When the herd turns

16 December, 2018 at 12:54 | Posted in Economics | Leave a comment

 

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The capital controversy

16 December, 2018 at 11:50 | Posted in Economics | 3 Comments

joanThe production function has been a powerful instrument of miseducation. The student of economic theory is taught to write Q = f(L, K) where L is a quantity of labor, K a quantity of capital and Q a rate of output of commodities. He is instructed to assume all workers alike, and to measure L in man-hours of labor; he is told something about the index-number problem in choosing a unit of output; and then he is hurried on to the next question, in the hope that he will forget to ask in what units K is measured. Before he ever does ask, he has become a professor, and so sloppy habits of thought are handed on from one generation to the next.

Joan Robinson The Production Function and the Theory of Capital (1953)

Brian Arthur and the ‘El Farol​ Problem’

15 December, 2018 at 15:38 | Posted in Economics | Leave a comment

 

Why all models are wrong

13 December, 2018 at 17:53 | Posted in Economics, Theory of Science & Methodology | 11 Comments

moModels share three common characteristics: First, they simplify, stripping away unnecessary details, abstracting from reality, or creating anew from whole cloth. Second, they formalize, making precise definitions. Models use mathematics, not words … Models create structures within which we can think logically … But the logic comes at a cost, which leads to their third characteristic: all models are wrong … Models are wrong because they simplify. They omit details. By considering many models, we can overcome the narrowing of rigor by crisscrossing the landscape of the possible.

To rely on a single  model is hubris. It invites disaster … We need many models to make sense of complex systems.

Yes indeed. To rely on a single mainstream economic theory and its models is hubris.  It certainly does invite disaster. To make sense of complex economic phenomena we need many theories and models. We need pluralism. Pluralism both in theories and methods.

Using ‘simplifying’ mathematical tractability assumptions — rational expectations, common knowledge, representative agents, linearity, additivity, ergodicity, etc — because otherwise they cannot ‘manipulate’ their models or come up with ‘rigorous ‘ and ‘precise’ predictions and explanations, does not exempt economists from having to justify their modelling choices. Being able to ‘manipulate’ things in models cannot per se be enough to warrant a methodological choice. If economists do not think their tractability assumptions make for good and realist models, it is certainly a just question to ask for clarification of the ultimate goal of the whole modelling endeavour.

The final court of appeal for models is not if we — once we have made our tractability assumptions — can ‘manipulate’ them, but the real world. And as long as no convincing justification is put forward for how the inferential bridging de facto is made, model building is little more than hand-waving that give us rather a little warrant for making inductive inferences from models to the real world.

Mainstream economists construct closed formalistic-mathematical theories and models for the purpose of being able to deliver purportedly rigorous deductions that may somehow by be exportable to the target system. By analyzing a few causal factors in their ‘laboratories’ they hope they can perform ‘thought experiments’ and observe how these factors operate on their own and without impediments or confounders.

Unfortunately, this is not so. The reason for this is that economic causes never act in a socio-economic vacuum. Causes have to be set in a contextual structure to be able to operate. This structure has to take some form or other, but instead of incorporating structures that are true to the target system, the settings made in mainstream economic models are rather based on formalistic mathematical tractability. In the models they often appear as unrealistic ‘tractability’ assumptions, usually playing a decisive role in getting the deductive machinery to deliver precise’ and ‘rigorous’ results. This, of course, makes exporting to real-world target systems problematic, since these models – as part of a deductivist covering-law tradition in economics – are thought to deliver general and far-reaching conclusions that are externally valid. But how can we be sure the lessons learned in these theories and models have external validity when based on highly specific unrealistic assumptions? As a rule, the more specific and concrete the structures, the less generalizable the results. Admitting that we in principle can move from (partial) falsehoods in theories and models to truth in real-world target systems do not take us very far unless a thorough explication of the relation between theory, model and the real world target system is made. To have a deductive warrant for things happening in a closed model is no guarantee for them being preserved when applied to an open real-world target system.

If the ultimate criteria for success of a deductivist system are to what extent it predicts and cohere with (parts of) reality, modern mainstream economics seems to be a hopeless misallocation of scientific resources. To focus scientific endeavours on proving things in models is a gross misapprehension of what an economic theory ought to be about. Real-world economic systems do not conform to the restricted closed-system structure the mainstream modelling strategy presupposes.

What is wrong with mainstream economics is not that it employs models per se. What is wrong is that it employs poor models. They — and the tractability assumptions on which they to a large extent build on — are poor because they do not bridge to the real world in which we live. And — as Page writes — “if a model cannot explain, predict, or help us reason, we must set it aside.”

Disconfirming rational expectations

13 December, 2018 at 11:12 | Posted in Economics | Leave a comment

56238100Empirical efforts at testing the correctness of the rational expectations hypothesis have resulted in a series of empirical studies that have more or less concluded that it is not consistent with the facts. In one of the more well-known and highly respected evaluation reviews made, Michael Lovell (1986) concluded:

it seems to me that the weight of empirical evidence is sufficiently strong to compel us to suspend belief in the hypothesis of rational expectations, pending the accumulation of additional empirical evidence.

And this is how Nikolay Gertchev summarizes studies on the empirical correctness of the hypothesis:

More recently, it even has been argued that the very conclusions of dynamic models assuming rational expectations are contrary to reality … If taken as an empirical behavioral assumption, the RE hypothesis is plainly false; if considered only as a theoretical tool, it is unfounded and selfcontradictory.

Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies and institutions are those based on rational expectations and representative actors. As I have tried to show elsewhere — in On the use and misuse of theories and models in economics and Rational expectations: a fallacious foundation for macroeconomics in a non-ergodic world — there is really no support for this conviction at all. On the contrary. If we want to have anything of interest to say on real economies, financial crises and the decisions and choices real people make, it is high time to dump macroeconomic models building on representative actors and rational expectations microfoundations in the pseudo-science dustbin.

Wynne Godley on what it means for a nation not to have its own currency

10 December, 2018 at 11:10 | Posted in Economics | 1 Comment

If a government stops having its own currency, it doesn’t just give up “control over monetary policy” as normally understood; its spending powers also become constrained in an entirely new way. If a government does not have its own central bank on which it can draw cheques freely, its expenditures can be financed only by borrowing in the open market in competition with businesses, and this may prove excessively expensive or even impossible, particularly under “conditions of extreme emergency.”

greece-feb12-bank__3197265kIf Europe is not to have a full-scale budget of its own under the new arrangements it will still have, by default, a fiscal stance of its own made up of the individual budgets of component states. The danger, then, is that the budgetary restraint to which governments are individually committed will impart a disinflationary bias that locks Europe as a whole into a depression it is powerless to lift.

Wynne Godley

Wynne Godley — the man who saw through the euro

9 December, 2018 at 15:27 | Posted in Economics | 3 Comments

If there were an economic and monetary union, in which the power to act independently had actually been abolished, ‘co-ordinated’ reflation of the kind which is so urgently needed now could only be undertaken by a federal European government. Without such an institution, EMU would prevent effective action by individual countries and put nothing in its place …

wgodleyWhat happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback? So long as it is a sovereign state, it can devalue its currency. It can then trade successfully at full employment provided its people accept the necessary cut in their real incomes. With an economic and monetary union, this recourse is obviously barred, and its prospect is grave indeed unless federal budgeting arrangements are made which fulfil a redistributive role … If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation … What I find totally baffling is the position of those who are aiming for economic and monetary union without the creation of new political institutions (apart from a new central bank), and who raise their hands in horror at the words ‘federal’ or ‘federalism’. This is the position currently adopted by the Government and by most of those who take part in the public discussion.

Wynne Godley

The euro crisis is far from over. The tough austerity measures imposed in the eurozone has made economy after economy contract. And it has not only made things worse in the periphery countries, but also in countries like France and Germany. Alarming facts that should be taken seriously.

Europe may face a future with growing economic disparities where we will have​ to confront increasing hostility between nations and peoples. What we’ve seen lately in France shows that the protests against technocratic attempts to undermine democracy may go extremely violent.

The problems — created to a large extent by the euro — may not only endanger our economies, but also our democracy itself. How much whipping can democracy take? How many more are going to get seriously hurt and ruined before we end this madness and scrap the euro?

Your model is internally consistent? So what!

8 December, 2018 at 14:47 | Posted in Economics | 3 Comments

‘New Keynesian’ macroeconomist Simon Wren-Lewis has a post on his blog discussing how evidence is treated in modern macroeconomics (emphasis added):

quote-Oscar-Wilde-consistency-is-the-last-refuge-of-the-58The unique property that DSGE models have is internal consistency. Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.

Being able to model a credible world, a world that somehow could be considered real or similar to the real world is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified (in terms of resemblance, relevance, etc.). At the very least, the minimalist demand on models in terms of credibility has to give away to a stronger epistemic demand of appropriate similarity and plausibility. One could of course also ask for a sensitivity or robustness analysis, but the credible world, even after having tested it for sensitivity and robustness, can still be far away from reality – and unfortunately often in ways we know are important. Robustness of claims in a model does not per se give a warrant for exporting the claims to real world target systems.

Yours truly and people like Tony Lawson have for many years been urging economists to pay attention to the ontological foundations of their assumptions and models. Sad to say, economists have not paid much attention — and so modern economics has become increasingly irrelevant to the understanding of the real world.

an-unconvenient-truthWithin mainstream economics, internal validity is still everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!

To have valid evidence is not enough. Aiming only for validity is setting the economics aspirations level too low for developing a realist and relevant science.

DSGE — models built on shaky ground

5 December, 2018 at 15:53 | Posted in Economics | 1 Comment

In most aspects of their lives humans must plan forwards. They take decisions today that affect their future in complex interactions with the decisions of others. When taking such decisions, the available information is only ever a subset of the universe of past and present information, as no individual or group of individuals can be aware of all the relevant information. Hence, views or expectations about the future, relevant for their decisions, use a partial information set, formally expressed as a conditional expectation given the available information.

vraylar-shaky-ground-large-4Moreover, all such views are predicated on there being no un-anticipated future changes in the environment pertinent to the decision. This is formally captured in the concept of ‘stationarity’. Without stationarity, good outcomes based on conditional expectations could not be achieved consistently. Fortunately, there are periods of stability when insights into the way that past events unfolded can assist in planning for the future.

The world, however, is far from completely stationary. Unanticipated events occur, and they cannot be dealt with using standard data-transformation techniques such as differencing, or by taking linear combinations, or ratios. In particular, ‘extrinsic unpredictability’ – unpredicted shifts of the distributions of economic variables at unanticipated times – is common. As we shall illustrate, extrinsic unpredictability has dramatic consequences for the standard macroeconomic forecasting models used by governments around the world – models known as ‘dynamic stochastic general equilibrium’ models – or DSGE models …

Many of the theoretical equations in DSGE models take a form in which a variable today, say incomes (denoted as yt) depends inter alia on its ‘expected future value’… For example, yt may be the log-difference between a de-trended level and its steady-state value. Implicitly, such a formulation assumes some form of stationarity is achieved by de-trending.

Unfortunately, in most economies, the underlying distributions can shift unexpectedly. This vitiates any assumption of stationarity. The consequences for DSGEs are profound. As we explain below, the mathematical basis of a DSGE model fails when distributions shift … This would be like a fire station automatically burning down at every outbreak of a fire. Economic agents are affected by, and notice such shifts. They consequently change their plans, and perhaps the way they form their expectations. When they do so, they violate the key assumptions on which DSGEs are built.

David Hendry & Grayham Mizon

A great article, not only showing on what shaky mathematical basis DSGE models are built but also confirming much of Keynes’s critique of econometrics, underlining that to understand real-world ‘non-routine’ decisions and unforeseeable changes in behaviour, stationary probability distributions are of no avail. In a world full of genuine uncertainty — where real historical time rules the roost — the probabilities that ruled the past are not those that will rule the future.

Advocates of DSGE modelling want to have deductively automated answers to fundamental causal questions. But to apply ‘thin’ methods we have to have ‘thick’ background knowledge of what’s going on in the real world, and not in idealized models. Conclusions can only be as certain as their premises — and that also applies to the quest for causality and forecasting predictability in DSGE models.

Economic crises and uncertainty

3 December, 2018 at 19:59 | Posted in Economics | 44 Comments

The financial crisis of 2007-08 hit most laymen and economists with surprise. What was it that went wrong with our macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable?

There are many who have ventured to answer this question. And they have come up with a variety of answers, ranging from the exaggerated mathematization of economics to irrational and corrupt politicians.

0But the root of our problem goes much deeper. It ultimately goes back to how we look upon the data we are handling. In ‘modern’ macroeconomics — Dynamic Stochastic General Equilibrium, New Synthesis, New Classical and New ‘Keynesian’ — variables are treated as if drawn from a known ‘data-generating process’ that unfolds over time and on which we, therefore, have access to heaps of historical time-series. If we do not assume that we know the ‘data-generating process’ – if we do not have the ‘true’ model – the whole edifice collapses. And of course, it has to. I mean, who really honestly believes that we should have access to this mythical Holy Grail, the data-generating process?

‘Modern’ macroeconomics obviously did not anticipate the enormity of the problems that unregulated ‘efficient’ financial markets created. Why? Because it builds on the myth of us knowing the ‘data-generating process’ and that we can describe the variables of our evolving economies as drawn from an urn containing stochastic probability functions with known means and variances.

This is like saying that you are going on a holiday-trip and that you know that the chance the weather being sunny is at least 30% and that this is enough for you to decide on bringing along your sunglasses or not. You are supposed to be able to calculate the expected utility based on the given probability of sunny weather and make a simple decision of either-or. Uncertainty is reduced to risk.

But as Keynes convincingly argued in his monumental Treatise on Probability (1921), this is not always possible. Often we simply do not know. According to one model the chance of sunny weather is perhaps somewhere around 10% and according to another – equally good – model the chance is perhaps somewhere around 40%. We cannot put exact numbers on these assessments. We cannot calculate means and variances. There are no given probability distributions that we can appeal to.

In the end, this is what it all boils down to. We all know that many activities, relations, processes and events are of the Keynesian uncertainty-type. The data do not unequivocally single out one decision as the only “rational” one. Neither the economist nor the deciding individual can fully pre-specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works.

wrongrightSome macroeconomists, however, still want to be able to use their hammer. So they decide to pretend that the world looks like a nail, and pretend that uncertainty can be reduced to risk. So they construct their mathematical models on that assumption. The result: financial crises and economic havoc.

How much better – how much bigger chance that we do not lull us into the comforting thought that we know everything and that everything is measurable and we have everything under control – if instead, we could just admit that we often simply do not know and that we have to live with that uncertainty as well as it goes.

Fooling people into believing that one can cope with an unknown economic future in a way similar to playing at the roulette wheels, is a sure recipe for only one thing – economic crisis!

The importance of studying economics

2 December, 2018 at 12:06 | Posted in Economics | 2 Comments

quote-the-purpose-of-studying-economics-is-not-to-acquire-a-set-of-ready-made-answers-to-economic-joan-robinson-60-41-70

Polanyi and Keynes on the idea of ‘self-adjusting’ markets

30 November, 2018 at 15:28 | Posted in Economics | Leave a comment

Paul Krugman has repeatedly over the years argued that we should continue to use maistream 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 being characterized by​ catchwords like “tendency to return to full employment” and “money is neutral in the long run.”

quote-our-thesis-is-that-the-idea-of-a-self-adjusting-market-implied-a-stark-utopia-such-an-karl-polanyi-120-53-85

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 enables 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)

The real value of analogue economies

28 November, 2018 at 21:19 | Posted in Economics | Leave a comment

huntModelling by the construction of analogue economies is a widespread technique in economic theory nowadays … As Lucas urges, the important point about analogue economies is that everything is known about them … and within them the propositions we are interested in ‘can be formulated rigorously and shown to be valid’ … For these constructed economies, our views about what will happen are ‘statements of verifiable fact.’

The method of verification is deduction … We are however, faced with a trade-off: we can have totally verifiable results but only about economies that are not real …

How then do these analogue economies relate to the real economies that we are supposed to be theorizing about? … My overall suspicion is that the way deductivity is achieved in economic models may undermine the possibility to teach genuine truths about empirical reality.

Social ekonomi — den tredje vägen

26 November, 2018 at 11:21 | Posted in Economics | Leave a comment

Verksamheter inom den sociala ekonomin har allmännytta och/eller medlemsnytta, inte vinstintresse som drivkraft.

soc econ Förskolor, fritidshem, fritidsgårdar, hemtjänst, äldreboenden, biblioteksfilialer, anläggningar inom kultur- och fritidsområdet är exempel på verksamheter som kan drivas av stiftelser, ideella föreningar eller ekonomiska föreningar …

Kunskapen om den sociala ekonomin och dess betydelse för samhällets utveckling är låg i Sverige. Vi tycker att det är dags att få igång en debatt kring den sociala ekonomin och dess möjligheter till gagn både för medborgarna och kommuner …

Den sociala ekonomins styrka inför framtiden består i dess särart. Det ligger i dess natur att aktörerna inom denna del av ekonomin står nära medborgarna och därför har ett ständigt uppdrag att finna lösningar, som är bra både för invid och samhälle.

Verksamheten i den sociala ekonomin måste byggas underifrån. Social ekonomi kan inte beslutas eller kommenderas fram genom beslut uppifrån …

Alltför sällan talar vi om att det finns en tredje del i ekonomin – en tredje väg – en möjlighet att komplettera de offentliga och privata delarna i samhällsekonomin och som på många olika sätt väsentligt bidrar till att förbättra välfärden och öka tillväxten. Denna tredjedel av den sociala ekonomin, är på inget sätt någon ny företeelse. Tvärtom har vi i Sverige, liksom Europa i övrigt, en lång tradition av sammanslutningar där människor går samman för att lösa gemensamma angelägenheter.

Lars Pålsson Syll & Hans Mannefred

Demystifying economics

25 November, 2018 at 18:10 | Posted in Economics | 7 Comments

The first thing to understand about macroeconomic theory is that it is weirder than you think. The heart of it is the idea that the economy can be thought of as a single infinite-lived individual trading off leisure and consumption over all future time …

reality-header2This approach is formalized in something called the Euler equation … Some version of this equation is the basis of most articles on macroeconomic theory published in a mainstream journal in the past 30 years …

The models may abstract away from features of the world that non-economists might think are rather fundamental to “the economy” — like the existence of businesses, money, and government … But in today’s profession, if you don’t at least start from there, you’re not doing economics.

J W Mason

Yes indeed, mainstream macroeconomics sure is weird. Very weird. And among the weirdest things are those Euler equations Mason mentions in his article.

In a post on his blog, sorta-kinda ‘New Keynesian’ Paul Krugman argues that the problem with the academic profession is that some macroeconomists aren’t “bothered to actually figure out” how the New Keynesian model with its Euler conditions —  “based on the assumption that people have perfect access to capital markets, so that they can borrow and lend at the same rate” — really works. According to Krugman, this shouldn’t  be hard at all — “at least it shouldn’t be for anyone with a graduate training in economics.”

If people (not the representative agent) at least sometimes can’t help being off their labour supply curve — as in the real world — then what are these hordes of Euler equations that you find ad nauseam in ‘New Keynesian’ macromodels gonna help us?

Yours truly’s doubts regarding the macroeconomics modellers’ obsession with Euler equations is basically that, as with so many other assumptions in ‘modern’ macroeconomics, the Euler equations don’t fit reality — and it seems as though I’m not alone holding that view:

fubar1This equation underlies every DSGE model you’ll ever see, and drives much of modern macro’s idea of how the economy works …

[T]he Euler Equation says that if interest rates are high, you put off consumption more. That makes sense, right? Money markets basically pay you not to consume today. The more they pay you, the more you should keep your money in the money market and wait to consume until tomorrow.

But what Canzoneri et al. show is that this is not how people behave. The times when interest rates are high are times when people tend to be consuming more, not less.  No matter what we assume that people want, their behavior is not consistent with the Euler Equation … The consumption Euler Equation is an important part of nearly any such model, and if it’s just wrong, it’s hard to see how those models will work.

Noah Smith

In the standard neoclassical consumption model — used in DSGE macroeconomic modeling — people are basically portrayed as treating time as a dichotomous phenomenon  today and the future — when contemplating making decisions and acting. How much should one consume today and how much in the future? Facing an intertemporal budget constraint of the form

ct + cf/(1+r) = ft + yt + yf/(1+r),

where ct is consumption today, cf is consumption in the future, ft is holdings of financial assets today, yt is labour incomes today, yf is labour incomes in the future, and r is the real interest rate, and having a lifetime utility function of the form

U = u(ct) + au(cf),

where a is the time discounting parameter, the representative agent (consumer) maximizes his utility when

u´(ct) = a(1+r)u´(cf).

This expression – the Euler equation – implies that the representative agent (consumer) is indifferent between consuming one more unit today or instead consuming it tomorrow. Typically using a logarithmic function form – u(c) = log c – which gives u´(c) = 1/c, the Euler equation can be rewritten as

1/ct = a(1+r)(1/cf),

or

cf/ct = a(1+r).

This importantly implies that according to the neoclassical consumption model that changes in the (real) interest rate and the ratio between future and present consumption move in the same direction.

So good, so far. But how about the real world? Is the neoclassical consumption as described in this kind of models in tune with the empirical facts? Hardly — the data and models are as a rule inconsistent!

In the Euler equation, we only have one interest rate,  equated to the money market rate as set by the central bank. The crux is that — given almost any specification of the utility function  – the two rates are actually often found to be strongly negatively correlated in the empirical literature.

Well, that more or less says it all, doesn’t it? Modern mainstream macroeconomics is indeed “weirder than you think.” If an economic model is found to be inappropriately used in research, then it is the model that has to be revised. Economic processes and structures are not about to change just to make the model relevant. Using scientific models is fine, but it has to be done within the limits set by the nature of the beast!

Far fuori il mito del NAIRU

25 November, 2018 at 17:12 | Posted in Economics | Leave a comment

Anche se è diventata una credenza diffusa, la presunta relazione tra la disoccupazione e l’aumento o la riduzione dei tassi d’inflazione si stava sgretolando, in particolar modo negli anni ’90 del Novecento. Nel 2000 la disoccupazione era scesa al di sotto del 4% senza che l’inflazione decollasse. Dall’inizio della Grande Recessione, il divario tra la teoria e la realtà non ha fatto altro che ampliarsi…

74-7495-LTNQ100ZUna volta che ci si rende conto di quanto sono fragili le fondamenta del tasso naturale di disoccupazione, si chiariscono altri ragionamenti su come perseguire tassi di disoccupazione che un tempo gli economisti ritenevano impossibili. I salari possono aumentare a scapito dei profitti societari senza provocare inflazione. In effetti, sin dal 2014 stiamo assistendo a un aumento della quota [di produzione] dell’economia che va ai lavoratori.

Meglio ancora, una disoccupazione inferiore non aiuta solo i lavoratori: può spronare una crescita complessiva. Come sostiene l’economista J.W. Mason, man mano che ci avviciniamo alla piena occupazione emergono incentivi per aumentare gli investimenti nella produttività che riduce il quantitativo di lavoro necessario, dato che le aziende cercano di tenere sotto controllo il costo del lavoro quando i lavoratori chiedono di più. Quest’aumento della produttività stimola ancora più crescita.

Più forte spingiamo per migliorare la produzione e l’occupazione, più impariamo quanto possiamo ottenere su quei due fronti. Quell’idea fiduciosa è agli antipodi di un tasso di disoccupazione naturale e inalterabile. Ed è un’idea, una mentalità, che abbiamo bisogno di abbracciare se vogliamo avere una possibilità di riprenderci completamente dalla devastazione della Grande Recessione.

Mike Konczal/Vox

Il NAIRU non regge semplicemente perché non è esistito negli ultimi cinquant’anni. Ma ancora oggi i macroeconomisti “neo-Keynesiani” lo usano nei loro modelli – così come la curva di Phillips, sua cugina – come un mattone fondamentale. Perché? Perché senza di esso i “neo-Keynesiani” dovrebbero rinunciare alla loro visione neoclassica della neutralità della moneta sul lungo periodo – ripetutamente smentita per via empirica – e all’idea semplicistica dell’inflazione come un fenomeno dovuto all’eccesso di domanda.

L’approccio NAIRU non è di interesse meramente teorico. Assolutamente no.

Il vero danno compiuto è che i policymaker che prendono decisioni sulla base dei modelli [che presuppongono il] NAIRU implementano sistematicamente misure di austerità e sterminano l’espansione economica. Spacciare quest’illusione errata dà solo luogo a stagnazione e disoccupazione non necessarie e onerose.

Lars Syll/ReteMMT

DSGE — a scientific illusion

24 November, 2018 at 15:21 | Posted in Economics | Leave a comment

Dynamic stochastic general equilibrium (DSGE) models remain the work-horse models employed by many academics and research departments at central banks … Prior to the Global Financial Crisis the financial sector played no role in these DSGE models. That limitation is now widely acknowledged and numerous aspects of the financial sector have been incorporated into second and later generation DSGE models … Unfortunately, these efforts are misguided because they do not address the fundamental flaw in the microeconomic foundations of these models and this mistake is widely repeated in all later generations of DSGE models.

macroeconomics-14-638Many theorists today simply fail to recognize the limitations inherent in starting with the wrong microeconomic foundations; frictionless or perfect barter microeconomic foundations. Consequently, those theorists are now intent on introducing ‘monetary’, ‘financial’ and other ‘frictions’ without acknowledging that those ‘frictions’ are inconsistent with the perfect barter or frictionless microeconomic foundations of their models as well as long established principles of monetary theory …

The misuse of the Walrasian or Arrow-Debreu GE microeconomic foundations, an imaginary world of perfect barter, largely explains why DSGE models proved so inept at understanding or anticipating the GFC and why attempts to now incorporate realistic and relevant features of the financial sector into such models also fail. In these DSGE models, money and the financial sector are converted into a friction and words and economic concepts take on different meanings.

Colin Rogers

If nothing else, the monumental failings and flaws of DSGE models — with or without inessential ‘frictions’ or other amendments — certainly shows the importance of model validation and checking the robustness and realism of assumptions and specifications. Describing modern economies ‘as-if’ consisting of ‘representative’ agents in the guise of self​-employed capitalists in a perfect barter economy is absurd and ultimately bound to fail. DSGE models are simply — from both empirical and methodological points of view — not suited for understanding modern monetary economies.

Krugman on math and economics

22 November, 2018 at 00:26 | Posted in Economics | 3 Comments

Yours truly have no problem with Krugman’s views on the use of math in this video in his recent tweet. I have said similar things myself for decades.

But there is a BUT here …

At other times Krugman — although admitting that economists have a tendency to use ”excessive math” and “equate hard math with quality” — has however vehemently defended the mathematization of economics:

I’ve seen quite a lot of what economics without math and models looks like — and it’s not good.

And when it comes to modeling philosophy, Krugman has more than once defended a ‘the model is the message’ position (my italics):

I don’t mean that setting up and working out microfounded models is a waste of time. On the contrary, trying to embed your ideas in a microfounded model can be a very useful exercise — not because the microfounded model is right, or even better than an ad hoc model, but because it forces you to think harder about your assumptions, and sometimes leads to clearer thinking. In fact, I’ve had that experience several times.

For years Krugman has in more than one article criticized mainstream economics for using too much (bad) mathematics and axiomatics in their model-building endeavours. But when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models. In his End This Depression Now — just to take one example — Krugman maintains that although he doesn’t buy “the assumptions about rationality and markets that are embodied in many modern theoretical models, my own included,” he still find them useful “as a way of thinking through some issues carefully.” When it comes to methodology and assumptions, Krugman obviously has a lot in common with the kind of model-building he otherwise — sometimes — criticizes.

My advice to Krugman: stick with Marshall and ‘burn the math’!

Why Minsky matters

21 November, 2018 at 14:04 | Posted in Economics | Comments Off on Why Minsky matters

skmbt_c45213091916091Listen to BBC 4 where Duncan Weldon tries to explain in what way Hyman Minsky’s thoughts on banking and finance offer a radical challenge to mainstream economic theory.

As a young research stipendiate in the U.S. yours truly had the great pleasure and privelege of having Hyman Minsky as teacher. He was a great inspiration at the time. He still is.

Gender pay gap and transparency

20 November, 2018 at 12:42 | Posted in Economics | Comments Off on Gender pay gap and transparency

GENDEREs wird oft vermutet, dass mehr Transparenz hier Abhilfe schaffen könnte: Wenn alle wüssten, was alle verdienen – dann wären diese Unterschiede nicht länger haltbar. Die zu kurz Gekommenen würden protestieren, mehr fordern und so für mehr Gleichheit und Gerechtigkeit sorgen. Seit dem 6. Januar dieses Jahres haben Beschäftigte ein Recht darauf zu erfahren, wie viel Kollegen beziehungsweise Kolleginnen des jeweils anderen Geschlechts verdienen. (Vorausgesetzt, der Betrieb hat mindestens 200 Angestellte und es gibt sechs oder mehr Personen, die einen gleichwertigen Job ausüben.) Dieses Lohntransparenzgesetz soll dafür sorgen, dass Gehaltsunterschiede zwischen Männern und Frauen schrumpfen.

Ganz so einfach scheint es allerdings nicht zu sein. In zwei Studien ist die Betriebswirtschaftsprofessorin Zoe Cullen von der Universität Harvard jetzt zu dem Ergebnis gekommen, dass mehr Einkommenstransparenz nicht automatisch hilft. Nicht nur, dass sie keineswegs zu einer Angleichung der Gehälter führt. Sie hatte sogar in der Gesamtheit niedrigere Löhne zur Folge, und zwar in einem erheblichen Ausmaß von sieben bis 25 Prozent.

Wie kann das sein? Der Hauptgrund dafür ist, dass es bei transparenten Verhältnissen weniger Ausreißer nach oben gibt: Wenn niemand weiß, wer wie viel verdient, zögern Arbeitgeber nicht lange, um Mitarbeitern, die sie unbedingt halten möchten, mehr zu zahlen als anderen. Würde das jedoch allgemein bekannt werden, könnte das zu Unmut in der Belegschaft führen. Also verzichten die Unternehmen auf die besonders hohen Gehälter. Dieser Effekt macht offenbar eventuelle Lohnsteigerungen zur Angleichung von Gehältern mehr als wett.

Die Zeit

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