Leontief and the sorry state of economics

30 Nov, 2020 at 10:53 | Posted in Economics | 10 Comments

The core assumption of 'modern' macro — totally FUBAR | LARS P. SYLL Page after page of professional economic journals are filled with mathematical formulas leading the reader from sets of more or less plausible but entirely arbitrary assumptions to precisely stated but irrelevant theoretical conclusions …

Year after year economic theorists continue to produce scores of mathematical models and to explore in great detail their formal properties; and the econometricians fit algebraic functions of all possible shapes to essentially the same sets of data without being able to advance, in any perceptible way, a systematic understanding of the structure and the operations of a real economic system.

Wassily Leontief

Mainstream economics has indeed, as noted by Leontief, become increasingly irrelevant to the understanding of the real world, and the main reason for this irrelevance is the failure of economists to match their deductive-axiomatic methods with their subject of study. The fixation on constructing models showing the certainty of logical entailment has been detrimental to the development of a relevant and realist economics. Insisting on formalistic-mathematical modelling forces the economist to give up on realism and substitute axiomatics for real-world relevance.

It is — sad to say — a fact that within mainstream economics internal validity is everything and external validity next to nothing. Why anyone should be interested in that kind of theories and models — as long as one does not come up with export licenses for the theories and models to the real world in which we live — is beyond comprehension. Stupid models are of no help at all in understanding the real world.

10 Comments

  1. By the way – the belief that maths show you more than you put into it yourself does a lot of harm not only in economics. Jerry Muller shows in his book The tyranny of numbers how it has infected worklife everywhere and contributed to miserable results everywhere: https://press.princeton.edu/books/hardcover/9780691174952/the-tyranny-of-metrics

    From the presentation:

    “Today, organizations of all kinds are ruled by the belief that the path to success is quantifying human performance, publicizing the results, and dividing up the rewards based on the numbers. But in our zeal to instill the evaluation process with scientific rigor, we’ve gone from measuring performance to fixating on measuring itself. The result is a tyranny of metrics that threatens the quality of our lives and most important institutions. In this timely and powerful book, Jerry Muller uncovers the damage our obsession with metrics is causing—and shows how we can begin to fix the problem.

    Filled with examples from education, medicine, business and finance, government, the police and military, and philanthropy and foreign aid, this brief and accessible book explains why the seemingly irresistible pressure to quantify performance distorts and distracts, whether by encouraging “gaming the stats” or “teaching to the test.” That’s because what can and does get measured is not always worth measuring, may not be what we really want to know, and may draw effort away from the things we care about. Along the way, we learn why paying for measured performance doesn’t work, why surgical scorecards may increase deaths, and much more. But metrics can be good when used as a complement to—rather than a replacement for—judgment based on personal experience, and Muller also gives examples of when metrics have been beneficial.”

  2. -Gunnar Myrdal was at first fascinated by the abstract mathematical models coming into fashion in the 1920s, and helped found the Econometric Society in London. Later, however, he accused the movement of ignoring the problem of distribution of wealth in its obsession with economic growth, of using faulty statistics and substituting Greek letters for missing data in its formulas and of flouting logic. He wrote, “Correlations are not explanations and besides, they can be as spurious as the high correlation in Finland between foxes killed and divorces.”

  3. Leontief’s criticisms focused on a narrow backwater of economics, namely the 50-54% of academic articles in the American Economic Review in 1972-1981 which were classed as “mathematical models without any data”.
    .
    But his criticisms are largely irrelevant to the other 46-50% of articles which were concerned with data in various ways.
    .
    And far more importantly, his criticisms were (and still are) irrelevant to the bulk of economic analyses outside academe, ie in business and government.

    • This didn’t prevent others from criticizing academic economists in general for exact the same sins. For example the economy historian Graeme Snooks:

      “The history of the social sciences has involved an intense struggle
      between those who think that theory should be developed inductively
      from observations of the past and present using historical and
      statistical techniques, and those who believe that it should be
      developed deductively with the aid of mathematics. In this struggle,
      the inductionists had the upper hand until the mid- to late nineteenth
      century, but thereafter the deductionists, through their impressive
      development of abstract ideas – particularly in the discipline of
      economics – began to surge ahead with, in Miltonian language,
      ‘blind zeal’ until they ultimately eclipsed the inductionists. The success
      of the deductionists was so overwhelming that the social sciences have
      become distinctly unbalanced in their approach to reality. Indeed,
      there are even times when deductive theory is mistaken for – and
      certainly preferred to – reality.”

      Of course there are business and government economists who are interested in reality. Otherwise our economy would be even worse than it really is. But the harm done by the academic economists is bad enough, since they are the most prestigious – for some reason I don’t understand.

      • Not the least of harms is that the deductionists (in Snooks’ language) gave scientific legitimation to a whole political party – those who in a “scientific” way try to redo the world according to the abstract ideas of the deductionists (and to the advantage of the finance industry). The “scientific Liberals”, as they have been called by the Swedish political commentator Carl Hamilton.

        One could study the harm they did for example in Alice Amsden: Escape from Empire, https://mitpress.mit.edu/books/escape-empire.

        Or in Erik Reinert: The terrible simplifiers: https://www.un.org/esa/desa/papers/2009/wp88_2009.pdf

        • Sorry for these replies on replies – but I found in Reinert’s paper an exact sentence describing what we are talking about: “As unlikely as it may initially sound, I shall endeavour to explain in this paper how—in spite of its apparent sophistication—equilibrium economics became ‘mathematized demagoguery’ based on an extremely simplistic world view”

        • Reinert’s article looks interesting. Will read!

          • Jan, I had the pleasure of meeting and knowing Alice Amsden. A very generous lady and fantastic speaker. I knew her during the early 2000s when economists were at the height of their arrogance. Everything she said about late developing countries now has pretty much been accepted, but then she was taking on a powerful orthodoxy virtually single-handedly.

            Her warnings about excessive formalism and the dangers of relying on neo-classical economic frameworks, however, are yet to be heeded.

            • I’m happy to hear that her views have been accepted. But the old superstition is nevertheless rolling on i media and political circles.

    • Here is an example of a journalist’s review of a private J P Morgan research report that explicitly models the Fed and makes testable price predictions: https://www.zerohedge.com/markets/titanic-taper-tantrum-jpmorgan-expects-bond-demand-tumble-600bn-2021
      .
      > […] according to JPM this deterioration in the supply/demand imbalance “implies upward pressure on bond yields next year of just over 20bp based on the relationship between annual changes in excess supply and global agg yields over the past decade, effectively reversing a third of this year’s decline.”
      .
      So JPM has a mathematical model of bond supply and demand, and the relationship to yield. Their input data are historical statistics.
      .
      You might test this prediction by taking a long or short position in Treasury bonds. JPM is saying short bonds.
      .
      Of course, JPM has been saying that for awhile. Looking up “how to short bonds” I came across this 2018 article: https://ragingbull.com/large-cap-stocks/how-to-short-the-bond-market-with-etfs/
      .
      > Rather than outright shorting the ETF and expose myself to a lot of risk, I’m in put options. With put options, my risk is limited to my invested premium. In other words, I’m placing a bet on a rise in interest rates and a fall in bond prices. For example, if you expect TLT to fall below $125 within two months, you could purchase put options with a strike price of $125 expiring in two months. Even if TLT starts to rise above $125, you would not be exposed because your maximum loss is the amount you invested. This helps immensly with managing your risk-reward.
      .
      TLT is (checks) $157.50 today, so he would have done just fine if he’d simply bought and held. But if one needs immediate income, one might place a bet on bond yields going up by 20 basis points. The lowest premium one might pay and the maximum potential reward can be fully specified up front, and is left as an exercise for the reader.


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