COVID-19 depression antidote (II)

31 Mar, 2020 at 19:16 | Posted in Varia | 1 Comment

 

Maths and economics

31 Mar, 2020 at 15:05 | Posted in Economics | Comments Off on Maths and economics

Many American undergraduates in Economics interested in doing a Ph.D. are surprised to learn that the first year of an Econ Ph.D. feels much more like entering a Ph.D. in solving mathematical models by hand than it does with learning economics. Typically, there is very little reading or writing involved, but loads and loads of fast algebra is required. Why is it like this? …

ecoOne reason to use math is that it is easy to use math to trick people. Often, if you make your assumptions in plain English, they will sound ridiculous. But if you couch them in terms of equations, integrals, and matrices, they will appear more sophisticated, and the unrealism of the assumptions may not be obvious, even to people with Ph.D.’s from places like Harvard and Stanford, or to editors at top theory journals such as Econometrica …

Given the importance of signaling in all walks of life, and given the power of math, not just to illuminate and to signal, but also to trick, confuse, and bewilder, it thus makes perfect sense that roughly 99% of the core training in an economics Ph.D. is in fact in math rather than economics.

Douglas L. Campbell

Indeed.

No, there is nothing wrong with mathematics per se.

No, there is nothing wrong with applying mathematics to economics.

amathMathematics is one valuable tool among other valuable tools for understanding and explaining things in economics.

What is, however, totally wrong, are the utterly simplistic beliefs that

• “math is the only valid tool”

• “math is always and everywhere self-evidently applicable”

• “math is all that really counts”

• “if it’s not in math, it’s not really economics”

• “almost everything can be adequately understood and analyzed with math”

Mainstream economists have always wanted to use their hammer, and so have decided to pretend that the world looks like a nail. Pretending that uncertainty can be reduced to risk and that all activities, relations, processes and events can be adequately converted to pure numbers, have only contributed to making economics irrelevant and powerless when confronting real-world financial crises and economic havoc.

How do we put an end to this intellectual cataclysm? How do we re-establish credence and trust in economics as a science? Five changes are absolutely decisive.

(1) Stop pretending that we have exact and rigorous answers on everything. Because we don’t. We build models and theories and tell people that we can calculate and foresee the future. But we do this based on mathematical and statistical assumptions that often have little or nothing to do with reality. By pretending that there is no really important difference between model and reality we lull people into thinking that we have things under control. We haven’t! This false feeling of security was one of the factors that contributed to the financial crisis of 2008.

(2) Stop the childish and exaggerated belief in mathematics giving answers to important economic questions. Mathematics gives exact answers to exact questions. But the relevant and interesting questions we face in the economic realm are rarely of that kind. Questions like “Is 2 + 2 = 4?” are never posed in real economies. Instead of a fundamentally misplaced reliance on abstract mathematical-deductive-axiomatic models having anything of substance to contribute to our knowledge of real economies, it would be far better if we pursued “thicker” models and relevant empirical studies and observations.

(3) Stop pretending that there are laws in economics. There are no universal laws in economics. Economies are not like planetary systems or physics labs. The most we can aspire to in real economies is establishing possible tendencies with varying degrees of generalizability.

(4) Stop treating other social sciences as poor relations. Economics has long suffered from hubris. A more broad-minded and multifarious science would enrich today’s altogether too autistic economics.

(5) Stop building models and making forecasts of the future based on totally unreal micro-founded macro models with intertemporally optimizing robot-like representative actors equipped with rational expectations. This is pure nonsense. We have to build our models on assumptions that are not so blatantly in contradiction to reality. Assuming that people are green and come from Mars is not a good – not even as a ‘successive approximation’ – modelling strategy.

Good reasons to become a Keynesian

30 Mar, 2020 at 18:14 | Posted in Economics | 1 Comment

Until [2008], when the banking industry came crashing down and depression loomed for the first time in my lifetime, I had never thought to read The General Theory of Employment, Interest, and Money, despite my interest in economics … I had heard that it was a very difficult book and that the book had been refuted by Milton Friedman, though he admired Keynes’s earlier work on monetarism. I would not have been surprised by, or inclined to challenge, the claim made in 1992 by Gregory Mankiw, a prominent macroeconomist at Harvard, that “after fifty years of additional progress in economic science, The General Theory is an outdated book. . . . We are in a much better position than Keynes was to figure out how the economy works.”

adaWe have learned since [2008] that the present generation of economists has not figured out how the economy works …

Baffled by the profession’s disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis …

It is an especially difficult read for present-day academic economists, because it is based on a conception of economics remote from theirs. This is what made the book seem “outdated” to Mankiw — and has made it, indeed, a largely unread classic … The dominant conception of economics today, and one that has guided my own academic work in the economics of law, is that economics is the study of rational choice … Keynes wanted to be realistic about decision-making rather than explore how far an economist could get by assuming that people really do base decisions on some approximation to cost-benefit analysis …

Economists may have forgotten The General Theory and moved on, but economics has not outgrown it, or the informal mode of argument that it exemplifies, which can illuminate nooks and crannies that are closed to mathematics. Keynes’s masterpiece is many things, but “outdated” it is not.

Richard Posner

Chicago economics — in praise of superficiality

29 Mar, 2020 at 14:50 | Posted in Economics | 9 Comments

igTo observe that economics is based on a superficial view of individual and social behaviour does not seem to me to be much of an insight. I think it is exactly this superficiality that gives economics much of the power that it has. Its ability to predict human behaviour without knowing very much about the make up and lives of the people whose behaviour we are trying to understand.

Robert Lucas

The purported strength of Chicago — New Classical — macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially that the decisions are taken by inter-temporal utility maximizing ‘forward-looking’ individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations — without ever presenting neither ontological nor epistemological justifications for this claim — has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations.

That anyone should take that kind of stuff seriously is totally and unbelievably ridiculous. Or as Robert Solow has it:

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

UK measures against Covid-19 — cosmetic and inefficient

29 Mar, 2020 at 10:58 | Posted in Politics & Society | 11 Comments

The error in the UK is on two levels. Modelling and policymaking.

First, at the modelling level, the government relied at all stages on epidemiological models that were designed to show us roughly what happens when a preselected set of actions are made, and not what we should make happen, and how.

covidThe modellers use hypotheses/assumptions, which they then feed into models, and use to draw conclusions and make policy recommendations. Critically, they do not produce an error rate. What if these assumptions are wrong? Have they been tested? The answer is often no. For academic papers, this is fine. Flawed theories can provoke discussion. Risk management – like wisdom – requires robustness in models …

Second, but more grave, is the policymaking. No 10 appears to be enamoured with “scientism” – things that have the cosmetic attributes of science but without its rigour. This manifests itself in the nudge group that engages in experimenting with UK citizens or applying methods from behavioural economics that fail to work outside the university – yet patronise citizens as an insult to their ancestral wisdom and risk-perception apparatus. Social science is in a “replication crisis”, where less than half the results replicate (under exact same conditions), less than a tenth can be taken seriously, and less than a hundredth translate into the real world …

So what is called “evidence-based” methods have a dire track record and are pretty much evidence-free.

The obvious policy left now is a lockdown, with overactive testing and contact tracing: follow the evidence from China and South Korea rather than thousands of error-prone computer codes. So we have wasted weeks, and ones that matter with a multiplicative threat.

Nassim Nicholas Taleb & Yaneer Bar-Yam

Covid-19 and the magic money tree

28 Mar, 2020 at 09:52 | Posted in Economics | 3 Comments

What will be the lasting effects of the covid-19 pandemic? Start with the size of the state. Over the next year government debt will rise sharply, as spending jumps and tax revenues collapse. When the economy recovers, attention will turn to paying it down. “Capital and Ideology”, a new book by Thomas Piketty, shows that after the first and second world wars many governments in the West turned to heavier taxation of the incomes and wealth of the richest to achieve that goal …

treeCentral banks’ innovations will also have lasting consequences. Few economists believe that the explicit co-operation between the fiscal and monetary authorities risks creating runaway inflation … However, just as the use of quantitative easing in 2008-09 opened the door to more of the same down the road, it will become harder to make the argument that the “magic money tree” does not exist … If central banks promised to fund the government during the coronavirus pandemic, they might ask, then why shouldn’t they also fund it to launch an expensive war against a foreign enemy or to invest in a Green New Deal?

Calls for a more activist fiscal-monetary government will come against a backdrop of structurally higher demand for state spending. The public sector tends to provide labour-intensive services in which productivity improvements are difficult, such as health care and education. It must match the salaries of workers in other sectors in order to retain its own, even as they become less productive relative to the overall economy—a phenomenon which raises the cost of provision. Long before the coronavirus pandemic, fiscal wonks argued that government spending would soar during the 2020s, even in the absence of a crisis. That was not only or even primarily because an ageing population would raise demand for health care, but because health systems would be able to treat a wider range of illnesses more effectively, which would push up costs.

The likely economic effects of the pandemic reach far beyond the role of the state … But the redefined role of the state could prove to be the most significant shift. The rules of the game have been moving in one direction for centuries. Another radical change is looming.

The Economist

‘New Keynesians’ have long been arguing that, at the zero lower bound of nominal interest rates, central bankers don’t have the tools to effectively fight recessions. This yours truly and other Post Keynesian economists have criticized, arguing that those monetary measures don’t work even when we’re not even close to the zero lower bound.

In the ‘New Keynesian’ world we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.

Now, the logic behind the New ‘Keynesians’ 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. According to this approach, 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 Post Keynesian point of view, this is a belief resting on nothing but sheer hope.

We have to 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.

Under the pressure of Covid-19, more and more economists and politicians have now come to realize that the ‘New Keynesian’ dogma is wrong and that we need other stabilisation (read fiscal) tools to get the economy going. That’s great. Now we’re eagerly awaiting the ‘New Keynesians’ to also finally wake up …

Yours truly among the top economics influencers to follow

27 Mar, 2020 at 09:58 | Posted in Varia | 7 Comments

lps2-1Yours truly is — together with people like e.g. Paul Krugman, Nate Silver, Dani Rodrik, Thomas Piketty, Steve Keen — ranked on Focus Economics’ Top 75 Influencers to Follow list. The list features academics, journalists, and central bankers who are widely followed on Twitter. I am — of course — truly awed, honoured and delighted.
 
[Added: And thanks everyone for all your congratulations and kind comments here on the blog!]

Economic growth and the size of the ‘private sector’

26 Mar, 2020 at 17:52 | Posted in Statistics & Econometrics | 2 Comments

Economic growth has since long interested economists. Not least, the question of which factors are behind high growth rates has been in focus. The factors usually pointed at are mainly economic, social and political variables. In an interesting study from the University of  Helsinki, Tatu Westling expanded the potential causal variables to also include biological and sexual variables. In the report Male Organ and Economic Growth: Does Size Matter (2011), he was — based on the ‘cross-country’ data of Mankiw et al (1992), Summers and Heston (1988), Polity IV Project data of political regime types and a data set on average penis size in 76 non-oil producing countries (www.everyoneweb.com/worldpenissize) — able to show that the level and growth of GDP per capita between 1960 and 1985 varies with penis size. Replicating Westling’s study — yours truly has used his favourite program Gretl — we obtain the following two charts:


The Solow-based model estimates show that the maximum GDP is achieved with the penis of about 13.5 cm and that the male reproductive organ (OLS without control variables) are negatively correlated with — and able to ‘explain’ 20% of the variation in — GDP growth.

Even with the reservation for problems such as endogeneity and confounders one can not but agree with Westling’s final assessment that “the ‘male organ hypothesis’ is worth pursuing in future research” and that it “clearly seems that the ‘private sector’ deserves more credit for economic development than is typically acknowledged.” Or? …

Ngîl cennin eriel vi

24 Mar, 2020 at 17:06 | Posted in Varia | Comments Off on Ngîl cennin eriel vi

 

On the non-neutrality of money

24 Mar, 2020 at 10:12 | Posted in Economics | 4 Comments

Paul Krugman has repeatedly over the years argued that we should continue to use neoclassical hobby horses like IS-LM and Aggregate Supply-Aggregate Demand models. Here’s one example:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I doubt that Keynes would have been impressed by having his theory being characterized with catchwords like “tendency to return to full employment” and “money is neutral in the long run.”

alfa

One of Keynes’s central tenets — in clear contradistinction to the beliefs of mainstream economists — is that there is no strong automatic tendency for economies to move toward full employment levels in monetary economies.

Money doesn’t matter in mainstream macroeconomic models. That’s true. But in the real world in which we happen to live, money does certainly 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)

Message personnel

23 Mar, 2020 at 17:39 | Posted in Varia | Comments Off on Message personnel

 

Les sentiments amoureux résumé en 4 minutes sublimes.

Ti voglio così come sei

23 Mar, 2020 at 17:38 | Posted in Varia | Comments Off on Ti voglio così come sei

 

Le canzoni di questa cantautore mi hanno sempre emozionato. È grandissimo Peppino!

Chicago economics — a bit out of touch with the real world

23 Mar, 2020 at 08:34 | Posted in Economics | 1 Comment

new classicalTom Sargent is a bit out of touch with the real world up there in his office … Certain people have a capacity for ignoring facts which are patenty obvious, but are counter to their view of the world; so they just ignore them …

Sargent is a sort of tinkerer, playing an intellectual game. He looks at a puzzle to see if h ecan solve it in a particular way, exercising these fancy techniques.

Alan Blinder

Do you think this is too harsh? Well, then I suggest you read the following excerpt from the interview with Sargent in Arjo Klamer’s The New Classical Macroeconomics (1984):

People say that many of your assumptions are unrealistic.

It is true that these assumptions are unrealistic.

Do you feel comfortable with them?

Yes, about certain matters. I’m aware of all the problems with them. There are philosophical contradictions about using this methodoology. Deep down I don’t believe in them, but I don’t have a better method of understanding what’s going on out there.

But if the best is not good enough? Wittgenstein’s dictum in Tractatus Logico-Philosophicus comes to mind:

Wovon man nicht sprechen kann, darüber muss man schweigen.

Léo Ferré

21 Mar, 2020 at 18:29 | Posted in Varia | Comments Off on Léo Ferré

 

Un chanteur sans compromission. Toujours extra.

Assar Lindbeck

21 Mar, 2020 at 18:01 | Posted in Varia | 6 Comments

Assar Lindbeck skriver i DN (20200106) tillsammans med Mats Persson (L) att Sverige är illa rustat för fortsatt invandring. Få personer har haft ett så stort inflytande på den svenska samhällsutvecklingen under det senaste halvseklet som Lindbeck. Om Sverige är illa rustat ekonomiskt och politiskt beror det mycket på honom.

assarAssar Lindbeck är en av de mest inflytelserika nationalekonomer Sverige haft. Under en epok, då nationalekonomer har betraktats som sanningsägande guruer när det gäller ekonomi och politik, har Lindbeck haft kontroll över forskningsstipendier och tillsättningar. ”Han kunde ringa och säga att den där ska inte ha något för han har gjort fel”, sa den före detta LO-ekonomen P-O Edin i SOU 1999:150 (Vad hände med Sveriges ekonomi efter 1970?).

En som råkade särskilt illa ut var den internationellt respekterade ekonomen Sven Grassman. Han avslöjade felaktigheter i nationalräkenskaperna, som gynnade den borgerliga politiska propagandan. Han drevs att lämna sin tjänst som vicechef för Institutet för internationell ekonomi.

Lindbeck har också haft stort internationellt inflytande eftersom han 1969–1994 var ledamot och från 1980 till 1994 ordförande i den kommitté som utsåg vinnare av det så kallade Nobelpriset i ekonomi, som inte finansieras av arvet från Nobel utan den svenska staten. Speciellt stor betydelse för den nyliberala ekonomiska teorins genomslag hade priset till den nästan bortglömde nyliberalen Hayek 1974. Sedan fick en rad nyliberaler detta pris. Mest känd är Milton Friedman, som hyllade den blodige chilenske diktatorn Pinochet. Han fick det 1976.

Kerstin Eldh

Ja, det är svårt att inte hålla med författaren här. Få ekonomer har gjort mer skada för det här landet än Assar Lindbeck. En hänsynslös maktmänniska med unkna nyliberala ideal.

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