sic!) into lower-wage jobs, this in no way magically explains away the discrimination gap. As decades of socialization research has shown, women may be ‘structural’ victims of impersonal social mechanisms that in different ways aggrieve them.

You see it all the time in studies. “We controlled for…” paperAn example is research around the gender wage gap, which tries to control for so many things that it ends up controlling for the thing it’s trying to measure. As my colleague Matt Yglesias wrote:

“Take hours worked, which is a standard control in some of the more sophisticated wage gap studies. Women tend to work fewer hours than men. If you control for hours worked, then some of the gender wage gap vanishes. As Yglesias wrote, it’s “silly to act like this is just some crazy coincidence. Women work shorter hours because as a society we hold women to a higher standard of housekeeping, and because they tend to be assigned the bulk of childcare responsibilities.”

Controlling for hours worked, in other words, is at least partly controlling for how gender works in our society. It’s controlling for the thing that you’re trying to isolate.

Ezra Klein

Progressive capitalism? Is that even possible!?

29 Apr, 2019 at 09:16 | Posted in Economics | 5 Comments

 

For-profit​ private schools — a total disaster

28 Apr, 2019 at 19:00 | Posted in Education & School | 4 Comments

Neo-liberals and libertarians have always provided a lot of ideologically founded ideas and ‘theories’ to underpin their Panglossian view on markets. But when they are tested against reality they usually turn out to be wrong. The promised results are simply not to be found. And that goes for for-profit private schools too.

To make education more like a private good, [voucher advocates] tried to change the conditions of both supply and demand … The idea was that, rather than funding schools, government should provide funding directly parents in the form of vouchers that could be used at whichever school the parents preferred, and topped up, if necessary by additional fee payments.

Pros and Cons of PrivatizationAs is typically the case, voucher advocates ignored the implications of their proposals for the distribution of income. In large measure, vouchers represent a simply cash transfer, going predominantly from the poor to the rich. The biggest beneficiaries would be those, mostly well-off, who were already sending their children to private schools, for whom the voucher would be a simple cash transfer …

Sweden introduced voucher-style reforms in 1992, and opened the market to for-profit schools. Initially favorable assessments were replaced by disillusionment as the performance of the school system as a whole deteriorated … By 2015, the majority of the public favoured banning for-profit schools. The Minister for Education described the system as a ‘political failure.’ Other critics described it in harsher terms (The Swedish for-profit ‘free’ school disaster) …

Why has market-oriented reform of education been such a failure?

Education is characterized by market failure, by potentially inequitable initial allocations and, most importantly, by the fact that the relationship between the education ‘industry’ and its ‘consumers’, that is between educational institutions and teachers on the one hand and students on the other, cannot be reduced to a market transaction.

The critical problem with this simple model is that students, by definition, cannot know in advance what they are going to learn, or make an informed judgement about what they are learning. They have to rely, to a substantial extent, on their teachers to select the right topics of study and to teach them appropriately …

The implications for education policy are clear, at least at the school level. School education should be publicly funded and provided either by public schools or by non-profits with a clear educational mission, as opposed to corporate ‘school management organisations’.

John Quiggin

What we do in life echoes in eternity

28 Apr, 2019 at 14:07 | Posted in Varia | 1 Comment

ken

In science, courage is to follow the motto of enlightenment and Kant’s dictum — Sapere Aude!  To use your own understanding, having the ​courage to think for yourself and question ‘received opinion’, authority or orthodoxy.

In our daily lives, courage is a capability to confront fear, as when in front of the powerful and mighty, not to step back, but stand up for one’s rights not to be humiliated or abused.

Courage is to do the right thing in spite of danger and fear.

As when Sir Nicholas Winton organised the rescue of 669 children destined for Nazi concentration camps during World War II.

What we do in life echoes in eternity.

The interest rate fallacy

28 Apr, 2019 at 13:41 | Posted in Economics | 1 Comment

wrayWhile currency-issuing governments do not need to sell bonds, the fact that they do creates no competition for finite savings between public and private borrowers. First, government deficits stimulate growth and private savings as national income grows … Moreover, deficits place downward pressure on interest rates. Debt issuance serves to allow the central bank to maintain​ a positive target interest rate by providing investors with an interest bearing asset that drain the excess reserves in the banking system resulting from deficit spending. If these reserves were not drained, then in an environment of government deficits, the overnight interest​ rate would fall … and this might compromise the central bank’s target interest rate unless it offers a return on excess reserves, which most do …

The central bank targets the overnight interest rate and can keep that as close to zero as it likes, no matter how large the deficits might reach … The orthodox fears are unfounded​ but persist because mainstream economics does not properly ‘account for’ government deficits and debt because it does not ensure that its models are stock-flow consistent.

Do government deficits necessarily cause inflation?

27 Apr, 2019 at 15:26 | Posted in Economics | 5 Comments

CBO deficitsIt may be objected that government expenditure financed by borrowing will cause inflation. To this it may be replied that the effective demand created by the government acts like any other increase in demand. If labour​, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services … It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation.

Michal Kalecki

On the use of logic and mathematics in economics

27 Apr, 2019 at 12:44 | Posted in Economics | 2 Comments

1200-453314475-deductive-reasoning-example-4 Logic, n. The art of thinking and reasoning in strict accordance with the limitations and incapacities of the human misunderstanding. The basic of logic is the syllogism, consisting of a major and a minor premise and a conclusion – thus:

Major Premise: Sixty men can do a piece of work sixty times as quickly as one man.

Minor Premise: One man can dig a post-hole in sixty seconds; Therefore-
Conclusion: Sixty men can dig a post-hole in one second.

This may be called syllogism arithmetical, in which, by combining logic and mathematics, we obtain a double certainty and are twice blessed.

Ambrose Bierce The Unabridged Devil’s Dictionary

In mainstream economics, both logic and mathematics are used extensively. And most mainstream economists sure look upon themselves as “twice blessed.”

Is there any scientific ground for that blessedness? None whatsoever!

If scientific progress in economics lies in our ability to tell ‘better and better stories’ one would, of course, expect economics journals being filled with articles supporting the stories with empirical evidence confirming the predictions. However, the journals still show a striking and embarrassing paucity of empirical studies that (try to) substantiate these predictive 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 explicit discussion, argumentation and justification on the subject aren’t considered to be required.

In mathematics, the deductive-axiomatic method has worked just fine. But science is not mathematics. Conflating those two domains of knowledge has been one of the most fundamental mistakes made in modern economics. Applying it to real-world open systems immediately proves it to be excessively narrow and hopelessly irrelevant. Both the confirmatory and explanatory ilk of hypothetico-deductive reasoning fails since there is no way you can relevantly analyze confirmation or explanation as a purely logical relation between hypothesis and evidence or between law-like rules and explananda. In science, we argue and try to substantiate our beliefs and hypotheses with reliable evidence. Propositional and predicate deductive logic, on the other hand, is not about reliability, but the validity of the conclusions given that the premises are true.

Deduction — and the inferences that go with it — is an example of ‘explicative reasoning,’ where the conclusions we make are already included in the premises. Deductive inferences are purely analytical and it is this truth-preserving nature of deduction that makes it different from all other kinds of reasoning. But it is also its limitation since truth in the deductive context does not refer to a real-world ontology (only relating propositions as true or false within a formal-logic system) and as an argument scheme is totally non-ampliative — the output of the analysis is nothing else than the input.

If the ultimate criterion of success of a model is to what extent it predicts and coheres with (parts of) reality, modern mainstream economics seems to be a hopeless misallocation of scientific resources. To focus scientific endeavours on proving things in mathematical 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 economies.

Banks are NOT intermediaries of loanable funds

27 Apr, 2019 at 10:05 | Posted in Economics | 4 Comments

loanable_funds_curve-13FEC80C6110B93D6D9The 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 credit, determined by supply and demand — as Bertil Ohlin put it — “in the same way as the price of eggs and strawberries on a village market.”

In the traditional loanable funds theory — as presented in mainstream macroeconomics 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.


As argued by Kumhof in the video above (and here), there are many problems with the standard presentation and formalization of the loanable funds theory. And more can be added to the list:

1 As already noticed by James Meade decades ago, the causal story told to explicate the accounting identities used gives the picture of “a dog called saving wagged its tail labelled investment.” In Keynes’s view — and later over and over again confirmed by empirical research — it’s not so much the interest rate at which firms can borrow that causally determines the amount of investment undertaken, but rather their internal funds, profit expectations and capacity utilization.

2 As is typical of most mainstream macroeconomic formalizations and models, there is pretty little mention of real-world​ phenomena, like e. g. real money, credit rationing and the existence of multiple interest rates, in the loanable funds theory. Loanable funds theory essentially reduces modern monetary economies to something akin to barter systems — something they definitely are not. As emphasized especially by Minsky, to understand and explain how much investment/loaning/crediting is going on in an economy, it’s much more important to focus on the working of financial markets than staring at accounting identities like S = Y – C – G. The problems we meet on modern markets today have more to do with inadequate financial institutions than with the size of loanable-funds-savings.

3 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 realist Keynes-Minsky point of view, this can’t be considered anything else than a belief resting on nothing but sheer hope. [Not to mention that more and more Central Banks actually choose not to follow Taylor-like policy rules.] The age-old belief that Central Banks control the money supply has more an more come to be questioned and replaced by an “endogenous” money view, and I think the same will happen to the view that Central Banks determine “the” rate of interest.

4 A further problem in the traditional loanable funds theory is that it assumes that saving and investment can be treated as independent entities. To Keynes this was 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.

There are always (at least) two parts in an economic transaction. 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 this ultimately boils done to is — iter — that what happens at the microeconomic level — both in and out of equilibrium —  is not always compatible with the macroeconomic outcome. The fallacy of composition (the “atomistic fallacy” of Keynes) has many faces — loanable funds is one of them.

5 Contrary to the loanable funds theory, finance in the world of Keynes and Minsky precedes investment and saving. Highlighting the loanable funds fallacy, Keynes wrote in “The Process of Capital Formation” (1939):

Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving.

What is “forgotten” in the loanable funds theory, is the insight that finance — in all its different shapes — has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterwards, simply isn’t enough.

All real economic activities nowadays depend on a functioning financial machinery. But institutional arrangements, states of confidence, fundamental uncertainties, asymmetric expectations, the banking system, financial intermediation, loan granting processes, default risks, liquidity constraints, aggregate debt, cash flow fluctuations, etc., etc. — things that play decisive roles in channelling​ money/savings/credit — are more or less left in the dark in modern formalizations of the loanable funds theory.

It should be emphasized that the equality between savings and investment … will be valid under all circumstances.kalecki In particular, it will be independent of the level of the rate of interest which was customarily considered in economic theory to be the factor equilibrating the demand for and supply of new capital. In the present conception investment, once carried out, automatically provides the savings necessary to finance it. Indeed, in our simplified model, profits in a given period are the direct outcome of capitalists’ consumption and investment in that period. If investment increases by a certain amount, savings out of profits are pro tanto higher …

One important consequence of the above is that the rate of interest cannot be determined by the demand for and supply of new capital because investment ‘finances itself.’

Krugman to Lietaer: “Never touch the money​ system”

26 Apr, 2019 at 18:22 | Posted in Economics | 1 Comment


Bernard Lietaer (1942-2019) was a former professor of international finance and president at the Central Bank of Belgium. One of our greatest monetary thinkers, and contrary to Krugman et consortes he dared to talk about — and question — our monetary system!

Austerity 101

26 Apr, 2019 at 15:21 | Posted in Economics | Comments Off on Austerity 101


We are not going to get out of the present economic doldrums as long as we continue to be obsessed with the insane idea that austerity is the universal medicine. When an economy is already hanging on the ropes, you can’t just cut government spendings.austerity22Cutting government expenditures reduces aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues mean increased deficits — and calls for even more austerity. And so on, and so on.

To many conservative and neoliberal politicians and economists, there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these Keynesophobics to fight it are the confidence argument and the doctrine of ‘sound finance.’

Is this witless crusade against economic reason new? Not at all!

kale Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system,​ the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

Michal Kalecki Political aspects of full employment  (1943)

Ich bin Rocker, doch ohne amputiertes Gehirn

26 Apr, 2019 at 09:16 | Posted in Varia | Comments Off on Ich bin Rocker, doch ohne amputiertes Gehirn

 

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