Nationalekonomins verktyg

6 Feb, 2023 at 15:11 | Posted in Economics | Leave a comment

Nationalekonomins verktyg - 9789144159867 | Studentlitteratur

I denna nyutkomna bok presenterar Mikael Priks och Jonas Vlachos — professorer i nationalekonomi vid Stockholms universitet — en genomgång av viktiga metoder ekonomer har till sitt förfogande för att göra empiriska analyser av stora och aktuella samhällsfrågor. Med utgångspukt i ekonometriska och statistiska modeller diskuterar man vilka olika identifikationsansatser  som används för att undgå olika former av ‘selektionsbias’ när ekonomer försöker utröna kausala samband/effekter inom områden som exempelvis utbildning, försäkringsväsende, diskriminering på arbetsmarknaden, m m.

Presentationen är pedagogisk och — åtminstone för att behandla ett rätt komplicerat område inom forskningsdesign — relativt lättingänglig. Visst kan man som forskare ha kritiska synpunkter både här och där, men här handlar det om att lära ekonomistudenter att ‘krypa’ och då är det kanske inte rättvist att ha invändningar som mer är applicerbara för dem som redan ‘går’.

Jämfört med mycket annat av det som används som läroböcker i nationalekonomi vid våra universitet är boken i förtjänstfull grad befriad från övertro på räckvidden av ‘verktygslådan’. Även efter att vi tänkt till och gjort överlagda val av forskningsdesign och ekonometriska skattningsmetoder kvarstår — inte minst när det handlar om identifikation av kausala relationer — ett stort mått av osäkerhet.

Empiriska studier som testar hypoteser baseras på en teoretisk idé om mekanismerna bakom det samband som undersöks. Dessa mekanismer kan dock sällan undersökas direkt. Även om en studie med en trovärdig idenfikationsstrategi finner att x med största sannolikhet påverkar y kvarstår osäkerhet om exakt varför sambandet finns …

Studier som kan påvisa vilka mekanismer som ligger bakom ett visst resultat är både trovärdigare och mer användbara än studier som bara påvisar en kausal effekt fran x till y. Däremot är det i samhällsvetenskaperna sällan möjligt att nå hela vägen fram vad gäller mekanismerna utan det finns alltid ytterligare steg som inte låter sig studeras. Detta innebär också att det alltid finns osäkerhet kring hur ett visst samband ser ut i olika sammanhang och för olika grupper.

The money multiplier – neat, plausible, and utterly wrong

6 Feb, 2023 at 11:48 | Posted in Economics | Leave a comment

The mainstream textbook concept of money multiplier assumes that banks automatically expand the credit money supply to a multiple of their aggregate reserves.  If the required currency-deposit reserve ratio is 5%, the money supply should be about twenty times larger than the aggregate reserves of banks.  In this way, the money multiplier concept assumes that the central bank controls the money supply by setting the required reserve ratio.

In his Macroeconomics — just to take an example — Greg Mankiw writes:

We can now see that the money supply is proportional to the monetary base. The factor of proportionality … is called the money multiplier … Each dollar of the monetary base produces m dollars of money. Because the monetary base has a multiplied effect on the money supply, the monetary base is called high-powered money.

The money multiplier concept is — as can be seen from the quote above — nothing but one big fallacy. This is not the way credit is created in a monetary economy. It’s nothing but a monetary myth that the monetary base can play such a decisive role in a modern credit-run economy with fiat money.

garbageIn the real world, banks first extend credits and then look for reserves. So the money multiplier basically also gets the causation wrong. At a deep fundamental level, the supply of money is endogenous.

One may rightly wonder why on earth this pet mainstream fairy tale is still in the textbooks and taught to economics undergraduates. Giving the impression that banks exist simply to passively transfer savings into investment, it is such a gross misrepresentation of what goes on in the real world, that there is only one place for it — and that is in the garbage can!

Luigi Pasinetti (1930-2023) In Memoriam

1 Feb, 2023 at 20:48 | Posted in Economics | Leave a comment

Pasinetti, Luigi Lodovico | Accademia Nazionale dei LinceiSad news has reached us today. Only two weeks after Victoria Chick’s death, another giant among Post Keynesian economists, Luigi Pasinetti, passed away yesterday at the age of 92.

R.I.P.

Economic forecasting — why it matters and why it is so often wrong

31 Jan, 2023 at 16:11 | Posted in Economics | Leave a comment

oskarAs Oskar Morgenstern noted in his 1928 classic Wirtschaftsprognose: Eine Untersuchung ihrer Voraussetzungen und Möglichkeiten, economic predictions and forecasts amount to little more than intelligent guessing.

Making forecasts and predictions obviously isn’t a trivial or costless activity, so why then go on with it?

The problems that economists encounter when trying to predict the future really underline how important it is for social sciences to incorporate Keynes’s far-reaching and incisive analysis of induction and evidential weight in his seminal A Treatise on Probability (1921).

According to Keynes, we live in a world permeated by unmeasurable uncertainty – not quantifiable stochastic risk – which often forces us to make decisions based on anything but ‘rational expectations.’ Keynes rather thinks that we base our expectations on the confidence or ‘weight’ we put on different events and alternatives. treatprobTo Keynes, ​expectations are a question of weighing probabilities by ‘degrees of belief,’ beliefs that often have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents as modelled by ‘modern’ social sciences. And often we “simply do not know.”

How strange that social scientists and mainstream economists, as a rule, do not even touch upon these aspects of scientific methodology that seem to be so fundamental and important for anyone trying to understand how we learn and orient ourselves in an uncertain world. An educated guess on why this is a fact would be that Keynes’s concepts are not possible to squeeze into a single calculable numerical ‘probability.’ In the quest for measurable quantities, one puts a blind eye to qualities and looks the other way.

So why do companies, governments, and central banks, continue with this more or less expensive, but obviously worthless, activity?

A part of the answer concerns ideology and apologetics. Forecasting is a non-negligible part of the labour market for (mainstream) economists, and so, of course, those in the business do not want to admit that they are occupied with worthless things (not to mention how hard it would be to sell the product with that kind of frank truthfulness). Governments, the finance sector and (central) banks also want to give the impression to customers and voters that they, so to say, have the situation under control (telling people that next year x will be 3.048 % makes wonders in that respect). Why else would anyone want to pay them or vote for them? These are sure not glamorous aspects of economics as a science, but as a scientist, it would be unforgivably dishonest to pretend that economics doesn’t also perform an ideological function in society.

Hyman Minsky and the IS-LM obfuscation

26 Jan, 2023 at 16:38 | Posted in Economics | 3 Comments

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

The concepts which it is usual to ignore or deemphasize in interpreting Keynes — the cyclical perspective, the relations between investment and finance, and uncertainty, are the keys to an understanding of the full significance of his contribution …

miThe glib assumption made by Professor Hicks in his exposition of Keynes’s contribution that there is a simple, negatively sloped function, reflecting the productivity of increments to the stock of capital, that relates investment to the interest rate is a caricature of Keynes’s theory of investment … which relates the pace of investment not only to prospective yields but also to ongoing financial behavior …

The conclusion to our argument is that the missing step in the standard Keynesian theory was the explicit consideration of capitalist finance within a cyclical and speculative context. Once capitalist​ finance is introduced and the development of cash flows … during the various states of the economy is explicitly examined, then the full power of the revolutionary insights and the alternative frame of analysis that Keynes developed becomes evident …

The greatness of The General Theory was that Keynes visualized [the imperfections of the monetary-financial system] as systematic rather than accidental or perhaps incidental attributes of capitalism … Only a theory that was explicitly cyclical and overtly financial was capable of being useful …

If we are to believe Minsky — and I certainly think we should — then when people like Paul Krugman and other ‘New Keynesian’ critics of MMT and Post-Keynesian economics think of themselves as defending “the whole enterprise of Keynes/Hicks macroeconomic theory,” they are simply wrong since there is no such thing as a Keynes-Hicks macroeconomic theory!

There is nothing in the post-General Theory writings of Keynes that suggests that he considered Hicks’s IS-LM anywhere near a faithful rendering of his thoughts. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE article there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. So, of course,​ there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” — simply because “Keynes/Hicks” never existed.

To be fair to Hicks, we  shouldn’t forget that he returned to his IS-LM analysis in an article in 1980 — in Journal of Post Keynesian Economics — and self-critically wrote:

sir_john_hicksThe only way in which IS-LM analysis usefully survives — as anything more than a classroom gadget, to be superseded, later on, by something better — is in application to a particular kind of causal analysis, where the use of equilibrium methods, even a drastic use of equilibrium methods, is not inappropriate. I have deliberately interpreted the equilibrium concept, to be used in such analysis, in a very stringent manner (some would say a pedantic manner) not because I want to tell the applied economist, who uses such methods, that he is in fact committing himself to anything which must appear to him to be so ridiculous …

When one turns to questions of policy, looking toward the future instead of the past, the use of equilibrium methods is still more suspect … It may be hoped that, after the change in policy, the economy will somehow, at some time in the future, settle into what may be regarded, in the same sense, as a new equilibrium; but there must necessarily be a stage before that equilibrium is reached …

We now know that it is not enough to think of the rate of interest as the single link between the financial and industrial sectors of the economy; for that really implies that a borrower can borrow as much as he likes at the rate of interest charged, no attention being paid to the security offered. As soon as one attends to questions of security, and to the financial intermediation that arises out of them, it becomes apparent that the dichotomy between the two curves of the IS-LM diagram must not be pressed too hard.

In his 1937 paper, Hicks actually elaborates on four different models (where Hicks uses I to denote Total Income and Ix to denote Investment):

1) “Classical”: M = kI   Ix = C(i)   Ix = S(i,I)

2) Keynes’ “special” theory: M = L(i)   Ix = C(i)    I = S(I)

3) Keynes’ “general” theory: M = L(I, i)   Ix = C(i)   I = S(I)

4) The “generalized general” theory: M = L(I, i)   Ix =C(I, i)  Ix = S(I, i)

It is obvious from the way Krugman and other ‘New Keynesians’ draw their IS-LM curves that they are thinking in terms of model number 4 — and that is not even by Hicks considered a Keynes model! It is basically a loanable funds model, that belongs in the neoclassical camp and which you find reproduced in most mainstream textbooks.

Hicksian IS-LM? Maybe. Keynes? No way!

Systembrus

17 Jan, 2023 at 18:24 | Posted in Economics | 1 Comment

Brus (Noise) | Volante - En klokare & roligare världEn vanlig missuppfattning när det gäller oönskad variabilitet i bedömningar är att det inte spelar någon roll eftersom slumpfel tar ut varandra. Det stämmer att positiva och negativa fel i en bedömning av samma fall mer eller mindre tar ut varandra och vi kommer att diskutera mer i detalj hur denna omständighet kan utnyttjas för att minska bruset. Men brusiga system gör inte flera bedömningar av samma fall. De gör brusiga bedömningar av olika fall. Om en försäkring har för hög premie och en annan för låg kan prissättningen se korrekt ut “i genomsnitt”, men försäkringsbolaget har då begått två dyrbara misstag. Om två brottslingar som båda borde dömas till fem års fängelse får domar på tre respektive sju år kan inte någon “genomsnittlig” rättvisa sägas ha skipats. I brusiga system tar felen inte ut varandra. De läggs pa hög.

Victoria Chick (1936-2023) In Memoriam

16 Jan, 2023 at 16:17 | Posted in Economics | 2 Comments

Gresham's Law in Economics: Background to the CrisisSad news has reached us today. One of the leading Post Keynesian economists, Victoria Chick, passed away yesterday at the age of 86.

R.I.P.

Is an economics degree really worth it?

13 Jan, 2023 at 16:36 | Posted in Economics | Comments Off on Is an economics degree really worth it?

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A science that doesn’t self-reflect on its own history and asks important methodological and science-theoretical questions about its own activity is in dire straits.

Already back in 1991, a commission chaired by Anne Krueger and including people like Kenneth Arrow, Edward Leamer, and Joseph Stiglitz, reported from their own experience “that it is an underemphasis on the ‘linkages’ between tools, both theory and econometrics, and ‘real world problems’ that is the weakness of graduate education in economics,” and that both students and faculty sensed “the absence of facts, institutional information, data, real-world issues, applications, and policy problems.” And in conclusion, they wrote that “graduate programs may be turning out a generation with too many idiot savants skilled in technique but innocent of real economic issues.”

Not much is different today. Economics — and economics education — is still in dire need of a remake.

More and more young economics students want to see a fundamental change in economics and how it’s taught. They want something other than the same old mainstream catechism. They don’t want to be force-fed with useless and harmfully irrelevant mainstream theories and models.

Wage rigidity theories

4 Jan, 2023 at 15:43 | Posted in Economics | 2 Comments

bewIt seems reasonable to hope that a successful explanation of wage rigidity would contribute to understanding the extent of the welfare loss associated with unemployment and what can be done to reduce it … Many theories of wage rigidity and unemployment include partial answers to these questions as part of their assumptions, so that the phenomena of real interest are described in the theories’ assumptions. For instance, Lucas concludes that increased unemployment during recessions implies little welfare loss … Lucas’s policy conclusions are not strongly supported …

A fanciful example may illustrate the danger of taking too narrow a view of instrumentalism. You are an explorer seeking contact with the Dafs, an isolated tribe about which almost nothing is known. You observe one of their villages through binoculars from far away … yellowhatYou observe that every morning on sunny days, men wearing bright yellow hats stand in the backyards and make sweeping gestures toward the sky … When you finally arrange a meeting with some Dafs, you meet a few men with yellow hats and a few other plainer people. Believing the first to be leaders, you offer them presents, at which point all the Dafs are outraged and assault you. What you have not observed is that yellow hats mark slaves, who throw grain to the household chickens in the yard on sunny days and inside on rainy ones … It would have been worth your while not to settle for treating arm waving and wearing yellow hats as the phenomena to be explained, but to test your assumptions about behavior by taking risks to sneak up closer and see precisely what the men were up to.

Bewley’s book is a modern classic and a fascinating must-read. It convincingly shows that when it comes to wage behaviour, participants in the labour market do not — as is the standard assumption in mainstream macroeconomics — only care about real outcomes/wages/prices. In real-world labour markets, people have different more or less complex motivations and norms. Wages do not simply adjust until they are in ‘equilibrium.’

How economics has become a religion

3 Jan, 2023 at 19:18 | Posted in Economics | Comments Off on How economics has become a religion

Economics today has — as we all know — become a “the model is the message” discipline.

But as long as it does not seriously argue and assess the compatibility of those models and their real-world target systems, the belief that those models in any essential way enhance our possibilities to understand or explain what happens in our economies, is a belief for which there really is no other ground than belief itself.

Science religion relationship sign Stock Photo by ©kikkerdirk 96770664Even if no controls were available, it would be presumptuous to ignore the testimony of people who make economic decisions and observe and participate in economic life. To do so would be to make economics a religion rather than a responsible analysis of experience. Good instincts about a subject can be developed only by contact with the phenomena studied. Unfortunately, attitudes in the economics profession discourage the use of information other than well-known data. Among these attitudes … is the belief that nothing is seen if one looks too closely, that the forest is missed for the trees. It is true that remote views are useful, that aerial photographs disclose forest diseases. But it is also true that to understand forests, you should know something about trees.

Truman Bewley

On the use of mathematics in empirical modeling

1 Jan, 2023 at 17:56 | Posted in Economics | 5 Comments

What is Math Modeling? Video Series Part 1: What is Math Modeling? - YouTubeI have argued that in order for a mathematical modeling exercise to illuminate its target the following two conditions must be met:(1*) the objects under investigation must plausibly be stable, modular, and quantitative, with no qualitative differences among instantiations of each type; and (2*) the relations between them must be fixed and law-like throughout the context under study in the modeling exercise …

If we have not established that (1*) and (2*) are satisfied, then the most we could claim is that the analysis could be a test of a theory about the proto-model form of the delimited social phenomena. By definition, proto-model entities possess the characteristics needed to be legitimate inputs into the theoretical model, but as discussed above their connection to the actual data-generating process is purely conjectural unless the economist explicitly explores whether (1*) and (2*) hold. Put briefly, without establishing that (1*) and (2*) are fulfilled, a mathematical modeling exercise answers only the question of what would be true of the relevant social phenomena if they possessed only the same kind of complexity as their mathematical analogues. But, surely, one of the most vexing aspects of social behavior is that we generally do not know what kind of complexity underlies it. The question of the stability, modularity, and law-like relations of the social phenomena of interest, then, is lexicographically prior to any questions about the legitimacy of the econometric specification and the appropriateness of the data. Unless and until this prior question is addressed, we can have no idea what the econometric results imply about the social phenomena in which we are interested.

Peter Spiegler

Economic modeling — a constructive critique

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

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

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

Highly recommended reading!

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

In their search for validity, rigour and precision, mainstream macro modellers of various ilks construct microfounded DSGE models that standardly assume rational expectations, Walrasian market clearing, unique equilibria, time invariance, linear separability and homogeneity of both inputs/outputs and technology, infinitely lived intertemporally optimizing representative household/ consumer/producer agents with homothetic and identical preferences, etc., etc. At the same time, the models standardly ignore complexity, diversity, uncertainty, coordination problems, non-market clearing prices, real aggregation problems, emergence, expectations formation, etc., etc.

Behavioural and experimental economics — not to speak of psychology — show beyond any doubt that ‘deep parameters’ — peoples’ preferences, choices and forecasts — are regularly influenced by those of other participants in the economy. And how about the homogeneity assumption? And if all actors are the same – why and with whom do they transact? And why does economics have to be exclusively teleological (concerned with intentional states of individuals)? Where are the arguments for that ontological reductionism? And what about collective intentionality and constitutive background rules?

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

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

My philosophy of economics

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

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

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

As John Locke wrote in An Essay Concerning Human Understanding:

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

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

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

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

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

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

How to ensure that models serve society

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

• Mind the assumptions — assess uncertainty and sensitivity.

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

• Mind the framing — match purpose and context.

• Mind the consequences — quantification may backfire.

• Mind the unknowns — acknowledge ignorance.

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

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

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

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

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

According to Keynes we live in a world permeated by unmeasurable uncertainty — not quantifiable stochastic risk — which often forces us to make decisions based on anything but “rational expectations.” Keynes rather thinks that we base our expectations on the confidence or “weight” we put on different events and alternatives. To Keynes, expectations are a question of weighing probabilities by “degrees of belief,” beliefs that often have preciously little to do with the kind of stochastic probabilistic calculations made by the rational agents as modelled by “modern” social sciences. And often we “simply do not know.” 

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

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

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

Economics beyond Krugman, Mankiw, and Rodrik

17 Dec, 2022 at 21:25 | Posted in Economics | 10 Comments

1390045613Economics students today are complaining more and more about the way economics is taught. The lack of fundamental diversity — not just path-dependent elaborations of the mainstream canon — and narrowing of the curriculum, dissatisfy econ students all over the world. The frustrating lack of real-world relevance has led many of them to demand the discipline to start developing a more open and pluralistic theoretical and methodological attitude.

Dani Rodrik — among economics journalists and commentators often described as a heterodox economist — has little understanding of these views, finding it hard to ‘understand these complaints in the light of the patent multiplicity of models within economics.’  Rodrik shares the view of his colleagues Paul Krugman and Greg Mankiw — both of whom he approvingly cites in his book Economics Rules — that there is nothing basically wrong with ‘standard theory’ and ‘economics textbooks.’ As long as policymakers and economists stick to ‘standard economic analysis’ everything is fine. Economics is just a method that makes us ‘think straight’ and ‘reach correct answers.’

Writes Rodrik in Economics Rules:

Pluralism with respect to conclusions is one thing; pluralism with respect to methods is something else … An aspiring economist has to formulate clear models … These models can incorporate a wide range of assumptions … but not all assumptions are equally acceptable. In economics, this means that the greater the departure from benchmark assumptions, the greater the burden of justifying and motivating why those departures are needed …

Some methods are better than others … For some these constraints represent a kind of methodological straitjacket that crowds out new thinking. But it is easy to exaggerate the rigidity of the rules within which the profession operates.

Young economics students that want to see a real change in economics and the way it’s taught, have to look beyond Rodrik, Mankiw, Krugman & Co. Those future economists who really want something other than the same old mainstream neoclassical catechism; those who really don’t want to be force-fed with mainstream neoclassical deductive-axiomatic analytical formalism, have to look elsewhere.

Just like Krugman, Rodrik likes to present himself as a kind of pluralist anti-establishment economics iconoclast, but when it really counts, he shows what he is — a mainstream economist fanatically defending the relevance of standard economic modelling strategies. In other words — no heterodoxy where it really would count.

Almost all the change and diversity that people like Krugman and Rodrik applauds only take place within the analytic-formalistic modelling strategy that makes up the core of mainstream economics. All the flowers that do not live up to the precepts of the mainstream methodological canon are pruned. You’re free to take your analytical formalist models and apply it to whatever you want – as long as you do it using a modelling methodology acceptable to the mainstream. 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.” This isn’t pluralism. It’s a methodological reductionist straightjacket.

In Rodrik’s world “newer generations of models do not render the older generations wrong or less relevant,” but “simply expand the range of the discipline’s insights.” I don’t want to sound derisory or patronizing, but although it’s easy to say what Rodrik says, we cannot both have our cake and eat it. Analytical formalism doesn’t save us from either specifying the intended areas of application of the models or having to accept them as rival models facing the risk of being put to the test and found falsified.

The insistence on using analytical formalism and mathematical methods comes at a high cost — it often makes the analysis irrelevant from an empirical-realist point of view.

No matter how many thousands of models mainstream economists come up with, as long as they are just axiomatic variations of the same old mathematical-deductive ilk, they are not heterodox in any substantial way, and they will not take us one single inch closer to giving us relevant and usable means to further our understanding and explanation of real economies.

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