LARS P. SYLL

The non-existence of economic laws

In mainstream economics, there’s — still — a lot of talk about ‘economic laws.’ The crux of these laws — and regularities — that allegedly exist in economics, is that they only hold ceteris paribus. That fundamentally means that these laws/regularities only hold when the right conditions are at hand to give rise to them. Unfortunately, from an empirical point of view, those conditions are only at hand in artificially closed nomological models purposely designed to give rise to the kind of regular associations that economists want to explain. But, really, since these laws/regularities do not exist outside these ‘socio-economic machines,’ what’s the point in constructing thought experimental models showing these non-existent laws/regularities? When the almost endless list of narrow and specific assumptions necessary to allow the ‘rigorous’ deductions are known to be at odds with reality, what good do these models do?

Deducing laws in theoretical models is of no avail if you cannot show that the models — and the assumptions they build on — are realistic representations of what goes on in real life.

Conclusion? Instead of restricting our methodological endeavours to building ever more rigorous and precise deducible models, we ought to spend much more time improving our methods for choosing models!

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in science, it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

There is a difference between having evidence for some hypothesis and having evidence for the hypothesis relevant for a given purpose. The difference is important because scientific methods tend to be good at addressing hypotheses of a certain kind and not others: scientific methods come with particular applications built into them … The advantage of mathematical modelling is that its method of deriving a result is that of mathemtical proof: the conclusion is guaranteed to hold given the assumptions. However, the evidence generated in this way is valid only in abstract model worlds while we would like to evaluate hypotheses about what happens in economies in the real world … The upshot is that valid evidence does not seem to be enough. What we also need is to evaluate the relevance of the evidence in the context of a given purpose.

Cutting-edge macroeconomics …

No sooner had I finished my comment on the irrelevancy of economics but I had confirmation — albeit unwittingly — in this morning’s Financial Times.  There on the editorial page was a short column by Soumaya Keynes talking about the rise of Hank.

For those of you not on the cutting edge, “Hank” stands for Heterogeneous Agent New Keynesian, as in a complicated model of the economy.

Hank is a whole new way of looking at model economies, with the really big breakthrough being that it includes — roll the drums please — more than one household.

Yes, economists are moving at a rapid pace.  Their research has shown that the economy includes more than one household.

Gasp.

If you are a sociologist or anthropologist you are forgiven at this point for laughing out loud.

Reflect, if you will, on the enormous hubris expressed by Steve Levitt when he criticized economics for becoming too inwardly focused and potentially irrelevant.  His condemnation was absolute.  He said that economics risked falling into the kind of disrepair that, in his mind at least, make sociology and anthropology laughingstocks.  Now, I don’t know sociology or anthropology all that well, but I imagine they don’t base a substantial amount of their theoretical effort on the notion that America has only one household.  Even if that household is “representative”.

Representative of what?  Some Chicago-trained logician masquerading as an economist?

Peter Radford

Yes indeed, ‘Hank’ and similar modelling approaches are nothing but convenient untruths — and still economists rely on them to derive policy implications!

Mainstream economists seem to be impressed by the ‘rigour’ brought to macroeconomics by New-Classical-New-Keynesian DSGE models and its rational expectations and representative agent micro-foundations. It is difficult to see why.

Take the rational expectations assumption. Rational expectations in the mainstream economists’ world imply that relevant distributions have to be time-independent. This amounts to assuming that an economy is like a closed system with known stochastic probability distributions for all different events. In reality, it is straining one’s beliefs to try to represent economies as outcomes of stochastic processes. An existing economy is a single realization tout court, and hardly conceivable as one realization out of an ensemble of economy-worlds since an economy can hardly be conceived as being completely replicated over time. It is — to say the least — very difficult to see any similarity between these modelling assumptions and the expectations of real persons. In the world of the rational expectations hypothesis, we are never disappointed in any other way than when we lose at the roulette wheels. But real life is not an urn or a roulette wheel. And that’s also the reason why allowing for cases where agents make ‘predictable errors’ in DSGE models doesn’t take us any closer to a relevant and realist depiction of actual economic decisions and behaviours. If we really want to have anything of interest to say on real economies, financial crises and the decisions and choices real people make we have to replace the rational expectations hypothesis with more relevant and realistic assumptions concerning economic agents and their expectations than childish roulette and urn analogies.

‘Rigorous’ and ‘precise’ DSGE models cannot be considered anything else than unsubstantiated conjectures as long as they aren’t supported by evidence from outside the theory or model. To my knowledge no in any way decisive empirical evidence has been presented.

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 millimetre if they do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside these models are, they do not say anything about real-world economies.

Proving things ‘rigorously’ in DSGE models is at most a starting point 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.

The kind of knowledge and information we seek in science is something different from what we look for in fiction. Building ‘fictional’ models that we all know are false — not only in the sense that they idealize or abstract from some things (all models do) — in the sense that no matter how many corrections, amendments or ‘successive approximations’ are made, they will never be true of the real-world phenomenon they try to describe or analyze, can’t be the right way to proceed in science. Although that kind of model assumption (often of a mathematical kind) is necessary from a tractability point of view, they are far from harmless since they usually are not possible to ‘relax.’ What drives them is their exact necessary form without which the sought-after results would never obtain. If this kind of economic model — as argued by some economic methodologists — gives us the same kind of knowledge as we get in ordinary fiction, well, then surely we should seriously reconsider what we are doing. Letting tractability, rather than reason, decide what assumptions we make in our theories and models, is not what we need if we want to build a realist and relevant economic science.

Mainstream economists think there is a gain from the DSGE style of modelling in its capacity to offer some kind of structure around which to organise discussions. To me, that sounds more like religious theoretical-methodological dogma, where one paradigm rules in divine hegemony. That’s not progress. That’s the death of economics as a science.

Showing that something is possible in a ‘possible world’ doesn’t give us a justified license to infer that it therefore also is possible in the real world. ‘The Great Gatsby’ is a wonderful novel, but if you truly want to learn about what is going on in the world of finance, I would recommend rather reading Minsky or Keynes and directly confronting real-world finance.

The assumptions and descriptions we use in our modelling have to be true — or at least ‘harmlessly’ false — and give a sufficiently detailed characterization of the mechanisms and forces at work. Models in mainstream economics do nothing of the kind.

Our aspirations have to be more far-reaching than just constructing coherent and ‘credible’ models about ‘possible worlds’. We want to understand and explain ‘difference-making’ in the real world and not just in some made-up fantasy world.  Science has to be something more than just more or less realistic ‘story-telling’ or ‘explanatory fictionalism’. You have to provide decisive empirical evidence that what you can infer in your model also helps us to uncover what actually goes on in the real world.  If you fail to support your models in that way,  you come up with nothing that holds as an explanation of what goes on in the world in which we live.

Postulating ‘representative agents’ equipped with ‘rational expectations’ may help mainstream economists derive sought-after results like ‘equilibrium’, ‘stability’ and downward-sloping demand curves. But telling us that something is possible in a patently artificial fictional world inhabited by ‘representative agents’ equipped with ‘rational expectations’ is not enough. Showing us that something possibly can happen in a model world, is not enough to explain what actually happens in the real world.

Tourism — a critical perspective

It may be noted in passing that essentially the same process, in which participation in an activity changes its form, occurs in tourism … The fact that some tourists are not in search of something different does not remove the anomaly. For if the increased activity of tourists at large deprives only one of their number of a satisfaction previously available, orthodox economic analysis provides no basis for judging the increase in tourism to be of net benefit. The victim has no way of indicating his valuation of the opportunity he has lost— no travel agency can provide him with a charter flight to the past …The key point is that more than a distributional issue is involved. Wider participation affects not just how much different participants get out of the game, but changes the game itself. It changes the set of choices available to all.

So the choice made by each individual in a piecemeal way ceases to be a valid guide to what individuals would choose if they could see the results of their choices along with other peoples’ choices. Suppose everyone spoils it a bit for everyone else. Without mutual coordination, the best tactic for every isolated individual will be to rush in before others have spoiled it even more. Each individual might nonetheless prefer a regime in which all agreed to hold back, and in which no one had the “freedom” to renege on such agreement.

Eurofanatiker försöker köra över folket igen

Efter att ha misslyckats med att få in Sverige i euron på demokratisk väg försöker nu marknadsliberaler andra metoder.

”Jag ser inget behov av en ny folkomröstning om euron” säger Liberalernas ordförande Johan Pehrson …

Syftet med demokrati är inte att folket alltid vet bäst. Det är att eliter alltid lider av grupptänk och hybris, och att någonting behövs för att hejda dem när de drar i väg med sina galna idéer.

Demokrati är en radikal kraft, men den har också konservatismens trygga drag: förmågan att tänka efter innan man tar förhastade beslut. Att rätta till misstag. Att inte riva ner och förstöra saker innan man funderar på om de fyller en funktion. Det är värt att försvara.

Max Jerneck

Euron har avlägsnat möjligheten för nationella regeringar att hantera sina ekonomier på ett meningsfullt sätt — och i Italien, Spanien, Portugal och Grekland för några år sedan var folket tvungna att betala de verkliga kostnaderna för dess huvudlösa åtstramningspolitik.

Utvecklingen av de upprepade ekonomiska kriserna i Euroland har — som yours truly påpekade i en offentlig föreläsning redan för tio år sedan — visat bortom allt tvivel att euron inte bara är ett ekonomiskt projekt, utan lika mycket ett politiskt. Det som den neoliberala revolutionen under 1980- och 1990-talet inte lyckades åstadkomma, ska nu euron tvinga på dem.

Men vill Europas folk verkligen beröva sig själva ekonomisk autonomi, tvingas acceptera lägre löner och skära ned på socialvården vid minsta tecken på ekonomisk nöd? Är ökande inkomstklyftor och en federal överstat verkligen det våra drömmar är gjorda av? Jag tvivlar.

Historien borde avskräcka. Under 1930-talet kom våra ekonomier inte ur depressionen förrän dåtidens dårskap, guldmyntfoten, slängdes på historiens sophög. Förhoppningsvis kommer euron snart att följa efter.

Ekonomer har en tendens att bli förtrollade av sina teorier och modeller och glömmer att bakom siffrorna och abstraktionerna finns en verklig värld med verkliga människor. Verkliga människor som får betala dyrt för felaktiga doktriner och rekommendationer.

Låt oss tala, och tala tydligt.

Demokrati är något vi ska vara stolta över. Vi har inte fått den gratis. Vi har fått kämpa för den. Den måste oupphörligen försvaras och erövras.

Europas medborgare accepterar inte att det politiska etablissemanget begår våldtäk på vår demokrati. Principen måste vara enkel — när folket berörs direkt ska det också tillfrågas direkt. Om den ekonomiska dårskapen EMU ska utvidgas eller omvandlas till en fiskal union ska folket också tillfrågas direkt — för demokratins skull!

Spekulationsbubblor

Spekulationsbubblor får konsekvenser för hela samhället. Men hur skapas de? Priserna på finansmarknaden sätts efter en annan logik än varor i vår vardag, säger professor Lars Pålsson Syll. Man köper tillgångar, inte för att använda dem, utan för att sälja dem vidare. Tulpanmanin i Holland på 1600-talet är den först kända spekulationsbubblan. Då drabbades bara de som handlade med lökar. Men i dagens globaliserade värld påverkas många fler när marknaden kraschar.

Här kan du lyssna på programmet.

Som ung vetenskap var nationalekonomin intimt sammanknippad med andra vetenskaper som filosofi och psykologi. Adam Smith, till exempel, var ju en av sin tids främsta moralfilosofer. Med tiden sökte många ekonomer medvetet att distansera sig från andra vetenskaper. Den ekonomiska vetenskapen skulle bygga på egna fundament i stället för de skakiga grunder en omogen och ovetenskaplig psykologi kunde förse den med.

På senare tid har dock allt fler ekonomer börjat inse behovet av att bygga sina modeller på mer realistiska psykologiska fundament. Beteendeekonomi har snabbt etablerat sig som en bärkraftig del av ekonomiämnet med ett stort inflytande inom särskilt finansiell ekonomi. Att inte beakta finansmarknadens djuppsykologiska dimensioner uppfattas mer och mer som att spela Hamlet utan prinsen av Danmark.

I den traditionella ekonomiska klokskapen har hypotesen om effektiva marknader länge varit central. Hypotesen säger i korthet att de priser som etableras på finansiella marknader motsvarar ekonomins fundamentala värden eftersom alla investerare är rationella och eliminerar förekomsten av priser som avviker från fundamenta.

Finansiell beteendeteori har dock kunnat visa att bilden av investerare som rationella är svår att förena med fakta hämtade från verkliga finansmarknader. Investerare verkar handla mer med utgångspunkt i brus än information. De extrapolerar utifrån korta tidsförlopp, är känsliga för hur problem presenteras, är dåliga på att revidera sina riskbedömningar och ofta överkänsliga för humörsvängningar. Följden blir att en tillgångs pris och verkliga värde kan avvika under en längre tid. Irrationalitet är inte irrelevant på finansmarknader.