It’s time to tax the Wall Street casino!

30 Jan, 2021 at 16:11 | Posted in Economics | 10 Comments

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.8489342The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism — which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.

These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges … The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.

Occupy GameStop

30 Jan, 2021 at 10:15 | Posted in Economics | 1 Comment

Steht der Fall GameStop tatsächlich für eine Krise des Aktienmarkts, gar des Kapitalismus? Und sorgen die Anleger mit ihren Absprachen in den sozialen Netzwerken für eine Demokratisierung des Handels? Offen ist auch, ob es überhaupt legal ist, sich online abzusprechen und dann gemeinsam einen bestimmten Wert einfach aufzukaufen. “Darauf gibt es keine einfache Antwort”, sagt Michael Grote, Professor für Kapitalmärkte an der Frankfurt School of Finance & Management. “Es ist erst mal etwas vollkommen Neues, dass sich lauter Kleinanleger zusammenschließen und zunächst schlicht Tipps austauschen. Das ist auch legal.”

GameStop is just a pawn in the new battle between Wall St and Main St - ABC  NewsOb das bereits eine Absprache im rechtlichen Sinne darstelle, müsse ein Gericht klären, weil es solche Fälle bisher nicht gegeben habe. “Verboten ist es, wenn sich große institutionelle Anleger absprechen.” Doch wo liegt da der Unterschied? …

Die Kritik des demokratischen US-Senators Brown richtet sich vor allem gegen die Entscheidung des Onlinebrokers Robinhood, Käufe der seit Tagen hochfliegenden GameStop-Aktie zu sperren …

Michael Grote von der Frankfurt School of Finance sieht diese Entscheidung kritisch. Es sei zwar verständlich, wenn eine solche Aktie an der Börse zeitweise vom Handel ausgesetzt werde. “Das kommt immer wieder vor, wenn etwas Außerordentliches passiert”, sagt Grote. Man gebe den Marktteilnehmern dann Zeit, das zu verarbeiten. Aber in diesem Fall würden Kunden einer privaten Plattform systematisch ausgeschlossen. “Das halte ich für extrem problematisch, weil es nicht Aufgabe eines privaten Unternehmens ist, das zu entscheiden, sondern der behördlichen Aufsicht”, sagt Grote.

J. C. Iser & Z. Zacharakis / Die Zeit

For another angle on this cause celèbre, here’s Yves Smith’s (Naked Capitalism) point of view.

Tobin tax — could it work? | LARS P. SYLL

Affaire Gamestop — les fonds spéculatifs pris à leur propre jeu

29 Jan, 2021 at 18:00 | Posted in Economics | Comments Off on Affaire Gamestop — les fonds spéculatifs pris à leur propre jeu

Cette semaine, le groupe new-yorkais Melvin Capital a perdu sa chemise sur les marchés – sur l’action de la société Gamestop, pour être précis –, le contraignant à mendier 2,75 milliards de dollars (2,27 milliards d’euros) auprès de ses concurrents pour éviter une faillite.

Congress plans hearings after GameStop stock frenzy and Robinhood trading  freeze - CBS NewsSes vainqueurs : une foule de boursicoteurs, saisis par l’ennui pendant la pandémie et qui se sont mis à jouer à Wall Street depuis qu’a éclaté le Covid-19. Ils se sont passé le mot sur le forum Reddit, mais aussi sur Twitter ou Facebook, faisant monter, monter, monter l’action de Gamestop pour mieux ruiner Melvin Capital …

Les boursicoteurs réussissent là où avaient échoué les militants d’Occupy Wall Street après la crise de 2009 : enrayer le système. L’affaire suscite un vif émoi aux Etats-Unis. La société de courtage TD Ameritrade a cessé de passer des ordres sur Gamestop et AMC. Le Wall Street Journal a ouvert un « live » pour couvrir l’affaire …

La sénatrice du Massachusetts Elizabeth Warren s’est moquée des arroseurs arrosés. « Pendant des années, ces mêmes fonds spéculatifs et investisseurs fortunés consternés aujourd’hui par les transactions sur Gamestop ont traité le marché boursier comme leur propre casino alors que tout le monde en paie le prix », a tweeté Mme Warren, estimant qu’« il est grand temps pour la SEC et les autres régulateurs financiers de se réveiller et de faire leur travail. Et avec une nouvelle administration et des démocrates qui dirigent le Congrès, j’ai l’intention de m’assurer qu’ils le feront ».

Arnaud Leparmentier / Le Monde

Sjukvården behöver en ny styråra

29 Jan, 2021 at 10:18 | Posted in Politics & Society | 4 Comments

Den svenska Hälso- och sjukvårdslagen har satts ur spel. Beslutet att låta det vinstdrivande vårdbolaget Kry ta över sjukvårdsrådgivningen 1177 i Region Stockholm är det senaste av en lång rad beslut som lett fram till ett systemskifte inom svensk sjukvård …

Robert Nybergs Vilgot om vinster i välfärden | Aftonbladet De privata vårdbolagens fria etableringsrätt ställer till problem för regionerna som måste förse bolagen med skattepengar, men som numera inte har rätt att styra vården dit den bäst behövs. Resultatet är att flertalet av de privata vårdcentralerna valt att etablera sig i storstadsregionernas mer välbärgade delar. Följden är att personer med små vårdbehov oftare uppsöker vårdcentralen – medan multisjuka och personer som bor på landsbygden eller i förorter fått allt svårare att få tillgång till vård. Höginkomsttagare utnyttjar vården mer än låginkomsttagare …

Det är dags att dra i nödbromsen. Marknadsexperimentet i sjukvården måste få ett slut. Vi behöver en sjukvård som fokuserar på patienternas bästa och på personalen som bär sjukvården på sina axlar. Vi behöver definitivt inga riskkapitalister i välfärden.

Gunilla Andersson & Lars Syll / Arbetet

Mainstream economics — nonsense masquerading as science

27 Jan, 2021 at 17:39 | Posted in Economics | 8 Comments

Assumptions in scientific theories/models are often based on (mathematical) tractability (and so necessarily simplifying) and used for more or less self-evidently necessary theoretical consistency reasons. But one should also remember that assumptions are selected for a specific purpose, and so the arguments (in economics shamelessly often totally non-existent) put forward for having selected a specific set of assumptions, have to be judged against that background to check if they are warranted.

This, however, only shrinks the assumptions set minimally – it is still necessary to decide on which assumptions are innocuous and which are harmful, and what constitutes interesting/important assumptions from an ontological & epistemological point of view (explanation, understanding, prediction). Especially so if you intend to refer your theories/models to a specific target system — preferably the real world. To do this one should start by applying a Real World Filter in the form of a Smell Test: Is the theory/model reasonable given what we know about the real world? If not, why should we care about it? If not – we shouldn’t apply it (remember time is limited and economics is a science on scarcity & optimization …)

I came to think of the importance of applying the Smell Test when re-reading Mark Thoma’s article — in The Fiscal Times — on “Do people have rational expectations?”:

Rational expectations attempts to avoid [the mistakes made by earlier expectational theories] by assuming people optimally incorporate all available information into their expectations …

The assumption of rational expectations is still present in most models today. But is it proper to assume that … people fully understand the policy rules that monetary and fiscal policymakers are using to stimulate or slow down the economy?

I think it’s a stretch to assume that people have this knowledge, but there are two responses to the objection that the economy is too complex for individuals to understand in the sense that rational expectations requires. The first is an “as if” argument … The other argument is that although individuals may not get things exactly correct, markets aggregate information efficiently, e.g. individual errors average out at the market level …

Rational expectations are important for two reasons. First, they serve as a “perfect case” benchmark … Assuming rational expectations is like assuming a perfect vacuum in physics – it provides a baseline that can be augmented with real-world features. Second, there are cases – simple games and financial markets for example – where the assumption of rational expectations may be approximately satisfied. But it’s a mistake, I think, to assume that rational expectations apply in all other settings or to the economy as a whole.

Although there is quite a lot of healthy skepticism on the rational expectations hypothesis (REH) here that yours truly agrees with, I still think that Thoma’s picture of the extent to which the assumption of rational expectations is useful and valid, is inadequate and unwarranted.

Let me elaborate a little on why I think so.

The concept of rational expectations was first developed by John Muth in  an Econometrica article in 1961 — Rational expectations and the theory of price movements  — and later — from the 1970s and onward — applied to macroeconomics. Muth framed his rational expectations hypothesis in terms of probability distributions:

Expectations of firms (or, more generally, the subjective probability distribution of outcomes) tend to be distributed, for the same information set, about the prediction of the theory (or the “objective” probability distributions of outcomes).

But Muth was also very open with the non-descriptive character of his concept:

The hypothesis of rational expectations does not assert that the scratch work of entrepreneurs resembles the system of equations in any way; nor does it state that predictions of entrepreneurs are perfect or that their expectations are all the same.

To Muth its main usefulness was its generality and ability to be applicable to all sorts of situations irrespective of the concrete and contingent circumstances at hand.

Muth’s concept was later picked up by New Classical Macroeconomics, where it soon became the dominant model-assumption and has continued to be a standard assumption made in many neoclassical (macro)economic models – most notably in the fields of (real) business cycles and finance (being a cornerstone of the “efficient market hypothesis”).

REH basically says that people on the average hold expectations that will be fulfilled. This makes the economist’s analysis enormously simplistic, since it means that the model used by the economist is the same as the one people use to make decisions and forecasts of the future.

pasteBut, strictly seen, REH only applies to ergodic – stable and stationary stochastic – processes. If the world was ruled by ergodic processes, people could perhaps have rational expectations, but no convincing arguments have ever been put forward, however, for this assumption being realistic – and this goes for Thoma too.

Of course you can make assumptions based on tractability, but then you do also have to take into account the necessary trade-off in terms of the ability to make relevant and valid statements on the intended target system. Mathematical tractability cannot be the ultimate arbiter in science when it comes to modeling real world target systems. Of course, one could perhaps accept REH if it had produced lots of verified predictions and good explanations. But it has done nothing of the kind. Therefore the burden of proof is on those who still want to use models built on utterly unreal assumptions.

In models building on REH it is presupposed – basically for reasons of consistency – that agents have complete knowledge of all of the relevant probability distribution functions. And when trying to incorporate learning in these models – trying to take the heat of some of the criticism launched against it up to date – it is always a very restricted kind of learning that is considered. A learning where truly unanticipated, surprising, new things never take place, but only rather mechanical updatings – increasing the precision of already existing information sets – of existing probability functions.

Nothing really new happens in these ergodic models, where the statistical representation of learning and information is nothing more than a caricature of what takes place in the real world target system. This follows from taking for granted that people’s decisions can be portrayed as based on an existing probability distribution, which by definition implies the knowledge of every possible event (otherwise it is in a strict mathematical-statistically sense not really a probability distribution) that can be thought of taking place.

But in the real world it is – as shown again and again by behavioural and experimental economics – common to mistake a conditional distribution for a probability distribution. Mistakes that are impossible to make in the kinds of economic analysis that build on REH. On average REH agents are always correct. But truly new information will not only reduce the estimation error but actually change the entire estimation and hence possibly the decisions made. To be truly new, information has to be unexpected. If not, it would simply be inferred from the already existing information set.

In the world of REH, learning is like being better and better at reciting the complete works of Shakespeare by heart – or at hitting bull’s eye when playing dart. It presupposes that we have a complete list of the possible states of the world and that by definition mistakes are non-systematic (which, strictly seen, follows from the assumption of “subjective” probability distributions being equal to the “objective” probability distribution). This is a rather uninteresting and trivial kind of learning. It is a closed world learning, synonymous to improving one’s adaptation to a world which is fundamentally unchanging. But in real, open world situations, learning is more often about adapting and trying to cope with genuinely new phenomena.

In the real world, it is not possible to just assume that probability distributions are the right way to characterize, understand or explain acts and decisions made under uncertainty. When we simply do not know, when we have not got a clue, when genuine uncertainty prevail, REH simply is not — to use Thoma’s own word — “reasonable.” In those circumstances it is not a useful assumption, since under those circumstances the future is not like the past, and henceforth, we cannot use the same probability distribution – if it at all exists – to describe both the past and future.

Now Thoma says that assuming rational expectations

is like assuming a perfect vacuum in physics – it provides a baseline that can be augmented with real-world features.

But although in physics it may possibly not be straining credulity too much to model processes as taking place in “vacuum worlds” – where friction, time and history do not really matter – in social and historical sciences it is obviously ridiculous. If societies and economies were frictionless ergodic worlds, why do econometricians fervently discuss things such as structural breaks and regime shifts? That they do is an indication of the unrealisticness of treating open systems as analyzable with frictionless ergodic “vacuum concepts.”

If the intention of REH is to help us explain real economies, it has to be evaluated from that perspective. A model or hypothesis without a specific applicability is not really deserving our interest. Without strong evidence all kinds of absurd claims and nonsense may pretend to be science. We have to demand more of a justification than rather watered-down versions of “anything goes” when comes to rationality postulates. If one proposes REH one also has to support its underlying assumptions. None is given. REH economists are not particularly interested in empirical examinations of how real choices and decisions are made in real economies. REH has been transformed from an – in principle – testable hypothesis to an irrefutable proposition.

The perhaps most problematic part of Thoma’s argument is that he maintains — with the help of his “tickling game” — tha young children in it (emphasis added)

have rational expectations in the sense that economists use the term.

But as shown already by Paul Davidson in the 1980s, REH implies that relevant distributions have to be time independent (which follows from the ergodicity implied by REH). This amounts to assuming that an economy is like a closed system with known stochastic probability distributions for all different events. In reality it is straining one’s beliefs to try to represent economies as outcomes of stochastic processes. An existing economy is a single realization tout court, and hardly conceivable as one realization out of an ensemble of economy-worlds, since an economy can hardly be conceived as being completely replicated over time. It’s really straining one’s imagination trying to see any similarity between these modelling assumptions and children’s expectations in the “tickling game.” In REH we are never disappointed in any other way than as when we lose at the roulette wheels, since, as Muth puts it, “averages of expectations are accurate.” But real life is not an urn or a roulette wheel, so REH is a vastly misleading analogy of real-world situations. It may be a useful assumption – but only for non-crucial and non-important decisions that are possible to replicate perfectly (a throw of dices, a spin of the roulette wheel etc).

Most models building on ratinal hypothesis are time-invariant and so give no room for any changes in expectations and their revisions. The only imperfection of knowledge they admit of is included in the error terms, error terms that are assumed to be additive and to have a give and known frequency distribution, so that the models can still fully pre-specify the future even when incorporating these stochastic variables into the models.

Thoma maintains that

Rational expectations are important for two reasons. First, they serve as a “perfect case” benchmark … Second, there are cases – simple games and financial markets for example – where the assumption of rational expectations may be approximately satisfied.

As I have tried to argue here, there is no support for this conviction at all. On the contrary. If we want to have anything of interest to say on real economies, financial crisis and the decisions and choices real people make, it is high time to replace the rational expectations hypothesis with more relevant and realistic assumptions concerning economic agents and their expectations.

Any model assumption — such as ‘rational expectations’ — that doesn’t pass the real world Smell Test is just silly nonsense on stilts.

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

Gedenktag für die Opfer des Nationalsozialismus

27 Jan, 2021 at 13:17 | Posted in Politics & Society | Comments Off on Gedenktag für die Opfer des Nationalsozialismus

.

Häften för Kritiska Studier

27 Jan, 2021 at 11:31 | Posted in Economics | 1 Comment

polomarkÅr 1968 utkom det första numret av Häften för kritiska studier. Under de mer än femtio år som gått sedan dess har mer än 200 nummer utkommit. För att fira detta tog några av tidskriftens redaktions-medlemmar ett initiativ till en jubileumsskrift som kom ut i början av år 2020.

Yours truly har ett bidrag med i skriften och tänkte därför ta tillfället i akt att säga något lite mer personligt om denna fantastiska tidskrift som alltid legat mig varmt om hjärtat.

Som en tämligen intellektuellt brådmogen 13-åring började jag läsa — och snart prenumerera på — HfKS. Jag vågar väl inte påstå att jag alltid fullt ut förstod de tankedigra och många gånger ‘djupa’ artiklar tidskriften var fylld med, men tillräckligt för att jag skulle lockas att läsa mer och förkovra mig. Mitt intresse stod tidigt till ekonomin, och jag minst speciellt ett par artiklar som handlade om handelsteori (som en av jubileumsskriftens bidragsgivare, Jan Otto Andersson, författat.)

Tidskriften gav god ammunition när jag några år senare på gymnasiet också dristade att ifrågasätta en samhällskunskapslärare (nybakad nationalekonom från Lund) som försökte få oss alla att tänka inom den traditionella neoklassiska teoriramen.hfDet var ju inget som gjorde en populär i lärarens ögon, men svaren uteblev ofta och förstärkte min övertygelse att de heterodoxa teorier HfKS introducerade hade fog för sig i kritiken av den förhärskande teoriuppfattningen.

På 90-talet kom jag själv att publicera ett flertal artiklar i tidskriften. För dem av oss som ville utveckla och publicera något annat än den vanliga färdigtuggade ekonomigröten vi matades med på de nationalekonomiska institutionerna gav HfKS oss möjlighet att göra våra röster hörda.

Nu så här när HfKS fyllt 50 år kan man inte heller annat än bli imponerad av det oförtröttliga arbete och kulturgärning den ständige redaktörn för tidskriften — Göran Fredriksson Humlesjö — bestått oss med. Få tidskrifter kan stoltsera med att ha en redaktör som varit med på ‘resan’ under ett halvt sekel!

Truth and rationality

27 Jan, 2021 at 11:16 | Posted in Economics | 4 Comments

Explaining Social Behavior: More Nuts and Bolts for the Social Sciences:  Elster, Jon: 9780521777445: Books - Amazon.caLet me conclude the discussion of rational-choice theory by emphasizing again its radically subjective nature

The rationality of beliefs is a completely different matter from that of their truth. Whereas truth is a feature of the relation between the belief and the world, rationality is a feature of the relation between the belief and the evidence possessed by the agent. Although rationality may require the agent to invest in new information, the investment is always constrained by its expected (that is, believed) costs and benefits.

Debunking anti-vaxxers

25 Jan, 2021 at 18:17 | Posted in Politics & Society | Comments Off on Debunking anti-vaxxers

.

Mainstream economics — a waste of time on a staggering scale

25 Jan, 2021 at 09:49 | Posted in Economics | 1 Comment

Though an enthusiast of reason, I believe that rational choice theory has failed abysmally, and it saddens me that this failure has brought discredit upon the very enterprise of serious theorizing in the field of social study …

bunbgeRational choice theory is far too ambitious. In fact, it claims to explain everything social in terms of just three assumptions that would hold for all individuals in all social groups and in every historical period. But a Theory of Everything does not explain anything in particular … And being unable to account for differences among individuals and for the variety of social interactions, systems, processes, and institutions, the theory is bound to be unrealistic, i. e., false …

The reader may feel that my criticism is excessive: that I am throwing the baby out along with the bath water. My reaction is that there is no baby … It died long ago from mathematical anemia, from deficiency in the enzymes required to digest the simplest social facts, and from lack of exposure to the sound and light and fury of the social weather.

Most mainstream economists want to explain social phenomena, structures and patterns, based on the assumption that the agents are acting in an optimizing — rational — way to satisfy given, stable and well-defined goals.

The procedure is analytical. The whole is broken down into its constituent parts so as to be able to explain (reduce) the aggregate (macro) as the result of the interaction of its parts (micro). Building their economic models, modern mainstream economists ground their models on a set of core assumptions describing the agents as ‘rational’ actors and a set of auxiliary assumptions. Together these assumptions make up the base model of all mainstream economic models. Based on these two sets of assumptions, they try to explain and predict both individual and social phenomena.

The core assumptions typically consist of completeness, transitivity, non-satiation, expected utility maximization, and consistent efficiency equilibria.

When describing the actors as rational in these models, the concept of rationality used is instrumental rationality – choosing consistently the preferred alternative, which is judged to have the best consequences for the actor given his in the model exogenously given interests and goals. How these preferences, interests, and goals are formed is not considered to be within the realm of rationality, and a fortiori not constituting part of economics proper.

The picture given by this set of core assumptions – ‘rational choice’ – is a rational agent with strong cognitive capacity that knows what alternatives she is facing, evaluates them carefully, calculates the consequences and chooses the one – given her preferences – that she believes has the best consequences according to her. Weighing the different alternatives against each other, the actor makes a consistent optimizing choice and acts accordingly.

Besides the core assumptions the model also typically has a set of auxiliary assumptions that spatio-temporally specify the kind of social interaction between ‘rational’ actors that take place in the model. These assumptions can be seen as giving answers to questions such as: who are the actors and where and when do they act; which specific goals do they have; what are their interests; what kind of expectations do they have; what are their feasible actions; what kind of agreements (contracts) can they enter into; how much and what kind of information do they possess; and how do the actions of the different individuals interact with each other.

So, the base model basically consists of a general specification of what (axiomatically) constitutes optimizing rational agents and a more specific description of the kind of situations in which these rational actors act (making the auxiliary assumptions serve as a kind of restriction of the intended domain of application for the core assumptions and the deductively derived theorems). The list of assumptions can never be complete since there will always be unspecified background assumptions and some (often) silent omissions (usually based on some negligibility and applicability considerations). The hope, however, is that the ‘thin’ list of assumptions shall be sufficient to explain and predict ‘thick’ phenomena in the real, complex, world.

These models are not primarily constructed for being able to analyze individuals and their aspirations, motivations, interests, etc., but typically for analyzing social phenomena as a kind of equilibrium that emerges through the interaction between individuals.

Now, of course, no one takes the base model (and the models that build on it) as a good (or, even less, true) representation of reality (which would demand a high degree of appropriate conformity with the essential characteristics of the real phenomena, that, even when weighing in pragmatic aspects such as ‘purpose’ and ‘adequacy,’ it is hard to see that this ‘thin’ model could deliver). The model is typically seen as a kind of thought experimental ‘as if’ bench-mark device for enabling a rigorous mathematically tractable illustration of social interaction in an ideal-type model world, and to be able to compare that ‘ideal’ with reality. The ‘interpreted’ model is supposed to supply analytical and explanatory power, enabling us to detect and understand mechanisms and tendencies in what happens around us in real economies.

Based on the model – and on interpreting it as something more than a deductive-axiomatic system – predictions and explanations can be made and confronted with empirical data and what we think we know. The base model and its more or less tightly knit axiomatic core assumptions are used to set up further ‘as if’ models from which consistent and precise inferences are made. If the axiomatic premises are true, the conclusions necessarily follow. But if the models are to be relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often do not. When addressing real economies, the idealizations and abstractions necessary for the deductivist machinery to work simply do not hold.

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? The logic of idealization, that permeates the base model, is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, where concepts and entities are without clear boundaries and continually interact and overlap.

Being told that the model is rigorous and amenable to ‘successive approximations’ to reality is of little avail, especially when the law-like (nomological) core assumptions are highly questionable and extremely difficult to test. Being able to construct ‘thought-experiments’ depicting logical possibilities does not take us very far. An obvious problem with the mainstream base model is that it is formulated in such a way that it realiter is extremely difficult to empirically test and decisively ‘corroborate’ or ‘falsify.’

e201ada1b6To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe. These are necessary conditions, not sufficient ones. Rational-choice theory often fails on both counts. The theory may be indeterminate, and people may be irrational …

I believe that much work in economics and political science that is inspired by rational-choice theory is devoid of any explanatory, aesthetic or mathematical interest, which means that it has no value at all. I cannot make a quantitative assessment of the proportion of work in leading journals that fall in this category, but I am confident that it represents waste on a staggering scale.

Jon Elster

Such models have — from an explanatory point of view — indeed no value at all. The ‘thinness’ is bought at too high a price unless you decide to leave the intended area of application unspecified or immunize your model by interpreting it as nothing more than two sets of assumptions making up a content-less theoretical system with no connection whatsoever to reality.

The Keynes-Ramsey-Savage debate on probability

24 Jan, 2021 at 17:42 | Posted in Economics | 3 Comments

Mainstream economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules, axiomatized by Ramsey (1931) and Savage (1954) — that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately — via some “Dutch book” or “money pump” argument — susceptible to being ruined by some clever “bookie”.

Bayesian Stats Joke | Data science, Mathematik meme, Mathe witzeBayesianism reduces questions of rationality to questions of internal consistency (coherence) of beliefs, but – even granted this questionable reductionism – do rational agents really have to be Bayesian? As I have been arguing elsewhere (e. g. here, here and here) there is no strong warrant for believing so.

In many of the situations that are relevant to economics one could argue that there is simply not enough of adequate and relevant information to ground beliefs of a probabilistic kind, and that in those situations it is not really possible, in any relevant way, to represent an individual’s beliefs in a single probability measure.

Say you have come to learn (based on own experience and tons of data) that the probability of you becoming unemployed in Sweden is 10 %. Having moved to another country (where you have no own experience and no data) you have no information on unemployment and a fortiori nothing to help you construct any probability estimate on. A Bayesian would, however, argue that you would have to assign probabilities to the mutually exclusive alternative outcomes and that these have to add up to 1, if you are rational. That is, in this case – and based on symmetry – a rational individual would have to assign probability 10% to becoming unemployed and 90% of becoming employed.

That feels intuitively wrong though, and I guess most people would agree. Bayesianism cannot distinguish between symmetry-based probabilities from information and symmetry-based probabilities from an absence of information. In these kinds of situations most of us would rather say that it is simply irrational to be a Bayesian and better instead to admit that we “simply do not know” or that we feel ambiguous and undecided. Arbitrary an ungrounded probability claims are more irrational than being undecided in face of genuine uncertainty, so if there is not sufficient information to ground a probability distribution it is better to acknowledge that simpliciter, rather than pretending to possess a certitude that we simply do not possess.

I think this critique of Bayesianism is in accordance with the views of John Maynard Keynes’ A Treatise on Probability (1921) and General Theory (1937). According to Keynes we live in a world permeated by unmeasurable uncertainty – not quantifiable stochastic risk – which often forces us to make decisions based on anything but rational expectations. Sometimes we “simply do not know.” Keynes would not have accepted the view of Bayesian economists, according to whom expectations “tend to be distributed, for the same information set, about the prediction of the theory.” Keynes, rather, thinks that we base our expectations on the confidence or “weight” we put on different events and alternatives. To Keynes expectations are a question of weighing probabilities by “degrees of belief”, beliefs that have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents modeled by Bayesian economists.

Stressing the importance of Keynes’ view on uncertainty John Kay writes in Financial Times:

For Keynes, probability was about believability, not frequency. He denied that our thinking could be described by a probability distribution over all possible future events, a statistical distribution that could be teased out by shrewd questioning – or discovered by presenting a menu of trading opportunities. In the 1920s he became engaged in an intellectual battle on this issue, in which the leading protagonists on one side were Keynes and the Chicago economist Frank Knight, opposed by a Cambridge philosopher, Frank Ramsey, and later by Jimmie Savage, another Chicagoan.

Keynes and Knight lost that debate, and Ramsey and Savage won, and the probabilistic approach has maintained academic primacy ever since …

I used to tell students who queried the premise of “rational” behaviour in financial markets – where rational means are based on Bayesian subjective probabilities – that people had to behave in this way because if they did not, people would devise schemes that made money at their expense. I now believe that observation is correct but does not have the implication I sought. People do not behave in line with this theory, with the result that others in financial markets do devise schemes that make money at their expense.

Although this on the whole gives a succinct and correct picture of Keynes’s view on probability, I think it’s necessary to somewhat qualify in what way and to what extent Keynes “lost” the debate with the Bayesians Frank Ramsey and Jim Savage.

John Maynard Keynes | Pålsson Syll, Lars | 55 SEKIn economics it’s an indubitable fact that few mainstream neoclassical economists work within the Keynesian paradigm. All more or less subscribe to some variant of Bayesianism. And some even say that Keynes acknowledged he was wrong when presented with Ramsey’s theory. This is a view that has unfortunately also been promulgated by Robert Skidelsky in his otherwise masterly biography of Keynes. But I think it’s fundamentally wrong. Let me elaborate on this point (the argumentation is more fully presented in my book John Maynard Keynes (SNS, 2007)).

It’s a debated issue in newer research on Keynes if he, as some researchers maintain, fundamentally changed his view on probability after the critique levelled against his A Treatise on Probability by Frank Ramsey. It has been exceedingly difficult to present evidence for this being the case.

Ramsey’s critique was mainly that the kind of probability relations that Keynes was speaking of in Treatise actually didn’t exist and that Ramsey’s own procedure  (betting) made it much easier to find out the “degrees of belief” people were having. I question this both from a descriptive and a normative point of view.

What Keynes is saying in his response to Ramsey is only that Ramsey “is right” in that people’s “degrees of belief” basically emanates in human nature rather than in formal logic.

Patrick Maher, former professor of philosophy at the University of Illinois, even suggests that Ramsey’s critique of Keynes’s probability theory in some regards is invalid:

Keynes’s book was sharply criticized by Ramsey. In a passage that continues to be quoted approvingly, Ramsey wrote:

“But let us now return to a more fundamental criticism of Mr. Keynes’ views, which is the obvious one that there really do not seem to be any such things as the probability relations he describes. He supposes that, at any rate in certain cases, they can be perceived; but speaking for myself I feel confident that this is not true. I do not perceive them, and if I am to be persuaded that they exist it must be by argument; moreover, I shrewdly suspect that others do not perceive them either, because they are able to come to so very little agreement as to which of them relates any two given propositions.” (Ramsey 1926, 161)

I agree with Keynes that inductive probabilities exist and we sometimes know their values. The passage I have just quoted from Ramsey suggests the following argument against the existence of inductive probabilities. (Here P is a premise and C is the conclusion.)

P: People are able to come to very little agreement about inductive proba- bilities.
C: Inductive probabilities do not exist.

P is vague (what counts as “very little agreement”?) but its truth is still questionable. Ramsey himself acknowledged that “about some particular cases there is agreement” (28) … In any case, whether complicated or not, there is more agreement about inductive probabilities than P suggests …

I have been evaluating Ramsey’s apparent argument from P to C. So far I have been arguing that P is false and responding to Ramsey’s objections to unmeasurable probabilities. Now I want to note that the argument is also invalid. Even if P were true, it could be that inductive probabilities exist in the (few) cases that people generally agree about. It could also be that the disagreement is due to some people misapplying the concept of inductive probability in cases where inductive probabilities do exist. Hence it is possible for P to be true and C false …

I conclude that Ramsey gave no good reason to doubt that inductive probabilities exist.

Ramsey’s critique made Keynes more strongly emphasize the individuals’ own views as the basis for probability calculations, and less stress that their beliefs were rational. But Keynes’s theory doesn’t stand or fall with his view on the basis for our “degrees of belief” as logical. The core of his theory — when and how we are able to measure and compare different probabilities —he doesn’t change. Unlike Ramsey he wasn’t at all sure that probabilities always were one-dimensional, measurable, quantifiable or even comparable entities.

He ain’t heavy, he’s my brother

23 Jan, 2021 at 16:44 | Posted in Varia | 1 Comment

.

In loving memory of my brother Peter.

Twenty years have passed.

People say time heals all wounds.

I wish that was true.

But some wounds never heal — you just learn to live with the scars.

peter o jag2But in dreams,
I can hear your name.
And in dreams,
We will meet again.

When the seas and mountains fall
And we come to end of days,
In the dark I hear a call
Calling me there
I will go there
And back again.

My favourite Italian teacher

22 Jan, 2021 at 16:28 | Posted in Varia | Comments Off on My favourite Italian teacher

.

How Richard Posner became a Keynesian

22 Jan, 2021 at 16:18 | Posted in Economics | 5 Comments

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

Der Lügen-Präsident verlässt das Weiße Haus

20 Jan, 2021 at 23:06 | Posted in Politics & Society | 1 Comment

.

Next Page »

Blog at WordPress.com.
Entries and Comments feeds.

%d bloggers like this: