Economic modeling — a constructive critique

31 Dec, 2022 at 11:29 | Posted in Economics | 5 Comments

Behind the Model: A Constructive Critique of Economic Modeling (Strategies  for Social Inquiry): Amazon.co.uk: Spiegler, Peter: 9781107069664: Books If we have independent reasons to believe that the phenomena under investigation are mechanical in Mill’s sense, well and good: mathematical modeling will prove an apt mode of representation … But if we have independent reasons to believe that there is more going on in the phenomena under investigation than a mathematical model can suggest – that is, that the phenomena in question are not in fact mechanical in the required sense – then mathematical modeling will prove misleading … Moreover, as will be discussed, the empirical assessment of such models using econometric methods will not be sufficient to reveal that mismatch.

These problems cannot themselves be addressed through reforms to mathematical methods. That would simply be to produce a more refined version of the wrong tool for the job, like sharpening one’s knife when what is needed is a spoon. Rather than striving to improve the quality of mathematical models given the assumption that the subject matter under investigation is mechanical in Mill’s sense and therefore susceptible of mathematical analysis, we need to ask a prior question, which is whether there is sufficient reason to feel confident that the subject matter under investigation is mechanical in the first place. That means scrutinizing the subject matter in the first instance in non-mathematical ways … We as scientists must remain sensitive to information about the phenomena in which we are interested that lies outside our models’ conceptual maps. In the case of economics, what this requires is a new field dedicated to qualitative empirical methods that would play a similar role to that played by econometrics in the matter of quantitative empirical methods.

Highly recommended reading!

Using formal mathematical modeling, mainstream economists sure can guarantee that the conclusions hold given the assumptions. However, the validity we get in abstract model worlds does not warrantly transfer to real-world economies.

In their search for validity, rigour and precision, mainstream macro modellers of various ilks construct microfounded DSGE models that 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 doubt 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?

The rigour and precision in formal logic focus has a devastatingly important trade-off: the higher the level of rigour and precision, the smaller the range of real-world application. So the more mainstream economists insist on formal logic validity, the less they have to say about the real world.

And as Spiegler has it — to think we solve the problem by reforms to mathematical modeling is nothing but “a more refined version of the wrong tool for the job, like sharpening one’s knife when what is needed is a spoon.

A room with a view

31 Dec, 2022 at 10:10 | Posted in Varia | 2 Comments

.my house

After almost forty years in Lund, yours truly returned to the town where he was born and bred — Malmö. Living on the top floor of this grandiose building, next to The Magistrate’s Park, and with The Opera and The Municipal Art Gallery just across the street, always convinces me that returning was a good decision …

Happy New Year!

Remember life is short, so dream big and make the most of your life!

Combinatorics (VI)

29 Dec, 2022 at 15:21 | Posted in Statistics & Econometrics | 4 Comments

Combinatorics in .NET - Part I - Permutations, Combinations & Variations –  try { } catch { } meIn my library, there are n philosophy books and six economics books. If yours truly can choose two books of each type in 150 ways, how many philosophy books are there in my library?

Malmö i sorg

29 Dec, 2022 at 12:26 | Posted in Varia | 1 Comment

Stjepan ‘Stippe’ Rasic har gått ur tiden.

Malmös alla nattsuddare tackar dig för allt.

RIP.

kk131118018 - Bilder i syd

My friends — you bow to no one!

28 Dec, 2022 at 16:38 | Posted in Varia | Comments Off on My friends — you bow to no one!

Dan-Ellsberg-edward-snowdenEdward Snowden and Daniel Ellsberg.

Bravest of the brave.

Never give in.

Never give up.

Nothing compares (personal)

28 Dec, 2022 at 14:59 | Posted in Varia | Comments Off on Nothing compares (personal)

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In loving memory of Kristina, beloved wife, and mother of David and Tora.

Those whom the gods love die young.

But 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 philosophy of economics

28 Dec, 2022 at 11:28 | Posted in Economics | 3 Comments

A critique yours truly sometimes encounters is that as long as I cannot come up with some own alternative to the failing mainstream theory, I shouldn’t expect people to pay attention.

This is however to misunderstand the role of philosophy and methodology of economics!

As John Locke wrote in An Essay Concerning Human Understanding:

19557-004-21162361The Commonwealth of Learning is not at this time without Master-Builders, whose mighty Designs, in advancing the Sciences, will leave lasting Monuments to the Admiration of Posterity; But every one must not hope to be a Boyle, or a Sydenham; and in an Age that produces such Masters, as the Great-Huygenius, and the incomparable Mr. Newton, with some other of that Strain; ’tis Ambition enough to be employed as an Under-Labourer in clearing Ground a little, and removing some of the Rubbish, that lies in the way to Knowledge.

That’s what philosophy and methodology can contribute to economics — clear obstacles to science.

respectEvery now and then yours truly also gets some upset comments from people wondering why I’m not always ‘respectful’ of people like Eugene Fama, Robert Lucas, Greg Mankiw, and others of the same ilk.

But sometimes it might actually, from a Lockean perspective, be quite appropriate to be disrespectful.

New Classical and ‘New Keynesian’ macroeconomics is rubbish that ‘lies in the way to Knowledge.’

And when New Classical and ‘New Keynesian’economists resurrect fallacious ideas and theories that were proven wrong already in the 1930s, then I think a less respectful and more colourful language is called for.

A Merry Christmas (personal)

24 Dec, 2022 at 15:17 | Posted in Varia | Comments Off on A Merry Christmas (personal)

IMG_0702 Amanda (32), Linnea (23), Sebastian (29), David (32), Tora (29), and Hedda (9).

It is great to be able to have all sons and daughters home over the Christmas holidays.

Oiche Chiúin

24 Dec, 2022 at 11:56 | Posted in Varia | Comments Off on Oiche Chiúin

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Hero of the year 2022

23 Dec, 2022 at 11:04 | Posted in Politics & Society | 2 Comments

Review: Biography of Ukrainian President Volodymyr Zelensky

Ukrainian President Volodymyr Zelensky outside Kyiv, on April 4, 2022.

O Holy Night

23 Dec, 2022 at 10:48 | Posted in Varia | Comments Off on O Holy Night


This live performance remains unequaled to this day.
Jussi Björling — the greatest of them all.

Harbour of hope

22 Dec, 2022 at 18:24 | Posted in Varia | Comments Off on Harbour of hope

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In April 1945 thousands of concentration camp survivors arrived at the harbour of the town where yours truly lives, Malmö, Sweden.

When taking my daily walk with the dog, I often go by the Jewish cemetery in the northern part of Sankt Pauli kyrkogård. And it breaks my heart every time to see tombstone after tombstone with the names of all those who passed away within months after having reached the harbour of hope.

(To my Swedish readers: Filmen finns nu att se på SvT Play)

Do complex numbers exist? (wonkish)

22 Dec, 2022 at 12:12 | Posted in Statistics & Econometrics | Comments Off on Do complex numbers exist? (wonkish)

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Christmas combinatorics

21 Dec, 2022 at 10:49 | Posted in Statistics & Econometrics | 13 Comments

Combinatorics in .NET - Part I - Permutations, Combinations & Variations –  try { } catch { } meYours truly has invited five of his colleagues to share a Christmas lunch with him around the circular dinner table in his kitchen. Unfortunately, two of the colleagues are not on speaking terms with each other, so they cannot be seated together. In how many ways can we be seated around the table?

How to ensure that models serve society

21 Dec, 2022 at 09:35 | Posted in Economics | 2 Comments

• Mind the assumptions — assess uncertainty and sensitivity.

• Mind the hubris — complexity can be the enemy of relevance.

• Mind the framing — match purpose and context.

• Mind the consequences — quantification may backfire.

• Mind the unknowns — acknowledge ignorance.

Andrea Saltelli, John Kay, Deborah Mayo, Philip B. Stark, et al.

Five principles I think modern times “the model is the message” economists would benefit much from pondering. And especially when it comes to the last principles, they would benefit enormously from reading.

More than a hundred years after John Maynard Keynes wrote his seminal A Treatise on Probability (1921), it is still very difficult to find economics and statistics textbooks that seriously try to incorporate his far-reaching and incisive analysis of induction and evidential weight.

The standard view in statistics and economics — and the axiomatic probability theory underlying it — is to a large extent based on the rather simplistic idea that “more is better.” But as Keynes argues — “more of the same” is not what is essential when making inductive inferences. It’s rather a question of “more but different.”

Variation, not replication, is at the core of induction. Finding that p(x|y) = p(x|y & w) doesn’t make w “irrelevant.” Knowing that the probability is unchanged when w is present gives p(x|y & w) another evidential weight (“weight of argument”).

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.” 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 often have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents as modelled by “modern” social sciences. And often we “simply do not know.” 

Science according to Keynes should help us penetrate “the true process of causation lying behind current events” and disclose “the causal forces behind the apparent facts.” Models can never be more than a starting point in that endeavour. He further argued that it was inadmissible to project history on the future. Consequently, we cannot presuppose that what has worked before, will continue to do so in the future. Getting hold of correlations between different “variables” is not enough. If our models cannot get at the causal structure that generated the data, they are not really “identified.”

How strange that writers of economics and statistics textbooks as a rule do not even touch upon these aspects of scientific methodology that seem so fundamental and important for anyone trying to understand how we learn and orient ourselves in an uncertain world. An educated guess on why this is a fact would be that Keynes’s concepts are not possible to squeeze into a single calculable numerical “probability.” In the quest for quantities, one puts a blind eye to qualities and looks the other way – but Keynes’s ideas keep creeping out from under the carpet.

It’s high time that economics and statistics textbooks give Keynes his due.

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