Self-righteous Chicago drivel

30 Jun, 2019 at 13:49 | Posted in Economics | 5 Comments

In 2007 Chicago überpriest Thomas Sargent gave a graduation speech at University of California at Berkeley, giving the grads “a short list of valuable lessons that our beautiful subject teaches”:

1. Many things that are desirable are not feasible.
2. Individuals and communities face trade-offs.
3. Other people have more information about their abilities, their efforts, and their preferences than you do.
4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.
5. There are trade offs between equality and efficiency.
6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well meaning outsiders to change things for better or worse.
Lebowski.jpg-610x07. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.
8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).
10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).
12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

Reading through this list of “valuable lessons” things suddenly fall in place. If you ever had doubt about economics as a n ideology, reading Sargent’s list sure gives a clear answer.

What is perhaps even worse is that this kind of self-righteous neoliberal drivel has again and again been praised and prized. And not only by econ bloggers and right-wing think-tanks.

Out of the 79 persons that have been awarded “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel,” more than 30 have been affiliated to The University of Chicago. The world is really a small place when it comes to economics …

Trösklar och statistisk signifikans

30 Jun, 2019 at 09:48 | Posted in Statistics & Econometrics | 1 Comment

I en artikelEkonomistas argumenterar nationalekonomen Robert Östling för att lösningen på den uppmärksammade ‘replikationskrisen’ är att ändra på tröskeln för vad som ska betraktas som ‘statistiskt signifikant’ från 5% till 0,5%.

Även om detta i sig är vällovligt är det dock ingen lösning. Det räcker inte med att ändra godtyckliga nivåer för vad som ska anses vara ‘statistiskt signifikant’ eller ej. Det är inte där det grundläggande problemet ligger:

worship-p-300x214We recommend dropping the NHST [null hypothesis significance testing] paradigm — and the p-value thresholds associated with it — as the default statistical paradigm for research, publication, and discovery in the biomedical and social sciences. Specifically, rather than allowing statistical signicance as determined by p < 0.05 (or some other statistical threshold) to serve as a lexicographic decision rule in scientic publication and statistical decision making more broadly as per the status quo, we propose that the p-value be demoted from its threshold screening role and instead, treated continuously, be considered along with the neglected factors [such factors as prior and related evidence, plausibility of mechanism, study design and data quality, real world costs and benefits, novelty of finding, and other factors that vary by research domain] as just one among many pieces of evidence.

We make this recommendation for three broad reasons. First, in the biomedical and social sciences, the sharp point null hypothesis of zero effect and zero systematic error used in the overwhelming majority of applications is generally not of interest because it is generally implausible. Second, the standard use of NHST — to take the rejection of this straw man sharp point null hypothesis as positive or even definitive evidence in favor of some preferredalternative hypothesis — is a logical fallacy that routinely results in erroneous scientic reasoning even by experienced scientists and statisticians. Third, p-value and other statistical thresholds encourage researchers to study and report single comparisons rather than focusing on the totality of their data and results.

Andrew Gelman et al.

Vi får aldrig glömma att de underliggande parametrar vi använder när vi gör våra signifikanstestningar är modellkonstruktioner. Oberoende av vlka p-värden vi än får så säger de oss ingenting om modellen är fel. Och framför allt — oberoende av hur många signifikanstester och vilka tösklar vi sätter så validerar de aldrig modeller!

frIn journal articles a typical regression equation will have an intercept and several explanatory variables. The regression output will usually include an F-test, with p – 1 degrees of freedom in the numerator and n – p in the denominator. The null hypothesis will not be stated. The missing null hypothesis is that all the coefficients vanish, except the intercept.

If F is significant, that is often thought to validate the model. Mistake. The F-test takes the model as given. Significance only means this: if the model is right and the coefficients are 0, it is very unlikely to get such a big F-statistic. Logically, there are three possibilities on the table:
i) An unlikely event occurred.
ii) Or the model is right and some of the coefficients differ from 0.
iii) Or the model is wrong.

Chicago style response to critique

29 Jun, 2019 at 18:44 | Posted in Economics | 5 Comments


In a post up here earlier this week yours truly questioned the scientific value of Chicago economics. I took as an example the SMD theorem, that has unequivocally showed that there does not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of a general equilibrium solution — and that it, therefore, is intellectually dishonest to just go on pretending that it is still acceptable to model real-world economies building on the assumption that an entire economy can be modelled as a representative actor and that this is a valid procedure.

And as usual, when those Chicago economists respond to the critique, they
immediately want to divert the attention into focusing on mathematical technicalities.

As if that was the problem! It is not.

The basic problem is that Chicago style models crucially build on unrealistic assumptions known to be false. And since genuine explanations require truth, those models capture nothing of significance and so end up being explanatorily totally irrelevant since they fundamentally misrepresent acting causal factors known to be relevant — they simply lack the necessary representational relationship with the real world.

But reacting the way they do those Chicago economists, should come as no surprise to us since this is the typical Chicago procedure when facing critique. How should one react? Robert Solow knows:

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

Robert Solow

Georgescu-Roegen — the bioeconomic approach to climate change and growth

28 Jun, 2019 at 18:41 | Posted in Economics | 1 Comment

grPositivism does not seem to realize at all that the concept of verifiability — or that the position that ‘the meaning of a proposition is the method of its verification’ — is covered by a dialectical penumbra in spite of the apparent rigor of the sentences used in the argument …

I hope the reader will not take offense at the unavoidable conclusion that most of the time all of us talk some nonsense, that is, express our thoughts in dialectical terms with no clear-cut meaning …

The position that dialectical concepts should be barred from science because they would infest it with muddled thinking, is, therefore, a flight of fancy — unfortunately, not an innocuous one. For it has bred another kind of muddle that now plagues large sectors of social sciences: arithmomania. To cite a few cases from economics alone. The complex notion of economic developmet has been reduced to a number, the income per capita. The dialectical spectrum of human wants … has long since been covered under the colorless numerical concept of ‘utility’ for which, moreover, nobody has yet been able to provide an actual procedure of measurement.

In the postwar period, it has become increasingly clear that economic growth has not only brought greater prosperity. The other side of growth, in the form of pollution, contamination, wastage of resources, and climate change, has emerged as perhaps the greatest challenge of our time.

Against the mainstream theory’s view on the economy as a balanced and harmonious system, where growth and the environment go hand in hand, ecological economists object that it can rather be characterized as an unstable system that at an accelerating pace consumes energy and matter, and thereby pose a threat against the very basis for its survival.

nicholasThe Romanian-American economist Nicholas Georgescu-Roegen (1906-1994) argued in his epochal The Entropy Law and the Economic Process (1971) that the economy was actually a giant thermodynamic system in which entropy increases inexorably and our material basis disappears. If we choose to continue to produce with the techniques we have developed, then our society and earth will disappear faster than if we introduce small-scale production, resource-saving technologies and limited consumption.

Following Georgescu-Roegen, ecological economists have argued that industrial society inevitably leads to increased environmental pollution, energy crisis and an unsustainable growth.

After a radio debate with one of the members of the Nobel prize committee, yours truly asked why Georgescu-Roegen hadn’t got the prize. The answer was — mirabile dictu — that he “never founded a school.” Talk about nonsense! I was surprised, to say the least, and wondered if he possibly had heard of the environmental movement. Well, he had — but it was “the wrong kind of school.” Can it be stated much clearer than this what it’s all about? If you haven’t worked within the mainstream paradigm — then you are excluded a priori from being eligible for the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel!

Today we really need to re-consider how we look upon how our economy influences the environment and climate change. And we need to do it fast. Nicholas Georgescu-Roegen gives us a good starting point for doing so!

[Added: In case your French isn’t too rusty, here’s a good presentation of his thoughts from France Culture.]

Teaching of economics — captured by a small and dangerous sect

28 Jun, 2019 at 17:40 | Posted in Economics | 1 Comment


The fallacy of composition basically consists of the false belief that the whole is nothing but the sum of its parts.  In the society and in the economy this is arguably not the case. An adequate analysis of society and economy a fortiori can’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts.

This fact shows up when mainstream economics tries to argue for the existence of The Law of Demand – when the price of a commodity falls, the demand for it will increase – on the aggregate. Although it may be said that one succeeds in establishing The Law for single individuals it soon turned out – in the Sonnenschein-Mantel-Debreu theorem firmly established already in 1976 – that it wasn’t possible to extend The Law of Demand 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 all agents are identical (i. e. there is 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 manstream economics reacted to this devastating findig? Basically by looking the other way, ignoring it and hoping that no one sees that the emperor is naked.

Having gone through a handful of the most frequently used textbooks of economics at the undergraduate level today, I can only conclude that the models that are presented in these 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 (1972) , 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 equlibrium solution.

So what modern economics textbooks present to students are really models built on the assumption that an entire economy can be modeled as a representative actor and that this is a valid procedure. But it isn’t — as the Sonnenschein-Mantel-Debreu theorem irrevocably has shown.

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 valid modeling 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.

Once the dust has settled, there is a strong case for an inquiry into whether the teaching of economics has been captured by a small but dangerous sect.

Larry Elliott/The Guardian

John Searle — a sexual harasser

27 Jun, 2019 at 13:08 | Posted in Politics & Society | 1 Comment

Screen-Shot-2015-01-12-at-10.15.23-AMJohn Searle, formerly a professor emeritus in UC Berkeley’s Department of Philosophy, has had his emeritus status revoked, along with all the privileges of that title, following a determination that he violated university policies against sexual harassment and retaliation.

This action permanently removes him from the university community. He will not be eligible to teach, work with graduate students, maintain office space or have special access to campus libraries, parking, etc. His access to the campus will be no different than those of any member of the general public.

Campus disciplinary proceedings determined that Searle engaged in sexual harassment and retaliation against a former student and employee who worked with him in his campus office after graduating.

UC Berkeley

We all, of course, condemn John Searle’s behaviour. But his behaviour was for decades not unknown to people at his faculty. So why did they just silently accept his unacceptable behaviour? An absolute disgrace!

On the nature of money and debt

27 Jun, 2019 at 11:48 | Posted in Economics | 6 Comments

key Perhaps we may elucidate the distinction between money and money-of-account by saying that the money-of-account is the description or title and the money is
the thing which answers to the description. Now if the same thing always answered to the same description, the distinction would have no practical interest. But if the thing can change, whilst the description remains the same, then the distinction can be highly significant. The difference is like that between the King of England (whoever he may be) and King George. A contract to pay ten years hence a weight of gold equal to the weight of the King of England is not the same thing as a contract to pay a weight of gold equal to the weight of the individual who is now King George. It is for the State to declare, when the time comes, who the King of England is.

Now by the mention of contracts and offers, we have introduced Law or Custom, by which they are enforceable; that is to say, we have introduced the State or the Community. Furthermore it is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of Money has been reached that Knapp’s Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realised.

Sometimes when you follow the ongoing debate on debt and money you get the impression that for some economists — especially those following in Innes’ footsteps — money is nothing but a question of credit and debt. But that is not Keynes view. For Keynes it is the state that determines what kind of ‘thing’ will count as credit and service debts. It is only when the state decides that a certain piece of paper counts as legal tender, that bit of paper is money.

Donald & Boris

26 Jun, 2019 at 19:12 | Posted in Politics & Society | Comments Off on Donald & Boris

DUMBC’est le rêve des auteurs de politique-fiction. Qui, ailleurs que dans leurs fantasmes les plus fous, aurait imaginé qu’un jour les Etats-Unis et le Royaume-Uni, deux pays qui, séparément ou ensemble, ont dominé le monde, seraient dirigés par des hommes aussi disruptifs que Donald Trump et Boris Johnson ?

La réalité, pourtant, est en passe de dépasser la fiction. Si tout se passe comme prévu, si, fin juillet, les militants du Parti conservateur britannique choisissent l’ancien maire de Londres comme chef, deux tignasses blondes se distingueront sur la carte postale du prochain sommet du G7, le mois suivant, à Biarritz (Pyrénées-Atlantiques). Et ce G7, qui s’annonce déjà compliqué pour son hôte, Emmanuel Macron, pourrait bien tourner au cauchemar …

Il y a, bien sûr, un certain nombre de traits communs aux deux hommes, en dehors de leur chevelure et du fait qu’ils soient tous les deux natifs de New York, il y a soixante-treize ans pour l’un, cinquante-cinq ans pour l’autre. Un narcissisme sans limites, une savante utilisation des médias, le goût du risque et de l’improvisation, un recours totalement désinhibé au mensonge, une propension à mobiliser les émotions plutôt que les faits, la facilité avec laquelle ils peuvent changer d’avis. Une vie privée agitée aussi : tous deux ont quitté leur deuxième femme pour une compagne vingt-quatre ans plus jeune qu’eux.

Sylvie Kauffman / Le Monde

The weird absence of money and finance in economic theory

26 Jun, 2019 at 14:45 | Posted in Economics | 8 Comments

Consider the problem of money. Money is of central importance to any modern capitalist market economy. Yet it is mainly sociologists, philosophers and dissenters that have maintained an interest in what money “is” with a view to continued critique and development … One might think this is because economics has already provided an agreed clear concept of money. But this is not the case. Contemporary economics defines money in terms of function (unit of account, store of value, medium of exchange), but puts aside both the actual history of money (after an origin story) and the conceptual problem of money, both of which likely affect the functionality of money in the broader sense of its role and consequence in real systems …

barterWhat appears weird to those outside of the mainstream is that in economic theory in general money is typically absent. It is usually assumed that in a properly functioning market system prices express the value of output such that all prices effectively become representative of ratios between goods and services (and inputs), and this ultimately means a market system operates as though it were barter. Money simply becomes the convenient symbol (in its medium of exchange guise) that expresses these ratios. As such, it has no independent significance, and one ought to look through money to the operation of “real” economic factors, and can in effect ignore money as a contributory, contextualising or significant component in a system …

The role of money in real systems has generally been peripheralised because of an arbitrary limitation created by the assumption that money is separate from and then circumspectly significant to “real” factors. This statement may seem odd to a non-economist, since we live in a world where monetary policy is high profile, and a great deal of attention is paid to central bank policy (inflation targeting for price stability), and to the existence and activity of banks.

Jamie Morgan / RWER

Yes indeed — money doesn’t matter in mainstream macroeconomic models. That’s true. According to the ‘classical dichotomy,’ real variables — output and employment — are independent of monetary variables, and so enables mainstream economics to depict the economy as basically a barter system.

But in the real world in which we happen to live, money certainly does matter. Money is not neutral and money matters in both the short run and the long run:

The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy.

J. M. Keynes A monetary theory of production (1933)

What is also ‘forgotten’ in mainstream economic 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 mainstream formalizations.

Adorno und die Ursachen von Rechtsradikalismus

26 Jun, 2019 at 09:00 | Posted in Politics & Society | 1 Comment

Chicago economics — a pseudo-scientific zombie

25 Jun, 2019 at 19:17 | Posted in Economics | 6 Comments

A couple of years ago, in a lecture on the US recession, Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturns in the US economy and its future prospects.

lucasLucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big – but smaller – dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery from where the US economy is today, maintaining that past experience would suggest an “automatic” recovery, if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the new classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But — if left to run its course unimpeded by European type welfare state activities — the free market will fix it all.

In a rather cavalier manner — without a hint of argument or presentation of empirical facts — Lucas dismisses even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead — “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” — this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do over and over again in their attempts to explain away the fact that the latest economic crises shows how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be government.

Chicago economics is a dangerous pseudo-scientific zombie ideology that ultimately relies on the poor having to pay for the mistakes of the rich. Trying to explain business cycles in terms of rational expectations has failed blatantly. Maybe it would be asking too much of freshwater economists like Lucas to concede that, but it’s still a fact that ought to be embarrassing.

shackleIf at some time my skeleton should come to be used by a teacher of osteology to illustrate his lectures, will his students seek to infer my capacities for thinking, feeling, and deciding from a study of my bones? If they do, and any report of their proceedings should reach the Elysian Fields, I shall be much distressed, for they will be using a model which entirely ignores the greater number of relevant variables, and all of the important ones. Yet this is what ‘rational expectations’ does to economics.

G. L. S. Shackle

Boris Johnson — la promesse d’une calamité pour le Royaume-Uni

25 Jun, 2019 at 13:09 | Posted in Politics & Society | 1 Comment

«Quelle révélation pourrait encore faire dérailler sa marche vers Downing Street, alors qu’il s’est maintes fois rendu coupable de mensonge, de tricherie, de déloyauté, de paresse, d’indiscrétion, d’incompétence, de mépris cynique pour les autres, sans jamais en subir les conséquences ?», se demandait la journaliste Sonia Purnell, une ancienne subordonnée de Boris Johnson pendant ses années de journaliste au Telegraph …

donald-trump«Il peut passer de la bonhomie à la fureur noire en quelques secondes, pour peu que l’on remette en cause le sentiment que tout lui est dû ou que l’on blesse son amour-propre», a ajouté Sonia Purnell dans le Times au lendemain de la rixe.

Si Boris Johnson n’était qu’un personnage de roman, il pourrait personnifier la quintessence d’une certaine catégorie d’Anglais : bien né et sûr de son fait, dilettante jusqu’au cynisme, spirituel jusqu’à la clownerie. Son assurance n’a d’égale que sa capacité à gaffer et à se ridiculiser. D’où les consignes de ses communicants : éviter au maximum les débats et les interviews en direct. « Fini de rire, Boris », semble être la consigne.

Le Monde

Bitte besteuert uns stärker!

25 Jun, 2019 at 12:41 | Posted in Politics & Society | 2 Comments

georgeIn einem offenen Brief haben sich mehrere reiche US-Unternehmer für die Einführung einer Vermögensteuer ausgesprochen. Zu den Initiatoren gehören etwa der Milliardär George Soros, Facebook-Mitbegründer Chris Hughes sowie Disney-Erben und die Besitzer der Hotelkette Hyatt. Sie rufen die Präsidentschaftsbewerber für die Wahl 2020 auf, eine gemäßigte Vermögensteuer zu unterstützen. “Amerika steht in der moralischen, ethischen und ökonomischen Verantwortung, unseren Wohlstand stärker zu besteuern”, heißt es in dem Brief, der auf der Plattform Medium veröffentlicht wurde.

Demnach kann eine Vermögensteuer dabei helfen, den Klimawandel anzugehen, die Wirtschaft zu stärken und Chancengleichheit zu schaffen. Umfragen zeigten, dass eine Mehrheit eine moderate Vermögensteuer für die reichsten Amerikaner unterstütze, schreiben die Autoren. Mehrere der demokratischen Präsidentschaftsbewerber haben sich bereits für eine Vermögensteuer ausgesprochen.

Die Unterzeichnerinnen und Unterzeichner verweisen unter anderem auf den Großinvestor Warren Buffet, der nach eigenen Angaben niedriger besteuert wird als seine Sekretärin. Sie signalisieren Unterstützung für die Vorstöße zu den Vermögensteuerplänen einiger demokratischer Präsidentschaftsbewerber – darunter die Senatorin Elizabeth Warren und Beto O’Rourke. Sie mahnen aber auch einen überparteilichen Konsens an.

Die Zeit

What is wrong with modern economics?

25 Jun, 2019 at 10:28 | Posted in Economics | 2 Comments

It is simply that modern economists persist in insisting that a set of tools be everywhere adopted that are mostly inadequate to social analysis, given the nature of social phenomena …

wrong toolTo put the matter bluntly (the pun may be useful), it is like attempting to cut the grass with a hammer or a piece of paper. The latter objects have their uses, but mowing the lawn is not one of them. Methods of applied mathematics of the sort economists wield have their uses, but illuminating social reality is not one of them, or at best, is so only in exceptional circumstances. I hope that it is clear that this explanation, whether correct or not, reflects a stance that is not anti-mathematics but anti a mismatch of tool and object — and so, given the circumstances, anti the abuse of mathematics …

There is a good deal wrong with modern economics. There is much to be done to remedy matters at all levels of analysis. But little can improve at any level until we discard the widely-worn methodological blinkers which encourage the view that mathematical modelling is everywhere automatically relevant, even essential, so that paying explicit attention to matters of ontology is unnecessary.

Tony Lawson

Modern economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality (1997), Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject

largepreview It is — sad to say — as relevant today as it was twenty years ago.

It is still a fact that within mainstream economics internal validity is 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!

Studying mathematics and logic is interesting and fun. It sharpens the mind. In pure mathematics and logic, we do not have to worry about external validity. But economics is not pure mathematics or logic. It’s about society. The real world.

Economics and Reality was a great inspiration to yours truly twenty years ago. It still is.

The difference between statistical and causal assumptions

24 Jun, 2019 at 19:57 | Posted in Statistics & Econometrics | Comments Off on The difference between statistical and causal assumptions

Causality and CorrelationThere are three fundamental differences between statistical and causal assumptions. First, statistical assumptions, even untested, are testable in principle, given sufficiently large sample and sufficiently fine measurements. Causal assumptions, in contrast, cannot be verified even in principle, unless one resorts to experimental control. This difference is especially accentuated in Bayesian analysis. Though the priors that Bayesians commonly assign to statistical parameters are untested quantities, the sensitivity to these priors tends to diminish with increasing sample size. In contrast, sensitivity to priors of causal parameters … remains non-zero regardless of (nonexperimental) sample size.

Second, statistical assumptions can be expressed in the familiar language of probability calculus, and thus assume an aura of scholarship and scientific re- spectability. Causal assumptions, as we have seen before, are deprived of that honor, and thus become immediate suspect of informal, anecdotal or metaphysical thinking. Again, this difference becomes illuminated among Bayesians, who are accustomed to accepting untested, judgmental assumptions, and should therefore invite causal assumptions with open arms—they don’t. A Bayesian is prepared to accept an expert’s judgment, however esoteric and untestable, so long as the judgment is wrapped in the safety blanket of a probability expression. Bayesians turn extremely suspicious when that same judgment is cast in plain English, as in “mud does not cause rain” …

The third resistance to causal (vis-a-vis statistical) assumptions stems from their intimidating clarity. Assumptions about abstract properties of density functions or about conditional independencies among variables are, cognitively speaking, rather opaque, hence they tend to be forgiven, rather than debated. In contrast, assumptions about how variables cause one another are shockingly transparent, and tend therefore to invite counter-arguments and counter-hypotheses.

Judea Pearl

Pearl’s seminal contributions to this research field is well-known and indisputable. But on the ‘taming’ and ‘resolve’ of the issues, yurs truly however has 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 his ‘do-calculus solutions’ for social sciences in general and economics in specific (see here, here, here and here). The distinction between the causal — ‘interventionist’ — E[Y|do(X)] and the more traditional statistical — ‘conditional expectationist’ — E[Y|X] is crucial, but Pearl and his associates, although they have fully explained why the first is so important, have to convince us that it (in a relevant way) can be exported from ‘engineer’ contexts where it arguably easily and universally apply, to socio-economic contexts where ‘manipulativity’ and ‘modularity’ are not perhaps so universally at hand.

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