Why Krugman and Stiglitz are no real alternatives to mainstream economics

30 May, 2023 at 07:57 | Posted in Economics | 17 Comments

verso_978-1-781683026_never_let_a_serious_crisis__pb_edition__large_300_cmyk-dc185356d27351d710223aefe6ffad0cLittle in the discipline has changed in the wake of the crisis. Mirowski thinks that this is at least in part a result of the impotence of the loyal opposition — those economists such as Joseph Stiglitz or Paul Krugman who attempt to oppose the more viciously neoliberal articulations of economic theory from within the camp of neoclassical economics. Though Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis … Mirowski argues that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has rendered them doubly ineffective.

First, their adoption of the battery of assumptions that accompany most neoclassical theorizing — about representative agents, treating information like any other commodity, and so on — make it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis. Instead, they end up tinkering with it, introducing a nuance here or a qualification there … Stiglitz’s and Krugman’s arguments, while receiving circulation through the popular press, utterly fail to transform the discipline.

Paul Heideman

Despite all their radical rhetoric, Krugman and Stiglitz are — where it really counts — nothing but die-hard mainstream economists, just like Milton Friedman, Robert Lucas or Greg Mankiw.

The only economic analysis that Krugman and Stiglitz  — like other mainstream economists — accept is the one that takes place within the analytic-formalistic modelling strategy that makes up the core of mainstream economics. All models and theories that do not live up to the precepts of the mainstream methodological canon are pruned. You’re free to take your models — not using (mathematical) models at all is considered totally unthinkable —  and apply them to whatever you want — as long as you do it within the mainstream approach and its modelling strategy. 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.’

straight-jacketThat isn’t pluralism.

That’s a methodological reductionist straightjacket.

So, even though we have seen a proliferation of models, it has almost exclusively taken place as a kind of axiomatic variation within the standard ‘Urmodell’, which is always used as a self-evident benchmark.

Krugman and Stiglitz want to purvey the view that the proliferation of economic models during the last twenty-thirty years is a sign of great diversity and an abundance of new ideas.

But it’s not that simple.

Although mainstream economists like to portray mainstream economics as an open and pluralistic ‘let a hundred flowers bloom,’ in reality, it is rather ‘plus ça change, plus c’est la même chose.’

Applying closed analytical-formalist-mathematical-deductivist-axiomatic models, built on atomistic-reductionist assumptions to a world assumed to consist of atomistic-isolated entities, is a sure recipe for failure when the real world is known to be an open system where complex and relational structures and agents interact. Validly deducing things in models of that kind doesn’t help us understand or explain what is taking place in the real world we live in. Validly deducing things from patently unreal assumptions — that we all know are purely fictional — makes most of the modelling exercises pursued by mainstream economists rather pointless. It’s not the stuff that real understanding and explanation in science is made of. Just telling us that the plethora of mathematical models that make up modern economics  “expand the range of the discipline’s insights” is nothing short of hand waving.

No matter how many thousands of technical working papers or models mainstream economists come up with, as long as they are just ‘wildly inconsistent’ 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 possible explanations of real economies.

Det dunkelt sagda

28 May, 2023 at 12:08 | Posted in Varia | Leave a comment

“Det dunkelt sagda är det dunkelt tänkta” — fanns det ‘postmodern’ mumbojumbo redan på Esaias Tegnérs tid?


The problem with Foucault

27 May, 2023 at 18:29 | Posted in Politics & Society | 1 Comment

My problem with Michel Foucault, then, is not that he seeks to “move beyond” the welfare state, but that he actively contributed to its destruction, and that he did so in a way that was entirely in step with the neoliberal critiques of the moment. His objective was not to move towards “socialism,” but to be rid of it …

Foucault and Neoliberalism – a few thoughts in response to the Zamora piece  in Jacobin | Progressive GeographiesIn addition to the “dependency” it supposedly creates, Foucault believes that social security ultimately serves mainly the affluent. Thus, in a 1976 interview, he invokes, again without much distancing, the classic neoliberal argument according to which the welfare state actually amounts to a subsidy for the rich paid for by the poor, since it is often the rich who make the most use of the services provided …

This argument, largely developed by Milton Friedman in his little opus Free to Choose — which Foucault was surely aware of — basically opposed any form of universal service financed by the public. According to Friedman, such a system always leads to “a transfer from the less well-off to the better-off” …

How could we seriously think that discrediting state action in the social domain and abandoning the very idea of social “rights” constitutes progress toward thinking “beyond the welfare state”? All it has done is allow the welfare state’s destruction, not a glimpse of something “beyond.”

Daniel Zamora

Foucault’s anti-socialism

27 May, 2023 at 16:34 | Posted in Politics & Society | Leave a comment

Amazon.com: Foucault and Neoliberalism: 9781509501779: Zamora, Daniel,  Behrent, Michael C.: BooksIt is not difficult to discern Foucault’s animosity toward the post-war left project. Obviously he was very hostile to Marxism … For Foucault in 1977, “the return of the revolution, that’s our problem (…) You know it very well: it’s the desire itself of the revolution that is a problem”

Foucault’s non-vote for Mitterrand in 1981 was about more than just a vote; it revealed his deep suspicion of the whole project of the left after 1945, with its strong state, universal rights, and public services. The new philosopher Andre Glucksman summarized this sensibility in “The Master Thinkers” – a book that Foucault endorsed in a long review and characterized as “brilliant”: “what have we won in replacing a capitalist with a functionary?” In his view, “in the long run, nationalization is domination” …

Let’s not forget that at that moment, he thought that the French left had no proper “governmentality” … Neoliberalism was thus attractive for a rethinking of the left … it was a rethinking that would put aside all his ideas of revolution and of socializing the means of production. Rather than creating a serious social alternative to the post-war left, Foucault did legitimize in many ways, the idea that there was no alternative to the market.

Daniel Zamora

Stefan Nilsson (1955-2023)

26 May, 2023 at 23:29 | Posted in Varia | Leave a comment

Vår främste filmmusikskapare har gått ur tiden.

Stefan skrev den sorts musik som glömskan inte rår på.

Tack för allt.

Vila i frid min vän.

Bille Augusts och Ingmar Bergmans mästerverk — med Stefan Nilssons musik, det vackraste och mest suggestiva i filmmusikväg som någonsin gjorts.

Pelle Erobreren — baserad på Martin Andersen Nexös episka mästerverk och med musik av Stefan Nilsson.

Kjell-Åke Anderssons filmatisering av Göran Tunströms mästerverk Juloratoriet — med gudabenådad musik av Stefan Nilsson.

Foucault’s neoliberalism

26 May, 2023 at 10:46 | Posted in Economics, Politics & Society | 4 Comments

foucault / desfoucault | Engraçado, PalavrasAlthough somewhat critical of its reductive elements, Foucault found certain attractive features in the ideal or programmatic form imagined by American neoliberalism, namely, that it envisages a kind of regulation outside sovereign, disciplinary, and biopolitical forms, that it regulates without the fabrication of subjectivities and in a manner that optimizes difference and tolerates minority groups and practices. Second, from a policy perspective, Foucault showed a certain acceptance of a neoliberal diagnosis of current problems of the welfare state as creating dependency, as unresponsive and costly, without offering an explicit endorsement of its reconstructions of health and social services as a series of markets. Finally, from the perspective of concrete political alignments, he displays an affinity with the “Second Left,” those elements within French social democracy that opposed the statism of the “First Left” and displayed a willingness to adopt neoliberal ideas and solutions …

Intellectually, Foucault expresses most affinity with American neoliberalism of the Chicago School. From a public policy perspective, he offers critiques of the welfare state found in the work of the principals of that School and explores technologies, such as the negative tax, that are sourced from such critiques. And from a concrete political perspective, he most clearly aligns himself with specific factions of the French Left open to ideas and solutions borrowed from American neoliberalism. To note this threefold, affirmative relationship is not to denounce Foucault as a neoliberal. It is simply to indicate his much more serious and fundamental engagement with a contemporary form of economic liberalism than is usually allowed in Foucauldian commentary.

Mitchell Dean

Ricardiansk ekvivalens och budgetunderskott

25 May, 2023 at 16:54 | Posted in Economics | Leave a comment

nedladdningFå frågor inom politik och ekonomi diskuteras nu för tiden så mycket — och förstås så lite — som offentlig skuld. Många höjer sina röster och uppmanar till att minska skulden, men få förklarar varför och på vilket sätt en minskning av skulden skulle främja en bättre ekonomi eller ett rättvisare samhälle. Dessutom finns det inga gränser för alla de katastrofer som en stor offentlig skuld förväntas leda till — arbetslöshet, inflation, högre räntor, lägre produktivitetstillväxt, ökade bördor för kommande generationer osv., osv.

Människor bryr sig vanligtvis mycket om budgetunderskott och skulder inom offentlig sektor och är generellt sett oroade och negativa till det. Genom att dra paralleller till den egna hushållsekonomin betraktas skulder som en indikation på en nära förestående risk för obestånd och därmed en källa till fördömelse. Men även om ingen kan tvivla på den politiska och ekonomiska betydelsen av offentlig skuld, råder det emellertid ingen enighet bland ekonomer om huruvida skuld spelar roll, och i så fall varför och på vilket sätt. Och ännu mindre vet man vad som är den ‘optimala’ storleken på offentlig skuld.

Genom historien har offentliga skulder gått upp och ner, ofta ökat under perioder av krig eller stora förändringar inom grundläggande infrastruktur och teknologi, för att sedan minska under perioder när saker och ting har stabiliserats.

Fördelarna och nackdelarna med offentlig skuld har diskuterats så länge som fenomenet självt har funnits, men trots det har det inte varit möjligt att nå någon form av samförstånd i frågan. Man har vanligtvis inte ens kunnat enas om huruvida offentlig skuld är ett problem, och om det är det — när det är det eller hur man bäst hanterar det. Några av de mer framträdande skälen till detta bristande samförstånd är frågans komplexitet, sammanblandningen av egenintressen, ideologi, psykologiska rädslor, osäkerheten vid beräkning och uppskattning av intergenerationella effekter osv., osv.

Under merkantilismens era ansågs offentlig skuld vanligtvis vara positiv (se exempelvis Berkeley, Melon, de Pinto), en syn som senare upprepades under 1800-talet av ekonomer som Adolf Wagner, Lorenz von Stein och Carl Dietzel. Statens huvudsakliga mål var att kontrollera och fördela nationens resurser, ofta genom regleringar och kraftfulla statliga ingripanden. Som en följd av ökad offentlig skuld skulle omsättningen av pengar och kredit öka mängden kapital och bidra till nationernas välstånd. Offentlig skuld betraktades i grunden som något som flyttades från “den högra handen till den vänstra handen”. Ekonomi behövde helt enkelt en stat som var beredd att låna betydande summor pengar och finansiella värdepapper och bli skuldsatt i processen.

Det fanns också en tydlig politisk dimension i frågan, och vissa författare var medvetna om att regeringens lån och skuldsättning kunde ha en politiskt stabiliserande effekt. Investerare hade ett egenintresse av stabila regeringar (låg ränta och låg riskpremie) och var därför instinktivt lojala mot regeringen.

Inom den klassiska ekonomin — i fotspåren av David Hume — framförde särskilt Adam Smith, David Ricardo och Jean-Baptiste Say mer negativa åsikter om offentlig skuld. En god budget var en balanserad budget. Om regeringen lånade pengar för att finansiera sina verksamheter skulle det bara leda till att privata företag och investeringar trängdes ut. Staten ansågs generellt sett vara oförmögen att betala sina skulder, och den verkliga bördan skulle därför i huvudsak falla på skattebetalarna som i slutändan fick betala för regeringens oansvarighet. Argumentationens moraliska karaktär var en framträdande egenskap — “antingen måste nationen förstöra den offentliga kreditvärdigheten, eller så kommer den offentliga kreditvärdigheten att förstöra nationen” (Hume 1752).

Senare under 1900-talet skulle ekonomer som John Maynard Keynes, Abba Lerner och Alvin Hansen återigen inta en mer positiv syn på offentlig skuld. Offentlig skuld var normalt sett inget att frukta, särskilt om den finansierades inom landet självt (men även utländska lån kunde vara gynnsamma för ekonomin om de investerades på rätt sätt). Vissa medlemmar i samhället skulle äga obligationer och tjäna ränta på dem, medan andra skulle betala skatten som i slutändan finansierade räntan på skulden. Men skulden ansågs inte vara en nettobörda för samhället som helhet, eftersom skulden i princip upphävde sig själv mellan de två grupperna. Om staten kunde emittera obligationer till en låg räntesats kunde arbetslösheten minskas utan att det nödvändigtvis ledde till starkt inflationstryck. Och den intergenerationella bördan var ingen verklig börda enligt denna grupp av ekonomer, eftersom skulden genom sina effekter på investeringar och sysselsättning faktiskt skulle vara nettovinnare om den användes på lämpligt sätt. Det kunde naturligtvis finnas oönskade negativa fördelningsmässiga sidoeffekter för kommande generationer, men det ansågs mestadels vara ett mindre problem eftersom (Lerner 1948) “om våra barn eller barnbarn betalar av en del av den nationella skulden kommer dessa betalningar att göras till våra barn och barnbarn och till ingen annan.”

Central för den Keynesianskt influerade synen är den grundläggande skillnaden mellan privat och offentlig skuld. Att blanda samman dem är ett exempel på ett ”atomistiskt felslut”, vilket i grund och botten är en variation av Keynes sparparadox. Om en individ försöker spara och minska sina skulder kan det vara bra och rationellt, men om alla försöker göra det skulle resultatet bli lägre sammanlagd efterfrågan och ökad arbetslöshet.

En individ måste alltid betala sina skulder. Men en regering kan alltid betala tillbaka gamla skulder med nya genom att emittera nya obligationer. Staten är inte som en individ. Offentlig skuld är inte som privat skuld. Statsskuld är i grunden en skuld till sig själv, till sina medborgare. Räntan som betalas på skulden betalas av skattebetalarna å ena sidan, men å andra sidan går räntan på obligationerna som finansierar skulderna till dem som lånar ut pengarna.

Abba Lerners essä “Functional Finance and the Federal Debt” fastställer vägledande principer för regeringar att anta i sina ansträngningar att använda ekonomiska, särskilt finansiella, åtgärder för att upprätthålla full sysselsättning och välstånd i ekonomier som kämpar med kroniska problem med att bibehålla tillräckligt hög aggregerad efterfrågan.

På grund av denna inneboende brist tenderade moderna stater att ha strukturella och långvariga problem med att upprätthålla full sysselsättning. Enligt Lerners principer för funktionell finansiering har den privata sektorn en tendens att inte generera tillräckligt med efterfrågan på egen hand, och därför måste regeringen ta på sig ansvaret för att se till att full sysselsättning uppnås. Det främsta verktyget för att göra detta är öppna marknadsoperationer – särskilt försäljning och köp av räntebärande statsskuldväxlar.

Även om Lerner verkar ha haft uppfattningen att idéerna som ingår i funktionell finansiering i princip kan tillämpas i alla typer av ekonomier, erkände han också betydelsen av institutionella arrangemang för att forma genomförbarheten och praktisk implementering av det.

Funktionell finansiering är kritiskt beroende av att nationella stater kan beskatta sina medborgare, ha en egen valuta och obligationer. Som blev tydligt under ”den stora recessionen” har EMU inte kunnat införa dessa strukturer, eftersom, som Hayek redan konstaterade 1939, “en regering genom överenskommelse är bara möjlig om vi inte kräver att regeringen agerar inom områden där vi kan få verklig överenskommelse.” Den monetära institutionella strukturen i EMU gör det mycket osannolikt, för att inte säga omöjligt, att detta någonsin kommer att bli ett “system” där funktionell finansiering anpassas.

För funktionell finansiering var de val som regeringar gör för att finansiera de offentliga underskotten och följdskulderna viktiga, eftersom finansiering med obligationer ansågs vara mer expansivt än att använda skatter också. Enligt Lerner syftar offentlig skuld till att uppnå en räntenivå som gör att investeringar gör full sysselsättning möjlig. På kort sikt kan detta leda till underskott, men han hävdade bestämt att det inte fanns någon anledning att anta att tillämpningen av funktionell finansiering för att upprätthålla full sysselsättning innebar att regeringen alltid måste låna pengar och öka den offentliga skulden. Tillämpningen av funktionell finansiering skulle ha en tendens att balansera budgeten på lång sikt, eftersom garantin för permanent full sysselsättning kommer att göra privata investeringar mycket mer attraktiva och följaktligen kommer större privata investeringar att minska behovet av underskott.

För både Keynes och Lerner var det uppenbart att staten hade förmågan att främja full sysselsättning och en stabil prisnivå – och att den borde använda sina befogenheter för att göra det. Om det innebar att den var tvungen att ta på sig skulder och (mer eller mindre tillfälligt) underbalansera sin budget — så låt det vara så! Offentlig skuld är varken bra eller dåligt. Det är ett medel för att uppnå två övergripande makroekonomiska mål – full sysselsättning och prisstabilitet. Det som är heligt är inte att ha en balanserad budget eller minska den offentliga skulden per se, oavsett effekterna på de makroekonomiska målen. Om “sund finansiering”, åtstramning och balanserade budgetar innebär ökad arbetslöshet och destabiliserande priser måste de överges.

Mot denna resonemang har förespråkare för teorin om Ricardiansk ekvivalens hävdat att det är ovidkommande om den offentliga sektorn finansierar sina utgifter genom skatter eller genom att utfärda obligationer, eftersom obligationer förr eller senare måste betalas tillbaka genom att höja skatterna i framtiden.

Robert Barro (1974) försökte ge påståendet en fast teoretisk grund, genom att argumentera för att ersättningen av ett budgetunderskott med nuvarande skatter inte har någon inverkan på den totala efterfrågan, och att budgetunderskott och beskattning har ekvivalenta effekter på ekonomin.

Om den offentliga sektorn tar på sig extra utgifter genom underskott, förväntar sig skattebetalarna enligt hypotesen att de kommer att behöva betala högre skatter i framtiden — och ökar därför sina besparingar och minskar sin nuvarande konsumtion för att kunna göra det, vilket resulterar i att den totala efterfrågan inte skiljer sig från vad som skulle hända om skatterna höjdes idag.

Ricardiansk ekvivalens innebär i grund och botten att finansiering av offentliga utgifter genom skatter eller skulder är ekvivalent, eftersom skuldfinansiering måste återbetalas med ränta, och aktörer – utrustade med rationella förväntningar – skulle endast öka sparandet för att kunna betala de högre skatterna i framtiden, vilket leder till att totala utgifter förblir oförändrade.


Continue Reading Ricardiansk ekvivalens och budgetunderskott…

In my dreams

25 May, 2023 at 15:32 | Posted in Varia | Leave a comment


Gammal kärlek rostar aldrig …

Jag var åtta år gammal och detta var favoritlåten.

Properties of arguments — validity and soundness

25 May, 2023 at 10:14 | Posted in Theory of Science & Methodology | Leave a comment


Using formal mathematical modelling, mainstream economists sure can guarantee that the conclusions hold given the assumptions. However, the validity we get in abstract model worlds does not warrant transfer to real-world economies. Validity may be good, but it is not enough.

Mainstream economists are proud of having an ever-growing smorgasbord of models to cherry-pick from (as long as, of course, the models do not question the standard modelling strategy) when performing their analyses. The ‘rigorous’ and ‘precise’ deductions made in these closed models, however, are not in any way matched by a similar stringency or precision when it comes to what ought to be the most important stage of any economic research — making statements and explaining things in real economies. Although almost every mainstream economist holds the view that thought-experimental modelling has to be followed by confronting the models with reality — which is what they indirectly want to predict/explain/understand using their models — they then all of a sudden become exceedingly vague and imprecise. It is as if all the intellectual force has been invested in the modelling stage and nothing is left for what really matters — what exactly do these models teach us about real economies.

No matter how precise and rigorous the analysis, and no matter how hard one tries to cast the argument in modern mathematical form, they do not push economic science forward one single iota if they do not stand the acid test of relevance to the target.  Proving things ‘rigorously’ in mathematical models is not a good recipe for doing an interesting and relevant economic analysis. Forgetting to supply export warrants to the real world makes the analysis an empty exercise in formalism without real scientific value. In the realm of true science, it is of little or no value to simply make claims about a model and lose sight of reality.

To have valid evidence is not enough. What economics needs is sound evidence. The premises of a valid argument do not have to be true, but a sound argument, on the other hand, is not only valid but builds on premises that are true. Aiming only for validity, without soundness, is setting the economics aspiration level too low for developing a realist and relevant science.

Irrational Exuberance — Robert Shiller’s modern classic

24 May, 2023 at 19:20 | Posted in Economics | 5 Comments

Irrational Exuberance | Princeton University PressAt the beginning of the year 2000, a book titled Irrational Exuberance was published. The American economics professor and Nobel laureate Robert Shiller warned that the extensive deregulation in the financial market that had taken place since the Thatcher-Reagan era had led to a rapid credit expansion. Banks and financial institutions saw a skyrocketing increase in lending, and the pursuit of gaining larger market shares led to neglecting creditworthiness checks and accepting poor customer relationships. Above all, the values of IT stocks were disproportionately high. It would inevitably lead to a financial crisis.

Shiller was proven right. Less than two months after the book was published, the usual happened. The bubble burst, and the financial market crisis became a reality.

Because human memory is short, new concerns reappeared after a few years. The crisis that the American economy once again found itself in had its origins in the speculative bubble that developed in the American housing market between 1997 and 2006. Despite falling interest rates and construction costs, housing prices rose by an average of 85 per cent over the ten years when the bubble was inflated.

The underlying pattern is the same in almost all financial crises. For some reason, a shift occurs (war, innovations, new rules, and more) in the economic cycle that leads to changes in banks’ and companies’ profit opportunities. Demand and prices rise, pulling more and more parts of the economy into a kind of euphoria. More and more people get involved, and soon speculative frenzy – whether it’s about tulip bulbs, properties, or mortgages – becomes a reality. Sooner or later, someone sells to cash in their profits, triggering a rush for liquidity. It’s time to jump off the carousel and convert securities and other assets into cash. A financial emergency arises and spreads. Prices begin to decline, bankruptcies increase, and the crisis accelerates, turning into panic.

To prevent the final crash, credit is tightened, and calls for a lender of last resort who can guarantee the supply of the demanded cash and restore confidence arise. If that fails, the crash becomes a reality.

Like his predecessors Hyman Minsky and Charles Kindleberger, Shiller emphasizes that bubbles are an inevitably recurring feature in an economy with essentially unregulated markets. But Shiller also argues that our contemporary reevaluation of work and wealth plays a role. Over the past decades, people’s perception of their role in the economy has undergone a decisive transformation. From viewing work as the foundation of our well-being based on a Protestant work ethic, the idea of expecting to make money through investments has spread increasingly. Today’s hero is not the hardworking industrial labourer but the smart investor for whom money is no longer a means but an end in itself. According to Shiller, this rethinking is the underlying cause of the crisis. This is where the heart of darkness lies.

That Shiller emphasizes the psychological aspects is not surprising, considering that he is a leading representative of the research field in financial economics called behavioural finance.

As a young science, economics was closely intertwined with other disciplines such as philosophy and psychology. Adam Smith, for example, was one of the foremost moral philosophers of his time. Over time, many economists deliberately sought to distance themselves from other sciences. Economic science would build on its own foundations instead of relying on the shaky grounds that immature and unscientific psychology could provide.

However, in recent times, more and more economists have realized the need to base their models on more realistic psychological foundations. Behavioural economics has quickly established itself as a sustainable part of the field of economics, with significant influence, particularly in financial economics. Neglecting the deep psychological dimensions of financial markets is increasingly seen as playing ‘Hamlet’ without the Prince of Denmark.

In traditional economic wisdom, the hypothesis of efficient markets has long been central. The hypothesis essentially states that the prices established in financial markets correspond to the fundamental values of the economy because all investors are rational and eliminate the existence of prices that deviate from fundamentals.

However, behavioural finance has been able to demonstrate that the depiction of investors as rational is difficult to reconcile with facts drawn from real financial markets. Investors seem to trade based more on noise than information. They extrapolate from short-term trends, are sensitive to how problems are presented, are poor at revising their risk assessments, and often overreact to mood swings. As a result, an asset’s price and its actual value can deviate for an extended period. Irrationality is not irrelevant in financial markets.

In Irrational Exuberance, Shiller demonstrates, based on his own empirical research on the fluctuations of the financial market, that stock value fluctuations were significantly higher than what is consistent with the hypothesis of an efficient market. And when different types of actors interact with each other, we cannot always expect the market to be efficient. To understand what happens in the financial market, we need to try to gain knowledge of how real investors behave. Behavioural finance has already taken us a long way in that regard.

So, what can be done to minimize the risk of future crises? Financial market participants evidently generate costs that they themselves do not bear. When the foremost economist of our time, John Maynard Keynes, advocated for the introduction of a general financial transaction tax after the stock market crash in 1929, it was because he believed that the market should bear the costs that its instability, imbalances, and disruptions give rise to. Those who, in their pursuit of profit, are willing to take unnecessary risks and cause lasting damage to the economy, must themselves contribute to paying the bill. It should hurt. And it should hurt if the lesson is to be learned.

Shiller emphasizes, just like Keynes, that when it comes to crisis solutions, one must distinguish between the short and long term. In the short-term perspective, it is necessary to mitigate the effects of price declines in housing and other assets through various measures. There are no guarantees that it will help, but fundamentally, there are no sustainable alternatives. Doing nothing would only fuel an already somewhat paralyzing uncertainty. When the house is engulfed in flames, we cannot simply stand on the sidelines and discuss the best method to extinguish it. Fires – like financial bubbles – have a nasty ability to spread.

In the long term, it is clearly beneficial for asset prices to fall back to a level that corresponds to their real value. A decrease in the price of one’s house does not make it less habitable. However, if the wheels of the economy were to come to a halt, the consequences would be very real.

Shiller argues forcefully for a solution he calls financial democracy, which he sees as a powerful remedy. Sound financial principles should be extended to encompass larger parts of society. It’s not only financial market participants who should have access to good information and expertise. Instead of avoiding all risks – which would be devastating to a society’s vitality and creativity – we should learn to manage insurable risks in a rational way. The basic idea is that extensive institutional changes, improved financial advice, increased transparency, freely accessible financial databases, and more should reduce the long-term risk of speculative bubbles emerging.

It is doubt, not belief, that creates new knowledge. Shiller’s research has strongly shown that we cannot both have our cake and eat it too. As long as we have an economy with unregulated financial markets, we will also be prone to periodically recurring crises.

Shiller provides us with both a map and a compass, and his proposals can actively contribute, together with stricter regulation of the financial market, to reducing the risks of costly financial system crises in the long run. However, if we reflexively refuse to see the extent of the problems, we will once again be helpless when the next crisis looms.

‘Self-adjusting’ markets

24 May, 2023 at 15:30 | Posted in Economics | 2 Comments

Paul Krugman has repeatedly over the years argued that we should continue to use mainstream economics hobby horses like IS-LM and AS-AD models. Here’s one example:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I seriously doubt that Keynes would have been impressed by having his theory characterized by​ catchwords like “tendency to return to full employment” and “money is neutral in the long run.”


One of Keynes’s central tenets is that there is no strong automatic tendency for economies to move towards full employment levels.

Money doesn’t matter in mainstream macroeconomic models. That’s true. According to the ‘classical dichotomy,’ real variables — output and employment — are independent of monetary variables, and so enable mainstream economics to depict the economy as basically a barter system.

But in the real world in which we happen to live, money certainly does matter. Money is not neutral and money matters in both the short run and the long run:

The theory which I desiderate would deal … with an economy in which money plays a part of its own and affects motives and decisions, and is, in short, one of the operative factors in the situation, so that the course of events cannot be predicted in either the long period or in the short, without a knowledge of the behaviour of money between the first state and the last. And it is this which we ought to mean when we speak of a monetary economy.

J. M. Keynes A monetary theory of production (1933)

Universalism vs tribalism

24 May, 2023 at 15:17 | Posted in Politics & Society | Leave a comment

Moral universalism: Global evidence | CEPRIt’s now an article of faith that universalism, like other Enlightenment ideas, is a sham that was invented to disguise Eurocentric views that supported colonialism. When I first heard such claims some fifteen years ago, I thought they were so flimsy they’d soon disappear. For the claims are not simply ungrounded: they turn Enlightenment upside down. Enlightenment thinkers invented the critique of Eurocentrism and were the first to attack colonialism, on the basis of universalist ideas …

In the last few years the Enlightenment has been held responsible for most of our misery, just as a century ago, the source for contemporary suffering was called modernity. Something big, after all, must be to blame. Enlightenment-bashing may have begun in American universities, but its reach has swept through the culture in much of the Western world …

They forget that the Enlightenment emerged from a blasted landscape, on a continent soaked with blood. Those who dismiss Enlightenment thinkers as naive or optimistic not only ignore their writings; more importantly, they ignore the history that formed the background to their thought.

Susan Neiman

Wokeism and the commodified academic industry

23 May, 2023 at 14:52 | Posted in Education & School, Politics & Society | Leave a comment


The problem with identity politics and wokeism

23 May, 2023 at 09:44 | Posted in Politics & Society | Leave a comment


The limited epistemic value of ‘variation analysis’

23 May, 2023 at 07:20 | Posted in Statistics & Econometrics | 8 Comments

R-Squared: Definition, Calculation Formula, Uses, and LimitationsWhile appeal to R squared is a common rhetorical device, it is a very tenuous connection to any plausible explanatory virtues for many reasons. Either it is meant to be merely a measure of predictability in a given data set or it is a measure of causal influence. In either case it does not tell us much about explanatory power. Taken as a measure of predictive power, it is limited in that it predicts variances only. But what we mostly want to predict is levels, about which it is silent. In fact, two models can have exactly the same R squared and yet describe regression lines with very different slopes, the natural predictive measure of levels. Furthermore even in predicting variance, it is entirely dependent on the variance in the sample—if a covariate shows no variation, then it cannot predict anything. This leads to getting very different measures of explanatory power across samples for reasons not having any obvious connection to explanation.

Taken as a measure of causal explanatory power, R squared does not fare any better. The problem of explaining variances rather than levels shows up here as well—if it measures causal influence, it has to be influences on variances. But we often do not care about the causes of variance in economic variables but instead about the causes of levels of those variables about which it is silent. Similarly, because the size of R squared varies with variance in the sample, it can find a large effect in one sample and none in another for arbitrary, noncausal reasons. So while there may be some useful epistemic roles for R squared, measuring explanatory power is not one of them.

Harold Kincaid

Although in a somewhat different context, Jon Elster makes basically the same observation as Kincaid:

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. As argued by both Kincaid and Elster, 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:

LiebersonOne 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 treatment 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 modelling, 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 Keynes already 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 relations. Forgetting that, economists will continue to be stuck with a second-best explanatory practice.

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