On Diane Coyle’s Cogs and Monsters

30 Oct, 2021 at 19:10 | Posted in Economics | Comments Off on On Diane Coyle’s Cogs and Monsters

Cogs and Monsters: What Economics Is, and What It Should Be: Coyle, Diane:  9780691210599: Amazon.com: BooksMacroeconomists seem to me the biggest offenders in not taking such empirical issues (of practical data handling) seriously enough. This might sound like sheer contrarianism given that macroeconomists are constantly wielding data; after all, their business is analysing the behaviour of the whole economy and forecasting its future path. My concerns are, first, that too few think about the vast uncertainty associated with the statistics they download and use; and secondly, how difficult it is to draw definitive conclusions about economy-wide phenomena, the aggregated outcomes of choice made by millions of businesses and consumers interacting in specific historical and geographic contexts, and social and political relations.

There’s a lot in this new book by Diane Coyle that I like, and I highly recommend reading it.

Unfortunately, there are also some things in it I find very hard to swallow.

A recurrent theme in the book — as in her earlier The Soulful Science (2010) — is Coyle’s view that much of the critique waged against mainstream economics from heterodox economists like yours truly and others are more or less of a straw-man kind and that we haven’t really understood the fact that economics “has changed a lot in two decades.”

One example she refers to — to underpin her view — is the development of the ‘new’ behavioural, ‘experimental,’ and ’empirical turn’ in economics.

So let’s take a look at that and what some of us ‘heterodox’ economists really have had to say about it.

Coyle — as many other more or less mainstream economists nowadays — seems to maintain that the empirical methods developed within economics — natural experiments, field experiments, RCTs — help us to answer important economic questions. I beg to differ. When looked at carefully, there are in fact few real reasons to share the optimism on this ’empirical turn’ in economics.

Field studies and experiments face the same basic problem as theoretical models — they are built on rather artificial conditions and have difficulties with the ‘trade-off’ between internal and external validity. The more artificial conditions, the more internal validity, but also less external validity. The more we rig experiments/field studies/models to avoid the ‘confounding factors’, the less the conditions are reminiscent of the real ‘target system.’ You could of course discuss the field vs. experiments vs. theoretical models in terms of realism — but the nodal issue is not about that, but basically about how economists using different isolation strategies in different ‘nomological machines’ attempt to learn about causal relationships. I have strong doubts about the generalizability of all three research strategies because the probability is high that causal mechanisms are different in different contexts and that lack of homogeneity/stability/invariance doesn’t give us warranted export licenses to the ‘real’ societies or economies.

By this, I do not mean to say that empirical methods per se are so problematic that they can never be used. On the contrary, I am basically — though not without reservations — in favor of the increased use of experiments and field studies within economics. Not least as an alternative to completely barren ‘bridgeless axiomatic-deductive theory models. My criticism is more about aspiration levels and what we believe that we can achieve with our mediational epistemological tools and methods in the social sciences.

Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems.

Real-world social systems are not governed by stable causal mechanisms or capacities. The kinds of ‘laws’ and relations that econometrics has established, are laws and relations about entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real-world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made ‘nomological machines’ they are rare, or even non-existent.

Taking assumptions like utility maximization or market equilibrium as a matter of course leads to the ‘standing presumption in economics that, if an empirical statement is deduced from standard assumptions then that statement is reliable’ …

The ongoing importance of these assumptions is especially evident in those areas of economic research, where empirical results are challenging standard views on economic behaviour like experimental economics or behavioural finance … From the perspective of Model-Platonism, these research-areas are still framed by the ‘superior insights’ associated with early 20th century concepts, essentially because almost all of their results are framed in terms of rational individuals, who engage in optimizing behaviour and, thereby, attain equilibrium. For instance, the attitude to explain cooperation or fair behaviour in experiments by assuming an ‘inequality aversion’ integrated in (a fraction of) the subjects’ preferences is strictly in accordance with the assumption of rational individuals, a feature which the authors are keen to report …

So, while the mere emergence of research areas like experimental economics is sometimes deemed a clear sign for the advent of a new era … a closer look at these fields allows us to illustrate the enduring relevance of the Model-Platonism-topos and, thereby, shows the pervasion of these fields with a traditional neoclassical style of thought.

Jakob Kapeller

Contrary to Coyle’s optimism, I would argue that although different ’empirical’ approaches have been — more or less — integrated into mainstream economics, there is still a long way to go before economics has become a truly empirical science.

Almost all the change and diversity that takes place in mainstream economics today only takes place within the analytic-formalistic modeling strategy that makes up the core of mainstream economics. All the flowers that do not live up to the precepts of the mainstream methodological canon are pruned. You’re free to take your analytical formalist models and apply them to whatever you want – as long as you do it using a modeling methodology acceptable to the mainstream. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. “If it isn’t modelled, it isn’t economics.” This isn’t pluralism. It’s a methodological reductionist straightjacket.

No matter how many thousands of models mainstream economists come up with, as long as they are just axiomatic variations of the same old mathematical-deductive ilk, they will not take us one single inch closer to giving us relevant and usable means to further our understanding and explanation of real economies.

So — in conclusion — it is not that heterodox critics haven’t noticed the development in mainstream economics that has taken place during the past 20-30 years. We have noticed — and understood that it still far too much builds on the same old neoclassical straight-jacket methodology.

Central Park

30 Oct, 2021 at 10:25 | Posted in Varia | Comments Off on Central Park

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Modelling dangers

29 Oct, 2021 at 11:19 | Posted in Statistics & Econometrics | Comments Off on Modelling dangers

On the poverty of econometric assumptions (wonkish) | LARS P. SYLLWith models, it is easy to lose track of three essential points: (i) results depend on assumptions, (ii) changing the assumptions in apparently innocuous ways can lead to drastic changes in conclusions, and (iii) familiarity with a model’s name is no guarantee of the model’s truth. Under the circumstances, it may be the assumptions behind the model that provide the leverage, not the data fed into the model. This is a danger with experiments, and even more so with observational studies.

David Freedman

Why economists should prefer accurate imprecision to inaccurate precision

28 Oct, 2021 at 18:36 | Posted in Economics | Comments Off on Why economists should prefer accurate imprecision to inaccurate precision

broken-linkMicrofounded DSGE models standardly assume rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative household/ consumer/producer agents with homothetic and identical preferences, etc., etc. At the same time the models standardly ignore complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc., etc.

Behavioural and experimental economics — not to speak of psychology — show beyond any doubts that “deep parameters” — peoples’ preferences, choices and forecasts — are regularly influenced by those of other participants in the economy. And how about the homogeneity assumption? And if all actors are the same — why and with whom do they transact? And why does economics have to be exclusively teleological (concerned with intentional states of individuals)? Where are the arguments for that ontological reductionism? And what about collective intentionality and constitutive background rules?

These are all justified questions — so, in what way can one maintain that these models give workable microfoundations for macroeconomics? Science philosopher Nancy Cartwright gives a good hint at how to answer that question:

Our assessment of the probability of effectiveness is only as secure as the weakest link in our reasoning to arrive at that probability. We may have to ignore some issues to make heroic assumptions about them. But that should dramatically weaken our degree of confidence in our final assessment. Rigor isn’t contagious from link to link. If you want a relatively secure conclusion coming out, you’d better be careful that each premise is secure going on.

Avoiding logical inconsistencies is crucial in all science. But it is not enough. Just as important is avoiding factual inconsistencies. And without showing — or at least warrantedly arguing — that the assumptions and premises of their models are in fact true, mainstream economists aren’t really reasoning, but only playing games. Formalistic deductive ‘Glasperlenspiel’ can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

Instead of making the model the message, I think we are better served by economists who more  than anything else try to contribute to solving real problems. And then the motto of John Maynard Keynes is more valid than ever:

It is better to be vaguely right than precisely wrong

Of what use are RCTs?

27 Oct, 2021 at 16:20 | Posted in Economics | Comments Off on Of what use are RCTs?

nancyIn her interesting Pufendorf lectures Nancy Cartwright presents a theory of evidence and explains why randomized controlled trials (RCTs) are not at all the “gold standard” that it has lately often been portrayed as. As yours truly has repeatedly argued on this blog (e.g. here and here), RCTs usually do not provide evidence that their results are exportable to other target systems. The almost religious belief with which its advocates portray it, cannot hide the fact that RCTs cannot be taken for granted to give generalizable results. That something works somewhere is no warranty for it to work for us or even that it works generally.

Näringslivstopparnas motbjudande arrogans

24 Oct, 2021 at 18:16 | Posted in Politics & Society | 1 Comment

Volvos Carl-Henrik Svanberg försökte häromdagen förklara varför Volvo AB inte vill betala tillbaka det permitteringsstöd företaget tagit emot under pandemin.

Ett av de mest arroganta — och ur etisk synpunkt motbjudande — uttalanden jag någonsin hört från svenskt näringsliv.

Makt korrumperar och förblindar.

Och som lök på laxen har vi en näringsminister som bara låtsas att det regnar istället för att ryta till och slå näven i bordet.

Herre du min milde! Och detta grodors plums och ankors plask ska man behöva höra år 2021.

Man tager sig för pannan. 

The LATE estimator — a critique (wonkish)

24 Oct, 2021 at 11:58 | Posted in Statistics & Econometrics | Comments Off on The LATE estimator — a critique (wonkish)

One of the reasons Guido Imbens and Joshua Angrist were given this year’s ‘Nobel prize’ in economics is their LATE estimator used in instrumental variables estimation of causal effects. Another prominent ‘Nobel prize’ winner in economics — Angus Deaton — is not overly impressed:

Without explicit prior consideration of the effect of the instrument choice on the parameter being estimated, such a procedure is effectively the opposite of standard statistical practice in which a parameter of interest is defined first, followed by an estimator that delivers that parameter. Instead, we have a procedure in which the choice of the instrument, which is guided by criteria designed for a situation in which there is no heterogeneity, is implicitly allowed to determine the parameter of interest. This goes beyond the old story of looking for an object where the light is strong enough to see; rather, we have at least some control over the light but choose to let it fall where it may and then proclaim that whatever it illuminates is what we were looking for all along …

Instrumental Variables Estimation (with Examples from Criminology) - ppt  video online downloadThe LATE may or may not be a parameter of interest to the World Bank or the Chinese government and, in general, there is no reason to suppose that it will be …

I find it hard to make any sense of the LATE. We are unlikely to learn much about the processes at work if we refuse to say anything about what determines (the effect ‘parameter’) θ; heterogeneity is not a technical problem calling for an econometric solution but a reflection of the fact that we have not started on our proper business, which is trying to understand what is going on. Of course, if we are as skeptical of the ability of economic theory to deliver useful models as are many applied economists today, the ability to avoid modeling can be seen as an advantage, though it should not be a surprise when such an approach delivers answers that are hard to interpret.

János Kornai (1928-2021)

24 Oct, 2021 at 10:10 | Posted in Economics | Comments Off on János Kornai (1928-2021)

Instead of real maturity, we see that general equilibrium theory possesses only pseudo-maturity.kornai For the description of the economic system, mathematical economics has succeeded in constructing a formalized theoretical structure, thus giving an impression of maturity, but one of the main criteria of maturity, namely, verification, has hardly been satisfied. In comparison to the amount of work devoted to the construction of the abstract theory, the amount of effort which has been applied, up to now, in checking the assumptions and statements seems inconsequential.

Milton Friedman — an intellectually dishonest peddler of neoliberalism

24 Oct, 2021 at 09:59 | Posted in Economics | 23 Comments

Last Friday, November 9, saw the big “Milton Friedman Centennial” celebration at the University of Chicago’s Becker Friedman Institute for Research in Economics. It was a big day for fans of one of the Founding Fathers of neoliberal/libertarian  free-market ideology …

The Destruction of our World and the lies of Milton Friedman One episode in Milton Friedman’s career not celebrated (or even acknowledged) at last week’s centennial took place in 1946, the same year Friedman began peddling his pro-business “free market economics” ideology.

According to Congressional hearings on illegal lobbying activities ’46 was the year that Milton Friedman and his U Chicago cohort George Stigler arranged an under-the-table deal with a Washington lobbying executive to pump out covert propaganda for the national real estate lobby in exchange for a hefty payout, the terms of which were never meant to be released to the public.

The arrangement between Friedman and Stigler with the Washington real estate lobbyist was finally revealed during he Buchanan Committee hearings on illegal lobbying activities in 1950. But then it was almost entirely forgotten, including apparently by those celebrating the “Milton Friedman Centennial” last week in Chicago.

Mark Ames

The last resort

23 Oct, 2021 at 14:49 | Posted in Varia | 1 Comment

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One of the most brilliantly beautiful songs ever written.

In loving memory of my brother Peter ‘Uncas’ Pålsson.

All by myself

23 Oct, 2021 at 14:33 | Posted in Varia | Comments Off on All by myself

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How to achieve exchangeability (student stuff)

21 Oct, 2021 at 16:53 | Posted in Statistics & Econometrics | Comments Off on How to achieve exchangeability (student stuff)

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Pourquoi toutes les marques de luxe sont-elles françaises?

21 Oct, 2021 at 14:47 | Posted in Varia | 1 Comment

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My favourite French teacher!

Economics — non-ideological and value-free? I’ll be dipped!

20 Oct, 2021 at 17:46 | Posted in Economics | 1 Comment

jp-imgresI’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.

David Card

David Card and the minimum wage myth

18 Oct, 2021 at 22:07 | Posted in Economics | 2 Comments

David Card - WikipediaBack in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economic theory’s competitive model — have increased relative to Pennsylvania. However, when ‘Nobel prize’ winning economist David Card and his colleague Alan Krueger gathered information on fast food restaurants in the two states to check what employment effects the minimum wage really have — using a basic difference-in-differences approach — it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong …

buchC6The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the pre-supposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.

James M. Buchanan in Wall Street Journal (April 25, 1996)

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