## Problems with Propensity Score Matching (wonkish)

30 Apr, 2022 at 14:42 | Posted in Statistics & Econometrics | Comments Off on Problems with Propensity Score Matching (wonkish)

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## Neues von Gerhard Schröder

30 Apr, 2022 at 10:16 | Posted in Varia | Comments Off on Neues von Gerhard Schröder

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## Statistical inference and sampling assumptions

28 Apr, 2022 at 12:55 | Posted in Statistics & Econometrics | Comments Off on Statistical inference and sampling assumptions

Real probability samples have two great benefits: (i) they allow unbiased extrapolation from the sample; (ii) with data internal to the sample, it is possible to estimate how much results are likely to change if another sample is taken. These benefits, of course, have a price: drawing probability samples is hard work. An investigator who assumes that a convenience sample is like a random sample seeks to obtain the benefits without the costs—just on the basis of assumptions. If scrutinized, few convenience samples would pass muster as the equivalent of probability samples. Indeed, probability sampling is a technique whose use is justified because it is so unlikely that social processes will generate representative samples. Decades of survey research have demonstrated that when a probability sample is desired, probability sampling must be done. Assumptions do not suffice. Hence, our first recommendation for research practice: whenever possible, use probability sampling.

If the data-generation mechanism is unexamined, statistical inference with convenience samples risks substantial error. Bias is to be expected and independence is problematic. When independence is lacking, the p-values produced by conventional formulas can be grossly misleading. In general, we think that reported p-values will be too small; in the social world, proximity seems to breed similarity. Thus, many research results are held to be statistically significant when they are the mere product of chance variation.

Richard Berk & David Freedman

In econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come into the picture.

The assumption of imaginary ‘super populations’ is one of many dubious assumptions used in modern econometrics and statistical analyses to handle uncertainty. As social scientists — and economists — we have to confront the all-important question of how to handle uncertainty and randomness. Should we define randomness with probability? If we do, we have to accept that to speak of randomness we also have to presuppose the existence of nomological probability machines, since probabilities cannot be spoken of – and actually, to be strict, do not at all exist – without specifying such system-contexts. Accepting a domain of probability theory and sample space of infinite populations also implies that judgments are made on the basis of observations that are actually never made!

Infinitely repeated trials or samplings never take place in the real world. So that cannot be a sound inductive basis for a science with aspirations of explaining real-world socio-economic processes, structures or events. It’s not tenable.

And as if this wasn’t enough, one could — as we’ve seen — also seriously wonder what kind of ‘populations’ these statistical and econometric models ultimately are based on. Why should we as social scientists — and not as pure mathematicians working with formal-axiomatic systems without the urge to confront our models with real target systems — unquestioningly accept models based on concepts like the ‘infinite super populations’ used in e.g. the ‘potential outcome’ framework that has become so popular lately in social sciences?

One could, of course, treat observational or experimental data as random samples from real populations. I have no problem with that (although it has to be noted that most ‘natural experiments’ are not based on random sampling from some underlying population — which, of course, means that the effect-estimators, strictly seen, only are unbiased for the specific groups studied). But probabilistic econometrics does not content itself with that kind of populations. Instead, it creates imaginary populations of ‘parallel universes’ and assume that our data are random samples from that kind of  ‘infinite super populations.’

But this is actually nothing else but hand-waving! And it is inadequate for real science. As David Freedman writes:

With this approach, the investigator does not explicitly define a population that could in principle be studied, with unlimited resources of time and money. The investigator merely assumes that such a population exists in some ill-defined sense. And there is a further assumption, that the data set being analyzed can be treated as if it were based on a random sample from the assumed population. These are convenient fictions … Nevertheless, reliance on imaginary populations is widespread. Indeed regression models are commonly used to analyze convenience samples … The rhetoric of imaginary populations is seductive because it seems to free the investigator from the necessity of understanding how data were generated.

In social sciences — including economics — it’s always wise to ponder C. S. Peirce’s remark that universes are not as common as peanuts …

## Papa Was a Rollin’ Stone

27 Apr, 2022 at 23:51 | Posted in Varia | Comments Off on Papa Was a Rollin’ Stone

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## Nils Frahm — Some

27 Apr, 2022 at 23:22 | Posted in Varia | Comments Off on Nils Frahm — Some

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## Fisher’s exact test (student stuff)

27 Apr, 2022 at 08:44 | Posted in Statistics & Econometrics | Comments Off on Fisher’s exact test (student stuff)

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## On mathematics and economics

26 Apr, 2022 at 17:12 | Posted in Economics | Comments Off on On mathematics and economics

Studying mathematics and logic is interesting and fun. It sharpens the mind. But economics is not pure mathematics or logic. It’s about society. The real world. Forgetting that, economics becomes nothing but an irrelevant and uninteresting ‘Glasperlenspiel.’ Or as Knut Wicksell put it already a century ago:

One must, of course, beware of expecting from this method more than it can give. Out of the crucible of calculation comes not an atom more truth than was put in. The assumptions being hypothetical, the results obviously cannot claim more than a very limited validity. The mathematical expression ought to facilitate the argument, clarify the results, and so guard against possible faults of reasoning — that is all.

It is, by the way, evident that the economic aspects must be the determining ones everywhere: economic truth must never be sacrificed to the desire for mathematical elegance.

## Il vortice della mondanità

24 Apr, 2022 at 11:01 | Posted in Varia | Comments Off on Il vortice della mondanità

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A movie as large as life itself.

## Marine Le Pen — Sherlock Holmes of the century

23 Apr, 2022 at 16:51 | Posted in Politics & Society | Comments Off on Marine Le Pen — Sherlock Holmes of the century

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Guess there are a couple of things that lady ought to be informed about when it comes to Russian elections …

## So arm ist Putin wirklich …

23 Apr, 2022 at 12:12 | Posted in Politics & Society | Comments Off on So arm ist Putin wirklich …

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## Significance testing and the real tasks of social science

21 Apr, 2022 at 11:36 | Posted in Statistics & Econometrics | 2 Comments

After having mastered all the technicalities of regression analysis and econometrics, students often feel as though they are masters of the universe. I usually cool them down with the required reading of Christopher Achen’s modern classic Interpreting and Using Regression. It usually gets​ them back on track again, and they understand that

no increase in methodological sophistication … alter the fundamental nature of the subject. It remains a wondrous mixture of rigorous theory, experienced judgment, and inspired guesswork. And that, finally, is its charm.

And in case they get too excited about having learned to master the intricacies of proper significance tests and p-values, I ask them to also ponder on Achen’s apt warning:

Significance testing as a search for specification errors substitutes calculations for substantive thinking. Worse, it channels energy toward the hopeless search for functionally correct specifications and diverts​ attention from the real tasks, which are to formulate a manageable description of the data and to exclude competing ones.

## Sverige behöver en hållbar riksbankslag

21 Apr, 2022 at 10:37 | Posted in Politics & Society | Comments Off on Sverige behöver en hållbar riksbankslag

Ett lands centralbank har makten att skapa pengar och styra hur dessa används. Det gör Riksbanken till en avgörande institution för Sveriges möjligheter till hållbar omställning. Ska denna makt kunna användas på ett konstruktivt sätt måste Riksbankens mål och verktygslåda uppdateras. Annars finns risk att penningpolitiken fortsätter på den tidigare kritiserade banan där låg ränta och kvantitativa lättnader blåst upp bubblor på börsen och bostadsmarknaden vilket ökat de ekonomiska klyftorna, skapat zombieföretag och gynnat fossila företag.

Därför är det positivt att regeringen tagit initiativ till en ny Riksbankslag som kommer behandlas nu den 21 april av konstitutionsutskottet och den 1 juni av Riksdagen. Förslaget har dock missat att ta intryck av den diskussion som pågår världen över om hur centralbanker kan bidra till ekologiskt, ekonomiskt och socialt hållbara samhällen. Över 80 centralbanker och tillsynsmyndigheter har inom samarbetet Network of Central Banks and Supervisors for Greening the Financial System (NGFS) tagit fram en rapport med nio kraftfulla åtgärder en centralbank kan vidta – om den politiska viljan finns. Men här i Sverige väljer regeringen istället att lägga fram ett lagförslag med [ett antal] brister …

Det är positivt att regeringen tagit initiativ till en översyn och uppdatering av riksbankslagen; Riksbankens uppdrag och befogenheter behöver vara tydligt definierade, ändamålsenliga och demokratiskt förankrade. Men i ljuset av den pågående klimatkrisen, lärdomarna från coronakrisen och de stora förändringar som pågår just nu på betal- och finansmarknaderna, så är förslaget redan utdaterat.Lagen riskerar att bakbinda Riksbankens handlingsutrymme till gårdagens kritiserade penningpolitiska verktygslåda, vilket sannolikt kommer göra större skada än nytta. Lagen lever inte upp till rimliga krav för en modern och hållbar centralbank. Den skapar inte ens tydligt utrymme för att använda merparten av de gröna verktyg Riksbanken själva har varit med och identifierat inom NGFS-samarbetet. Vi kan bättre än så, tänk om och tänk rätt!

Isadora Wronski   Jonas Bane   Lars P Syll   Samuel Färdow Kazen   Sasja Beslik

19 Apr, 2022 at 14:47 | Posted in Politics & Society | Comments Off on Adorno in 60 Minuten

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## The main insight of MMT

19 Apr, 2022 at 11:05 | Posted in Economics | 44 Comments

MMT is, first and foremost, a balance sheet approach to macroeconomics. At its very core lie reserve accounting, then deposit accounting, and then sectoral balances accounting. There is very little behaviour in any of this. Equilibrium rules as all balances balance – in both flows and stocks – and there are no assumptions apart from the existence of a central bank, a Treasury, a banking system and some households and firms. MMT can only be learned by mastering its balance sheet approach. It can only be engaged by discussing the balance sheet operations it puts forward. It is here where value is added …

First of all, the main insight of MMT is that the mainstream has the sequence wrong. Whereas they assume that government expenditure is financed by taxes, MMT assumes that government spending is financed by money creation. MMT stresses that the central bank, empowered by the law and serving the state, is the monopoly issuer of currency … This logically means that the state has to spend before taxes can be paid … When taxpayers pay their taxes (or banks buy government bonds on the primary market), they first need to have state money.

Dirk Ehnts

Fiscal deficits always lead to an increase in the supply of financial assets held in the nongovernmental sector of the economy. This real-world fact, of course, constitutes a huge problem for mainstream (textbook) macroeconomic theory with its models building on ‘money multipliers’ and ‘loanable funds.’

The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credit, determined by supply and demand — as Bertil Ohlin put it — “in the same way as the price of eggs and strawberries on a village market.”

In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate.

As argued by Kelton, there are many problems with the standard presentation and formalization of the loanable funds theory. And more can be added to the list:

1 As already noticed by James Meade decades ago, the causal story told to explicate the accounting identities used gives the picture of “a dog called saving wagged its tail labelled investment.” In Keynes’s view — and later over and over again confirmed by empirical research — it’s not so much the interest rate at which firms can borrow that causally determines the amount of investment undertaken, but rather their internal funds, profit expectations and capacity utilization.

2 As is typical of most mainstream macroeconomic formalizations and models, there is pretty little mention of real-world​ phenomena, like e. g. real money, credit rationing and the existence of multiple interest rates, in the loanable funds theory. Loanable funds theory essentially reduces modern monetary economies to something akin to barter systems — something they definitely are not. As emphasized especially by Minsky, to understand and explain how much investment/loaning/crediting is going on in an economy, it’s much more important to focus on the working of financial markets than staring at accounting identities like S = Y – C – G. The problems we meet on modern markets today have more to do with inadequate financial institutions than with the size of loanable-funds-savings.

3 The loanable funds theory in the “New Keynesian” approach means that the interest rate is endogenized by assuming that Central Banks can (try to) adjust it in response to an eventual output gap. This, of course, is essentially nothing but an assumption of Walras’ law being valid and applicable, and that a fortiori the attainment of equilibrium is secured by the Central Banks’ interest rate adjustments. From a realist Keynes-Minsky point of view, this can’t be considered anything else than a belief resting on nothing but sheer hope. [Not to mention that more and more Central Banks actually choose not to follow Taylor-like policy rules.] The age-old belief that Central Banks control the money supply has more and more come to be questioned and replaced by an “endogenous” money view, and I think the same will happen to the view that Central Banks determine “the” rate of interest.

4 A further problem in the traditional loanable funds theory is that it assumes that saving and investment can be treated as independent entities. To Keynes this was seriously wrong:

The classical theory of the rate of interest [the loanable funds theory] seems to suppose that, if the demand curve for capital shifts or if the curve relating the rate of interest to the amounts saved out of a given income shifts or if both these curves shift, the new rate of interest will be given by the point of intersection of the new positions of the two curves. But this is a nonsense theory. For the assumption that income is constant is inconsistent with the assumption that these two curves can shift independently of one another. If either of them shifts​, then, in general, income will change; with the result that the whole schematism based on the assumption of a given income breaks down … In truth, the classical theory has not been alive to the relevance of changes in the level of income or to the possibility of the level of income being actually a function of the rate of the investment.

There are always (at least) two parts to an economic transaction. Savers and investors have different liquidity preferences and face different choices — and their interactions usually only take place intermediated by financial institutions. This, importantly, also means that there is no “direct and immediate” automatic interest mechanism at work in modern monetary economies. What this ultimately boils done to is — iter — that what happens at the microeconomic level — both in and out of equilibrium —  is not always compatible with the macroeconomic outcome. The fallacy of composition (the “atomistic fallacy” of Keynes) has many faces — loanable funds is one of them.

5 Contrary to the loanable funds theory, finance in the world of Keynes and Minsky precedes investment and saving. Highlighting the loanable funds fallacy, Keynes wrote in “The Process of Capital Formation” (1939):

Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving.

What is “forgotten” in the loanable funds 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 nowadays 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 formalizations of the loanable funds theory.

It should be emphasized that the equality between savings and investment … will be valid under all circumstances. In particular, it will be independent of the level of the rate of interest which was customarily considered in economic theory to be the factor equilibrating the demand for and supply of new capital. In the present conception investment, once carried out, automatically provides the savings necessary to finance it. Indeed, in our simplified model, profits in a given period are the direct outcome of capitalists’ consumption and investment in that period. If investment increases by a certain amount, savings out of profits are pro tanto higher …

One important consequence of the above is that the rate of interest cannot be determined by the demand for and supply of new capital because investment ‘finances itself.’

## Pelle the Conqueror

18 Apr, 2022 at 17:35 | Posted in Varia | Comments Off on Pelle the Conqueror

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Max von Sydow (1929-2020) was a Swedish actor who featured in more than 100 films and TV series. He made many memorable roles, but the one that has touched me most is as the father in Pelle Erobreren — based on Martin Andersen Nexö’s epic masterpiece. Bille August directed. Stefan Nilsson wrote the music. Max von Sydow made the performance of his life. And it breaks my heart every time I watch it.

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