LARS P. SYLL

Attending economics seminars — a total waste of time!

Visiting economics conferences and seminars, the sessions usually start with the presentation of mathematical-statistical models building on assumptions somewhat analogous to “let us assume that people are green and descending from Mars” — and then long technical discussions follow on how good these models are at making us better understand contemporary societies and economies.

Yours truly finds it extremely hard to see we should at all pay attention to and waste time on modelling societies and economies assuming things like ‘rational expectations’, ‘representative agents’, calculable uncertainties, ergodicity, ‘common knowledge’, ‘infinitely-lived dynasties’, ‘modern-macro Euler equations’,  ‘overlapping generations of fixed size’, ‘wages determined by Nash bargaining’, ‘endogenous job openings’, etc., etc.

Without those patently absurd assumptions, the models presented and discussed deliver nothing. The assumptions matter crucially, and not even extreme idealizations in the form of invoking non-existent entities such as ‘hypothetical super populations or ‘actors maximizing expected utility’ delivers. Change only one of the assumptions and something completely different may happen.

Thirty years ago one of my intellectual heroes, Phil Mirowski, was invited to give a speech on themes from his book More Heat than Light at my old economics department in Lund, Sweden. All the mainstream professors were there. Their theories and model assumptions were totally mangled and no one — absolutely no one — had anything to say even remotely reminiscent of a defence. Being at a nonplus, one of them, in total desperation, finally asked: “But what shall we do then?”

Yes indeed — what shall they do? Because, sure, they have to do something. Before they come up with something better than the present fictional mainstream economics storytelling there is little reason for any of us to attend their seminars and conferences.

Mainstream economics — slipping from the model of reality to the reality of the model

A couple of years ago, Paul Krugman had a piece up on his blog arguing that the ‘discipline of modelling’ is a sine qua non for tackling politically and emotionally charged economic issues:

In my experience, modeling is a helpful tool (among others) in avoiding that trap, in being self-aware when you’re starting to let your desired conclusions dictate your analysis. Why? Because when you try to write down a model, it often seems to lead some place you weren’t expecting or wanting to go. And if you catch yourself fiddling with the model to get something else out of it, that should set off a little alarm in your brain.

So when ‘modern’ mainstream economists use their models — standardly assuming rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative agents with homothetic and identical preferences, etc. — and standardly ignoring complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc. — we are supposed to believe that this somehow helps them ‘to avoid motivated reasoning that validates what you want to hear.’

Yours truly is, to say the least, far from convinced. The alarm in my brain is that this, rather than being helpful for understanding real-world economic issues, is more of an ill-advised plaidoyer for voluntarily taking on a methodological straight-jacket of unsubstantiated and known to be false assumptions.

Let me just give one example to illustrate my point.

In 1817 David Ricardo presented — in Principles — a theory that was meant to explain why countries trade and, based on the concept of opportunity cost, how the pattern of export and import is ruled by countries exporting goods in which they have a comparative advantage and importing goods in which they have a comparative disadvantage.

Ricardo’s theory of comparative advantage, however, didn’t explain why the comparative advantage was the way it was. At the beginning of the 20th century, two Swedish economists — Eli Heckscher and Bertil Ohlin — presented a theory/model/theorem according to which the comparative advantages arose from differences in factor endowments between countries. Countries have comparative advantages in producing goods that use up production factors that are most abundant in the different countries. Countries would a fortiori mostly export goods that used the abundant factors of production and import goods that mostly used factors of production that were scarce.

The Heckscher-Ohlin theorem — as do the elaborations on it by e.g. Vanek, Stolper and Samuelson — builds on a series of restrictive and unrealistic assumptions. The most critically important — besides the standard market-clearing equilibrium assumptions — are

(1) Countries use identical production technologies.

(2) Production takes place with constant returns to scale technology.

(3) Within countries the factor substitutability is more or less infinite.

(4) Factor prices are equalised (the Stolper-Samuelson extension of the theorem).

These assumptions are, as almost all empirical testing of the theorem has shown, totally unrealistic. That is, they are empirically false. Building theories and models on unjustified patently ridiculous assumptions we know to be false, does not deliver real science. Science fiction is not science.

That said, one could indeed wonder why on earth anyone should be interested in applying this theorem to real-world situations. Like so many other mainstream mathematical models taught to economics students today, this theorem has very little to do with the real world.

From a methodological point of view, one can, of course, also wonder, how we are supposed to evaluate tests of a theorem building on known to be false assumptions. What is the point of such tests? What can those tests possibly teach us? From falsehoods, anything logically follows.

Some people have trouble with the fact that by allowing false assumptions mainstream economists can generate whatever conclusions they want in their models. But that’s really nothing very deep or controversial. What I’m referring to is the well-known ‘principle of explosion,’ according to which if both a statement and its negation are considered true, any statement whatsoever can be inferred.

Whilst tautologies, purely existential statements and other nonfalsifiable statements assert, as it were, too little about the class of possible basic statements, self-contradictory statements assert too much. From a self-contradictory statement, any statement whatsoever can be validly deduced. Consequently, the class of its potential falsifiers is identical with that of all possible basic statements: it is falsified by any statement whatsoever.

Using false assumptions, mainstream modellers can derive whatever conclusions they want. Wanting to show that ‘all economists consider austerity to be the right policy,’ just e.g. assume ‘all economists are from Chicago’ and ‘all economists from Chicago consider austerity to be the right policy.’  The conclusions follow by deduction — but are of course factually totally wrong. Models and theories building on that kind of reasoning are nothing but a pointless waste of time.

‘New Keynesian’ DSGE models — unparalleled spectacular failures

The problem of the DSGE-models (and more generally of rational expectations macroeconomic models) is that they assume extraordinary cognitive capabilities of individual agents …

The fact that the assumption of rational expectations is implausible does not necessarily mean that models using such an assumption cannot be powerful tools in making empirical predictions. The problem, however, is that rational expectations macroeconomic model make systematically wrong predictions, in particular about the speed with which prices adjust. This empirical failure could have led the profession of macroeconomists to drop the model and to look for another one. Instead, macroeconomists decided to stick to the rational expectations model but to load it with a series of ad-hoc repairs that were motivated by a desire to improve its fit …

The success of the DSGE-model has much to do with the story it tells about how the macroeconomy functions. This is a story in which rationality of superbly informed and identical agents reigns … We have questioned this story … No individual can ever hope to understand and to process the full complexity of the world in which he lives. That’s why markets are so important. They are institutions that efficiently aggregate the diverse bits of information stored in individual brains …

Paul De Grauwe

De Grauwe’s critique of the repair shop treatment of DSGE modelling convincingly shows that ‘New Keynesian’ tweaking of DSGE models will not do the job. Why? Basically, they do not acknowledge​ genuine real-world uncertainty, and without this acknowledgement,​ the job will not be done appropriately.

It also underscores the necessity of being sceptical of the pretences and aspirations of ‘New Keynesian’ macroeconomics. So far it has been impossible to see that it has yielded very much in terms of realist and relevant economic knowledge. And — as if that wasn’t enough — there’s nothing new or Keynesian about it!

‘New Keynesianism’ doesn’t have its roots in Keynes. It has its intellectual roots in Paul Samuelson’s ill-founded ‘neoclassical synthesis’ project, whereby he thought he could save the ‘classical’ view of the market economy as a (long run) self-regulating market clearing equilibrium mechanism, by adding some (short run) frictions and rigidities in the form of sticky wages and prices.

But — putting a sticky-price lipstick on the ‘classical’ pig sure will not do. The ‘New Keynesian’ pig is still neither Keynesian nor new.

The rather one-sided emphasis on usefulness and its concomitant instrumentalist justification cannot hide that ‘New Keynesians’ cannot give supportive evidence for their considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, yours truly cannot but conclude that ‘New Keynesian’ macroeconomics — on the whole, and not only regarding its repaired DSGE models — has not delivered anything else than ‘as if’ unreal and irrelevant models.

The purported strength of New Classical and ‘New Keynesian’ macroeconomics is that they have firm anchorage in preference-based microeconomics, especially the decisions taken by inter-temporal utility maximizing ‘forward-looking’ individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations — without ever presenting either ontological or epistemological justifications for this claim — has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations. It is as if these economists want to resurrect the omniscient Walrasian auctioneer in the form of all-knowing representative actors equipped with rational expectations and assumed to somehow know the true structure of our model of the world. A model of the world — as De Grauwe puts it — “that like, in the socialist models of the past, assumes an all-knowing individual, who can compute the optimal plans and set the optimal prices.”​

Stephanie Kelton till Stockholm

När tankesmedjan Katalys nu firar tioårsjubileum har man passande nog valt att bjuda in författaren till en av årtiondet största megahit inom ekonomiområdet — Underskottsmyten — Stephanie Kelton. Har ni vägarna förbi Stockholm den 6 maj tycker jag definitivt ni ska lägga ett par timmar på att besöka ABF-huset!

Yours truly har under flera års tid nu frågat sig varför vi i det här landet har  begåvats med regeringar som inte vågar satsa kraftfullt på en offensiv finanspolitik och låna mer, inte minst under perioder då vi hade historiskt låga räntor och det var gyllene tillfällen att satsa på investeringar inom infrastruktur, vård, skola och välfärd.

Av de återkommande uttalandena i media de senaste veckorna att döma, verkar det tyvärr som om vår nuvarande finansminister, Elisabeth Svantesson, har  rejäla kunskapsluckor. Lite ‘functional finance’ och MMT kanske inte skulle skada. Eller varför inte ta och läsa Keltons numera till svenska översatta bok?

Ett lands statsskuld är sällan en orsak till ekonomisk kris, utan snarare ett symtom på en kris som sannolikt blir värre om inte underskotten i de offentliga finan­serna får öka.

I stället för att prata om “sparande i ladorna” och att ”värna om statsfinanserna” bör en ansvarsfull rege­ringen se till att värna om samhällets framtid. 

Vad många politiker och mediala så kallade experter inte verkar (vilja) förstå är att det finns en avgörande skillnad mellan privata och offentliga skulder. Om en individ försöker spara och dra ner på sina skulder, så kan det mycket väl vara rationellt. Men om alla försöker göra det, blir följden att efterfrågan sjunker och arbetslösheten riskerar ökar.

En enskild individ måste alltid betala sina skulder. Men en suverän stat med egen valuta kan alltid betala tillbaka sina gamla skulder med nya skulder. Staten är inte en individ. Statliga skulder är inte som privata skulder. En stats skulder är väsentligen en skuld till den själv, till dess medborgare.

En statsskuld är varken bra eller dålig. Den ska vara ett medel att uppnå två övergripande makroekonomiska mål — full sysselsättning och prisstabilitet. Vad som är ‘heligt’ är inte att ha en balanserad budget eller att hålla nere statsskulden. Om idén om ‘sunda’ statsfinanser leder till ökad arbetslöshet och instabila priser borde det vara självklart att den överges. ‘Sunda’ statsfinanser är osunt.

Budgetunderskott är inte Sveriges problem idag. Och att fortsatt prata om att “spara i ladorna” är bara ren dumhet. Som min gamle mentor Sven Grassman uttryckte det: “uppoffringar och återhållen konsumtion leder inte till  framsteg.”