## Probability and economics

21 Sep, 2021 at 18:44 | Posted in Economics | 2 Comments

Modern mainstream economics relies to a large degree on the notion of probability.

To at all be amenable to applied economic analysis, economic observations allegedly have to be conceived as random events that are analyzable within a probabilistic framework.

But is it really necessary to model the economic system as a system where randomness can only be analyzed and understood when based on an a priori notion of probability?

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

This is at odds with reality. Randomness obviously is a fact of the real world. Probability, on the other hand, attaches (if at all) to the world via intellectually constructed models, and a fortiori is only a fact of a probability generating (nomological) machine or a well constructed experimental arrangement or ‘chance set-up.’

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

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

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

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

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

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

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

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

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

## Critical realism — making sense of science

19 Sep, 2021 at 23:09 | Posted in Theory of Science & Methodology | 2 Comments

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## Revealed preference theory — an empty tautology

19 Sep, 2021 at 16:12 | Posted in Economics | 3 Comments

The experiment reported here was designed to reflect the fact that revealed preference theory is concerned with hypothetical choices rather than actual choices over time. In contrast to earlier experimental studies, the possibility that the different choices are made under different preference patterns can almost be ruled out. We find a considerable number of violations of the revealed preference axioms, which contradicts the neoclassical theory of the consumer maximising utility subject to a given budget constraint. We should therefore pay closer attention to the limits of this theory as a description of how people actually behave, i.e. as a positive theory of consumer behaviour. Recognising these limits, we economists should perhaps be a little more modest in our ‘imperialist ambitions’ of explaining non-market behaviour by economic principles.

Reinhard Sippel

Sippel’s experiment showed considerable violations of the revealed preference axioms and that from a descriptive point of view — as a theory of consumer behaviour — the revealed preference theory was of a very limited value.

The neoclassical theory of consumer behaviour has been developed in great part as an attempt to justify the idea of a downward-sloping demand curve. What forerunners like e.g. Cournot (1838) and Cassel (1899) did was merely to assert this law of demand. The utility theorists tried to deduce it from axioms and postulates on individuals’ economic behaviour. Revealed preference theory — in the hands of Paul Samuelson and Hendrik Houthakker — tried to build a new theory and to put it in operational terms, but ended up with just giving a theory logically equivalent to the old one. As such it also shares its shortcomings of being empirically nonfalsifiable and of being based on unrestricted universal statements.

The theory is nothing but an empty tautology — and pondering on Reinhard Sippel’s experimental results and Nicholas Georgescu-Roegen’s apt description, a harsh assessment of what the theory accomplishes is inevitable:

Lack of precise definition should not … disturb us in moral sciences, but improper concepts constructed by attributing to man faculties which he actually does not possess, should. And utility is such an improper concept … [P]erhaps, because of this impasse … some economists consider the approach offered by the theory of choice as a great progress … This is simply an illusion, because even though the postulates of the theory of choice do not use the terms ‘utility’ or ‘satisfaction’, their discussion and acceptance require that they should be translated into the other vocabulary … A good illustration of the above point is offered by the ingenious theory of the consumer constructed by Samuelson.

## Till minnet av en vän (personal)

18 Sep, 2021 at 09:29 | Posted in Varia | Comments Off on Till minnet av en vän (personal)

År 2018 var — precis som de flesta år — ett år med både glädje och sorg.

För mig kommer året ändå alltid att främst förknipppas med att det var året då Bengt Nilsson, min bäste vän sedan mer än trettio år, gick ur tiden.

Under många år åkte vi på sommaren i väg ut i Europa. Första gången var 1988. Då gick färden med vår gamla rostiga Merca till Berlin och Prag. Sista gången var sommaren 2018. Då gick färden till Flensburg, Rømø, och Ribe.

Inga ord kan riktigt beskriva vad man känner när en människa man älskat inte längre finns där. Man minns skratten, glädjen, omtanken, den mäktiga intelligensen, den drastiska humorn, och det starka sociala patoset.

I dag är det tre år sedan du gick bort, min vän. Livet går vidare — men det kommer alltid att vara lite gråare, lite tristare, utan dig.

Det gör fortfarande ont.

Men även om det ofta känns — som du brukade säga — ‘förtvivlat’, hjälper mig minnet av vår vänskap finna modet att leva vidare.

Med värme och kärlek tillägnad Ingrid, Anton och Iskra.

## Jacques Lacan — a severe case of obscurantism

17 Sep, 2021 at 12:48 | Posted in Theory of Science & Methodology | 12 Comments

To lure the intended or preferred audience into accepting an assertion or set of assertions, the obscurantist should first of all convince the reader that there is indeed a deep and profound insight lurking underneath the surface of his prima facie incomprehensible statements. The obscurantist’s hope is to persuade the intended reader that the hidden treasure, the true meaning, is indeed so valu able and so revealing that he is willing to invest a huge hermeneutic effort in trying to understand whatever his hermeneutic efforts indicate as the “true meaning” of what Lacan says. As Lacan himself put it in a defiant mood: “L’écrit, ça n’est pas à comprendre. C’est bien pour ça que vous n’êtes pas forcés de comprendre les miens. Si vous ne les comprenez pas, tant mieux, ça vous donnera justement l’occasion de les expliquer” (Lacan, 1975, p. 35). What is in normal conversation extrinsic to understanding – acceptance of what is asserted – now triggers the desire to understand: “these pronouncements contain deep truths about myself that I must accept, so what he says must make sense.”

Filip Buekens & Maarten Boudry

## Challenging mainstream economics — a feminist perspective

17 Sep, 2021 at 11:41 | Posted in Economics | 1 Comment

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A must-see!

## Hovern’engan

16 Sep, 2021 at 20:05 | Posted in Varia | Comments Off on Hovern’engan

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To my brothers and sisters in Afghanistan.

## What Žižek and other postmodern obscurantists have in common

16 Sep, 2021 at 16:36 | Posted in Theory of Science & Methodology | Comments Off on What Žižek and other postmodern obscurantists have in common

Among the soft obscurantists some aim at truth, but do not respect the norms for arriving at truth, such as focusing on causality, acting as devil’s advocate, and generating falsifiable hypotheses. Others do not aim at truth, and often scorn the very idea that there is such a thing. By assumption, these non-respecters of truth cannot be reached by argument, only by ridicule …

Let me mention who they are, by discipline and by name. Disciplines include deconstructionism, postmodernism, subaltern theory, post-colonialism, queer theory, gender theory. Some names are Jacques Derrida, Bruno Latour, Gayatri Spivak, Alain Badiou, Slavoj  Žižek, Homi K. Bhabha, Judith Butler.

Jon Elster

When listening to — or reading — the postmodern obscurantist mumbo-jumbo​ that surrounds​ us today in social sciences and humanities, yours truly often finds himself wishing for that special Annie Hall moment of truth:

## Econometrics — a second-best explanatory practice

15 Sep, 2021 at 20:31 | Posted in Economics | Comments Off on Econometrics — a second-best explanatory practice

Consider two elections, A and B. For each of them, identify the events that cause a given percentage of voters to turn out. Once we have thus explained the turnout in election A and the turnout in election B, the explanation of the difference (if any) follows automatically, as a by-product. As a bonus, we might be able to explain whether identical turnouts in A and B are accidental, that is, due to differences that exactly offset each other, or not. In practice, this procedure might be too demanding. The data or he available theories might not allow us to explain the phenomena “in and of themselves.” We should be aware, however, that if we do resort to explanation of variation, we are engaging in a second-best explanatory practice.

Modern econometrics is fundamentally based on assuming — usually without any explicit justification — that we can gain causal knowledge by considering independent variables that may have an impact on the variation of a dependent variable. This is however, far from self-evident. Often the fundamental causes are constant forces that are not amenable to the kind of analysis econometrics supplies us with. As Stanley Lieberson has it in Making It Count:

One can always say whether, in a given empirical context, a given variable or theory accounts for more variation than another. But it is almost certain that the variation observed is not universal over time and place. Hence the use of such a criterion first requires a conclusion about the variation over time and place in the dependent variable. If such an analysis is not forthcoming, the theoretical conclusion is undermined by the absence of information …

Moreover, it is questionable whether one can draw much of a conclusion about causal forces from simple analysis of the observed variation … To wit, it is vital that one have an understanding, or at least a working hypothesis, about what is causing the event per se; variation in the magnitude of the event will not provide the answer to that question.

Trygve Haavelmo was making a somewhat similar point back in 1941, when criticizing the treatmeant of the interest variable in Tinbergen’s regression analyses. The regression coefficient of the interest rate variable being zero was according to Haavelmo not sufficient for inferring that “variations in the rate of interest play only a minor role, or no role at all, in the changes in investment activity.” Interest rates may very well play a decisive indirect role by influencing other causally effective variables. And:

the rate of interest may not have varied much during the statistical testing period, and for this reason the rate of interest would not “explain” very much of the variation in net profit (and thereby the variation in investment) which has actually taken place during this period. But one cannot conclude that the rate of influence would be inefficient as an autonomous regulator, which is, after all, the important point.

This problem of ‘nonexcitation’ — when there is too little variation in a variable to say anything about its potential importance, and we can’t identify the reason for the factual influence of the variable being ‘negligible’ — strongly confirms that causality in economics and other social sciences can never solely be a question of statistical inference. Causality entails more than predictability, and to really in depth explain social phenomena requires theory.

Analysis of variation — the foundation of all econometrics — can never in itself reveal how these variations are brought about. First when we are able to tie actions, processes or structures to the statistical relations detected, can we say that we are getting at relevant explanations of causation. Too much in love with axiomatic-deductive modeling, neoclassical economists especially tend to forget that accounting for causation — how causes bring about their effects — demands deep subject-matter knowledge and acquaintance with the intricate fabrics and contexts. As already Keynes argued in his A Treatise on Probability, statistics (and econometrics) should primarily be seen as means to describe patterns of associations and correlations, means that we may use as suggestions of possible causal realations. Forgetting that, economists will continue to be stuck with a second-best explanatory practice.

## La Grande Bellezza

14 Sep, 2021 at 20:33 | Posted in Varia | Comments Off on La Grande Bellezza

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One of the best movies I’ve ever seen. Un capolavoro!

## MMT and the deficit myth

12 Sep, 2021 at 14:28 | Posted in Economics | 24 Comments

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What Modern Monetary Theory (MMT) does is more or less what Knut Wicksell tried to do more than a hundred years ago, when he in 1898 wrote on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise). The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​

In the mainstream economist’s 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.

What mainstream economists have in mind when they argue this way, is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. What happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfill our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

Contrary to mainstream theory, finance in the world of MMT — and people like Keynes and Minsky — precedes investment and saving. What is ‘forgotten’ in mainstream 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 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 of economic theory.

## What the CIA did not tell us about its War on Terror

12 Sep, 2021 at 11:04 | Posted in Politics & Society | 1 Comment

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## Finansretoriska rådet — en mental härdsmälta

12 Sep, 2021 at 09:25 | Posted in Politics & Society | Comments Off on Finansretoriska rådet — en mental härdsmälta

Ett roligt klipp cirkulerar på John Hassler, professor i nationalekonomi och ledamot i Finanspolitiska rådet.

“Vi blev utskällda efter noter av finansministern”, säger han och tittar sorgset in i kameran.

Tydligen blev Magdalena Andersson (S) inte så imponerad av de politiska slutsatser som Finanspolitiska rådet överlämnade 2015. Hassler är fortfarande sur. “Finansretoriska rådet” kallade hon dem.

Efteråt behövde de stackars professorerna en “debriefing” med John Hasslers ordval.

Begreppet “debriefing” kommer ursprungligen från det militära och är en form av krisbearbetning som förebygger posttraumatiskt stressyndrom efter skarpa insatser.

Tänk svenska specialförband på Kabuls flygplats, poliser som jagar terrorister efter Drottninggatan eller våra veteraner från internationella insatser.

Och Johan Hassler.

Jag har faktiskt lite svårt att hålla mig för skratt.

## Islamo-gauchisme à l’université — fantasme ou réalité ?

10 Sep, 2021 at 23:08 | Posted in Politics & Society | Comments Off on Islamo-gauchisme à l’université — fantasme ou réalité ?

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## China’s crackdown on ‘effeminate’ behaviour

10 Sep, 2021 at 20:21 | Posted in Politics & Society | Comments Off on China’s crackdown on ‘effeminate’ behaviour

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