Revealed preference theory — an empty tautology

19 Sep, 2021 at 16:12 | Posted in Economics | 1 Comment

timthumbThe experiment reported here was designed to reflect the fact that revealed preference theory is concerned with hypothetical choices rather than actual choices over time. In contrast to earlier experimental studies, the possibility that the different choices are made under different preference patterns can almost be ruled out. We find a considerable number of violations of the revealed preference axioms, which contradicts the neoclassical theory of the consumer maximising utility subject to a given budget constraint. We should therefore pay closer attention to the limits of this theory as a description of how people actually behave, i.e. as a positive theory of consumer behaviour. Recognising these limits, we economists should perhaps be a little more modest in our ‘imperialist ambitions’ of explaining non-market behaviour by economic principles.

Reinhard Sippel 

Sippel’s experiment showed considerable violations of the revealed preference axioms and that from a descriptive point of view — as a theory of consumer behaviour — the revealed preference theory was of a very limited value.

The neoclassical theory of consumer behaviour has been developed in great part as an attempt to justify the idea of a downward-sloping demand curve. What forerunners like e.g. Cournot (1838) and Cassel (1899) did was merely to assert this law of demand. The utility theorists tried to deduce it from axioms and postulates on individuals’ economic behaviour. Revealed preference theory — in the hands of Paul Samuelson and Hendrik Houthakker — tried to build a new theory and to put it in operational terms, but ended up with just giving a theory logically equivalent to the old one. As such it also shares its shortcomings of being empirically nonfalsifiable and of being based on unrestricted universal statements.

The theory is nothing but an empty tautology — and pondering on Reinhard Sippel’s experimental results and Nicholas Georgescu-Roegen’s apt description, a harsh assessment of what the theory accomplishes is inevitable:

analytLack of precise definition should not … disturb us in moral sciences, but improper concepts constructed by attributing to man faculties which he actually does not possess, should. And utility is such an improper concept … [P]erhaps, because of this impasse … some economists consider the approach offered by the theory of choice as a great progress … This is simply an illusion, because even though the postulates of the theory of choice do not use the terms ‘utility’ or ‘satisfaction’, their discussion and acceptance require that they should be translated into the other vocabulary … A good illustration of the above point is offered by the ingenious theory of the consumer constructed by Samuelson.

Challenging mainstream economics — a feminist perspective

17 Sep, 2021 at 11:41 | Posted in Economics | 1 Comment

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A must-see!

Econometrics — a second-best explanatory practice

15 Sep, 2021 at 20:31 | Posted in Economics | Leave a comment

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. 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 treatmeant 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 modeling, 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 already Keynes 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 realations. Forgetting that, economists will continue to be stuck with a second-best explanatory practice.

MMT and the deficit myth

12 Sep, 2021 at 14:28 | Posted in Economics | 24 Comments

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What Modern Monetary Theory (MMT) does is more or less what Knut Wicksell tried to do more than a hundred years ago, when he in 1898 wrote on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise). The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​

In the mainstream economist’s world, we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.

What mainstream economists have in mind when they argue this way, is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. What happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfill our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

Contrary to mainstream theory, finance in the world of MMT — and people like Keynes and Minsky — precedes investment and saving. What is ‘forgotten’ in mainstream theory, is the insight that finance — in all its different shapes — has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies​ and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterwards, simply isn’t enough.

All real economic activities depend on a functioning financial machinery. But institutional arrangements, states of confidence, fundamental uncertainties, asymmetric expectations, the banking system, financial intermediation, loan granting processes, default risks, liquidity constraints, aggregate debt, cash flow fluctuations, etc., etc. — things that play decisive roles in channelling money/savings/credit — are more or less left in the dark in modern mainstream formalizations of economic theory.

Kan Magdalena Andersson släppa den nyliberala modellen?

8 Sep, 2021 at 20:23 | Posted in Economics | Leave a comment

Trots att ingen längre säger sig vara nyliberal, så dominerar de neoklassiska ekonomiska modeller som nobelpristagaren Milton Friedman skapade nyliberalismen av, den verkställda ekonomiska politiken. Det vill säga att ”marknadens” kollektiva visdom är den bärande bjälken som politiken har att förhålla sig till. Inte ens Socialdemokraterna, med finansministern och den sannolika partiledaren Magdalena Andersson i spetsen, vill släppa den modellen …

Neoliberalism: Political Success, Economic Failure - The American ProspectJag vill hävda att detta fullskaleexperiment med nyliberala idéer inte har varit rakt igenom lyckosamma utan har skapat det mesta av de sociala och ekonomiska spänningar som vi idag har att brottas med, i form av växande ojämlikhet och socialt utanförskap …

Problemen med dessa nyliberala reformer är att de har skapats för att vara så ”irreversibla” som möjligt. Där äganderätten och näringsfriheten är de heliga principer som har stadfästs så djupt som det någonsin går. Eller snarare definitionen av dessa rättigheter, som inte bygger på några ekonomiska naturlagar utan de är till sin natur politiska och handlar om vem som får privilegiet att definiera dem …

Vill man komma åt det sjuka systemet med vinstmaximerande skolor, så kan man börja med att reformera systemet för den så kallade skolpengen, som i dag är ger stora arbitragevinster till friskolorna.  Med sjunkande marginaler i friskolorna blir de också allt mindre intressanta som investeringsobjekt. Detta kommer i sin tur att bana väg för andra riktiga reformer.

Per Lindvall

Was Marx right after all?

6 Sep, 2021 at 18:33 | Posted in Economics | 3 Comments

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Analytical bias

5 Sep, 2021 at 16:41 | Posted in Economics | 2 Comments

Expectation vs reality concept business analysis Vector ImageThe world is made up of systems.  Our body is a system, or in fact a system of systems.  What we call “society” is another system of systems, as is the natural environment …

But these systems are very complex, difficult to explain or predict.  One successful strategy, which has had a revolutionary impact on how we live, is analysis …

By biting off chewable portions of a much larger world, science makes it possible to achieve progress in our understanding of how things work …

But this approach, for all its benefits, fails to capture most of the interactive effects that make a system a system.  It leads us to overstate the separateness of the things we study and observe and to understate their connectedness.  This is not an argument against thinking analytically, but for not being surprised by what this thinking fails to see so we can at least somewhat compensate for its shortcomings.

Peter Dorman

Using the ‘analytical’ method — “biting off chewable portions of a much larger world” — may indeed sound as a convincing and good scientific approach. But — as Dorman  notices — there is a snag!

The procedure only really works when you have a machine-like whole/system/economy where the parts appear in more or less fixed and stable configurations. And if there is anything we know about reality, it is that it is not a machine! The world we live in is not a ‘closed’ system. On the contrary. It is an essentially ‘open’ system. Things are uncertain, relational, interdependent, complex, and ever-changing.

Without assuming that the underlying structure of the economy that you try to analyze remains stable/invariant/constant, there is no chance the equations of the model remain constant. That’s the very rationale why economists use (often only implicitly) the assumption of ceteris paribus. But — nota bene — this can only be a hypothesis. You have to argue the case. If you cannot supply any sustainable justifications or warrants for the adequacy of making that assumption, then the whole analytical economic project becomes pointless non-informative nonsense. Not only have we to assume that we can shield off variables from each other analytically (external closure). We also have to assume that each and every variable themselves are amenable to be understood as stable and regularity producing machines (internal closure). Which, of course, we know is as a rule not possible. Some things, relations, and structures are not analytically graspable. Trying to analyse parenthood, marriage, employment, etc, piece by piece doesn’t make sense. To be a chieftain, a capital-owner, or a slave is not an individual property of an individual. It can come about only when individuals are integral parts of certain social structures and positions. Social relations and contexts cannot be reduced to individual phenomena. A cheque presupposes a banking system and being a tribe-member presupposes a tribe.  Not taking account of this in the ‘analytical’ approach, economic ‘analysis’ becomes rather uninformative nonsense.

Modern macro — ‘genuine plurality’ vs. ‘axiomatic variation’

5 Sep, 2021 at 13:13 | Posted in Economics | Leave a comment

out-of-the-fryingThe DSGE mainstream — which is made up of new classical macroeconomics and neo-Keynesianism — is unanimously based on the core assumptions that characterize the paradigm of social exchange theory. These are rationality, ergodicity and substitutionality, the exclusive acceptance of a formal mathematical-deductive, positivist reductionism. After the ‘empirical turn’ of the last two or three decades, these have been combined with sophisticated micro- and macroeconometrics, or with experimental arrangements, such as are familiar from the leading natural sciences (physics and chemistry). The postulate of stability and optimality (Walras’s law), which is implemented a priori in the core assumptions, serves as a ‘model solution,’ and thus functions as a marker of a negative heuristic. The apparently very different model prognoses of new classical macroeconomics (hyper-balanced and hyper-stable) on the one hand, and of standard and neo-Keynesianism (unbalanced, open to intervention) on the other hand are based on changes to assumptions in the ‘protective belt’ (e.g. about the speed of adjustment, the rigidity of prices and quantities, the formation of expectations etc.), but do not actually point to a different paradigmatic origin of the two schools of theory.

Arne Heise & Sebastian Thieme

Maintaining that economics is a science in the ‘true knowledge’ business, yours truly remains a skeptic of the pretences and aspirations of New Classical and ‘New Keynesian’ macroeconomics. So far, I cannot really see that they have yielded very much in terms of realistic and relevant economic knowledge.

The marginal return on its ever higher technical sophistication in no way makes up for the lack of serious underlabouring of the deeper philosophical and methodological foundations of mainstream economics. The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide it cannot give supportive evidence for considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, I cannot but conclude that ‘modern’ macroeconomics on the whole has not delivered anything else than “as if” unreal and irrelevant models.

Science should help us penetrate to “the true process of causation lying behind current events” and disclose “the causal forces behind the apparent facts” [Keynes 1971-89 vol XVII:427]. We should look out for causal relations. But models can never be more than a starting point in that endeavour. There is always the possibility that there are other variables — of vital importance and although perhaps unobservable and non-additive not necessarily epistemologically inaccessible –- that were not considered for the model.

The kinds of laws and relations that economics has established, are laws and relations about entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in the real world they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made “nomological machines” they are rare, or even non-existant. Unfortunately that also makes most of the achievements of macroeconomics — as most of contemporary endeavours of economic theoretical modeling — rather useless.

Most mainstream economists seem to have no problem with the lack of fundamental diversity — not just path-dependent elaborations of the mainstream canon — and vanishingly little real-world relevance that characterize modern mainstream macroeconomics. They usually stick to the view that there is nothing basically wrong with ‘standard theory.’ As long as policymakers​ and economists stick to ‘standard economic analysis’ everything is just fine. Economics is just a common language and method that makes us think straight,  reach correct answers, and produce ‘knowledge.’

Although some mainstream economists try hard to give a picture of modern macroeconomics as a pluralist enterprise, the change and diversity that gets their approval only takes place within the analytic-formalistic modeling strategy that makes up the core of mainstream economics. You’re free to take your analytical formalist models and apply it to whatever you want — as long as you do it with a modeling methodology that is acceptable to the mainstream. If you do not follow this particular mathematical-deductive analytical formalism you’re not even considered doing economics. If you haven’t modeled your thoughts, you’re not in the economics business. But this isn’t pluralism. It’s a methodological reductionist straightjacket.

No matter how precise and rigorous the analysis is, and no matter how hard one tries to cast the argument in modern ‘the model is the message’ form, mainstream economics do not push economic science forwards one millimetre​ since it simply do not stand the acid test of relevance to the target. No matter how clear, precise, rigorous or certain the inferences delivered inside the models are, that is no guarantee whatsoever they have anything interesting or relevant to say about real-world economies.

Levels of aspiration among economists

31 Aug, 2021 at 10:10 | Posted in Economics | Leave a comment

225px-allais_pn_maurice-24x30-2001bSubmission to observed or experimental data is the golden rule which dominates any scientific discipline. Any theory whatever, if it is not verified by empirical evidence, has no scientific value and should be rejected.

Maurice Allais

Formalistic deductive ‘Glasperlenspiel’ can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about models and lose sight of reality.

Mainstream economics has since long more or less given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence — still — only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. Hopefully humbled by the ever growing manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

To have valid evidence is not enough. What economics needs is sound evidence. Why? Simply because 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.

Keynes was not a Keynesian. He was a Post Keynesian!

24 Aug, 2021 at 20:37 | Posted in Economics | 1 Comment

keynes3But these more recent writers like their predecessors were still dealing with a system in which the amount of the factors employed was given and the other relevant facts were known more or less for certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in which the disappointment of expectation was ruled out. But at any given time facts and expectations were assumed to be given in a definite and calculable form; and risks, of which, tho admitted, not much notice was taken, were supposed to be capable of an exact actuarial computation. The calculus of probability, tho mention of it was kept in the background, was supposed to be capable of reducing uncertainty to the same calculable status as that of certainty itself …

Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of the classical economic theory.

John Maynard Keynes

And this emphasis on the importance of uncertainty is not even mentioned in ‘IS-LM Keynesianism’ …

Behavioural economics and complexity economics

17 Aug, 2021 at 22:29 | Posted in Economics | 1 Comment

James Galbraith: what Europe needs is solidarity, not austerity | etuiWhat is to take the place of neoclassical economics and its neoliberal policy offshoot? There is no shortage of candidates, grouped under the broad banner of economic heterodoxy. Some of these successor doctrines – behavioral economics and complexity economics are examples of note – take the neoclassical orthodoxies as a point of departure. They therefore continue to define themselves in relation to those orthodoxies. Others avoided the gravitational pull altogether – or, as in the exceptional case of Keynes, made a “long struggle to escape”. The behaviorists depart from neoclassicism by giving up strict assumptions of rational and maximizing behavior. Complexity theorists explore the dynamics of interacting agents and recursive functions. Both achieve a measure of academic reputability by remaining in close dialog with the orthodox mainstream. Neither pays more than a glancing tribute to earlier generations or other canons of economic thought. The model is that of neoclassical offshoots – New Institutionalism, New Classical Economics, New Keynesianism – that make a vampire practice of colonizing older words and draining them of their previous meaning. The dilemma of these offshoots lies in having accepted the false premise of the orthodoxy to which it proposes to serve as the alternative. The conceit is of a dispassionate search for timeless truth, once again pursued by “relaxing restrictive assumptions” in the interest of “greater realism”. Thus, for example, in complexity theories agents follow simple rules and end up generating intricate and unpredictable patterns, nonlinear recursive functions give the same result, the variance of returns turns out to be non-normal, and so forth. But once the starting point is taken to be the neoclassical competitive general equilibrium model, these exercises are largely drained of insight and relevance. The behaviorists can tell us that real people do not appear to fit well into the portrait of autonomous, selfish, commodity-obsessed pleasure-seekers that is “economic man”. The complexity theorists can tell us, as Arthur (2021) does, is that a system constructed from confections of interacting agents may be unstable. These things, even the dimmest observer of real-existing capitalism already knew.

James Galbraith / RWER

Although discounting empirical evidence cannot be the right way to solve economic issues, there are still, in my opinion, a couple of weighty reasons why we — just as Galbraith — perhaps shouldn’t be too excited about the so-called ’empirical’ or ‘behavioural’ revolution in economics.

behBehavioural experiments and laboratory research face the same basic problem as theoretical models — they are built on often rather artificial conditions and have difficulties with the ‘trade-off’ between internal and external validity. The more artificial conditions, the more internal validity, but also less external validity. The more we rig experiments to avoid the ‘confounding factors’, the less the conditions are reminiscent of the real ‘target system.’ The nodal issue is how economists using different isolation strategies in different ‘nomological machines’ attempt to learn about causal relationships. One may have justified doubts on the generalizability of this research strategy since the probability is high that causal mechanisms are different in different contexts and that lack of homogeneity and invariance doesn’t give us warranted export licenses to the ‘real’ societies or economies.

If we see experiments or laboratory research as theory tests or models that ultimately aspire to say something about the real ‘target system,’ then the problem of external validity is central (and was for a long time also a key reason why behavioural economists had trouble getting their research results published).

A standard procedure in behavioural economics — think of e.g. dictator or ultimatum games — is to set up a situation where one induce people to act according to the standard microeconomic — homo oeconomicus — benchmark model. In most cases, the results show that people do not behave as one would have predicted from the benchmark model, in spite of the setup almost invariably being ‘loaded’ for that purpose. [And in those cases where the result is consistent with the benchmark model, one, of course, have to remember that this in no way proves the benchmark model to be right or ‘true,’ since there, as a rule, may be many outcomes that are consistent with that model.]

For most heterodox economists this is just one more reason for giving up on the standard model. But not so for mainstreamers and many behaviouralists. To them, the empirical results are not reasons for giving up on their preferred hardcore axioms. So they set out to ‘save’ or ‘repair’ their model and try to ‘integrate’ the empirical results into mainstream economics. Instead of accepting that the homo oeconomicus model has zero explanatory real-world value, one puts lipstick on the pig and hope to go on with business as usual. Why we should keep on using that model as a benchmark when everyone knows it is false is something we are never told. Instead of using behavioural economics and its results as building blocks for a progressive alternative research program, the ‘save and repair’ strategy immunizes a hopelessly false and irrelevant model.

By this, I do not mean to say that empirical methods per se are so problematic that they can never be used. On the contrary, I am basically — though not without reservations — in favour of the increased use of behavioural experiments and laboratory research within economics. Not least as an alternative to completely barren ‘bridge-less’ axiomatic-deductive theory models. My criticism is more about aspiration levels and what we believe that we can achieve with our mediational epistemological tools and methods in the social sciences.

The increasing use of natural and quasi-natural experiments in economics during the last couple of decades has led several prominent economists to triumphantly declare it as a major step on a recent path toward empirics, where instead of being a deductive philosophy, economics is now increasingly becoming an inductive science.

Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems.

‘Ideally controlled experiments’ tell us with certainty what causes what effects — but only given the right ‘closures.’ Making appropriate extrapolations from (ideal, accidental, natural or quasi) experiments to different settings, populations or target systems, is not easy. ‘It works there’ is no evidence for ‘it will work here.’ Causes deduced in an experimental setting still have to show that they come with an export-warrant to the target system. The causal background assumptions made have to be justified, and without licenses to export, the value of ‘rigorous’ and ‘precise’ methods is despairingly small.

Taking assumptions like utility maximization or market equilibrium as a matter of course leads to the ‘standing presumption in economics that, if an empirical statement is deduced from standard assumptions then that statement is ‘reliable’ …

maxresdefaultThe ongoing importance of these assumptions is especially evident in those areas of economic research, where empirical results are challenging standard views on economic behaviour like experimental economics or behavioural finance … From the perspective of Model-Platonism, these research-areas are still framed by the ‘superior insights’ associated with early 20th century concepts, essentially because almost all of their results are framed in terms of rational individuals, who engage in optimizing behaviour and, thereby, attain equilibrium …

While the mere emergence of research areas like experimental economics is sometimes deemed a clear sign for the advent of a new era … a closer look at these fields allows us to illustrate the enduring relevance of the Model-Platonism-topos and, thereby, shows the pervasion of these fields with a traditional neoclassical style of thought.

Jakob Kapeller

So — although it is good that behavioural economists are rewarded ‘Nobel prizes’ and that much of their research has vastly undermined the lure of axiomatic-deductive mainstream economics, there is still a long way to go before economics has become a truly empirical science. The great challenge for future economics is not to develop methodologies and theories for well-controlled laboratories, but to develop relevant methodologies and theories for the messy world in which we happen to live.

An economic theory that does not go beyond proving theorems and conditional ‘if-then’ statements — and do not make assertions and put forward hypotheses about real-world individuals and institutions — is of little consequence for anyone wanting to use theories to better understand, explain or predict real-world phenomena.

Building theories and models on patently ridiculous assumptions we know people never conform to, does not deliver real science. Real and reasonable people have no reason to believe in ‘as-if’ models of ‘rational’ robot-imitations acting and deciding in a Walt Disney-world characterised by ‘common knowledge,’ ‘full information,’ ‘rational expectations,’ zero transaction costs, given stochastic probability distributions, risk-reduced genuine uncertainty, and other laughable nonsense assumptions of the same ilk. Science fiction is not science.

For decades now, economics students have been complaining about the way economics is taught. Their complaints are justified. Force-feeding young and open-minded people with unverified and useless autistic mainstream theories and models cannot be the right way to develop a relevant and realist economic science.

Much work done in mainstream theoretical economics is devoid of any explanatory interest. And not only that. Seen from a strictly scientific point of view, it has no value at all. It is a waste of time. And as so many have been experiencing in modern times of austerity policies and market fundamentalism — a very harmful waste of time.

An alternative to mainstream orthodoxy that has been discussed much lately is so the called complexity economics and its agent-based modelling.

Agent-based models are formal models usually constructed using mathematical programming and performing simulations and ‘artificial experiments’ with the intention of being able to (more explicitly than in conventional mainstream game theory) describe aggregate effects and dynamics of interacting individuals and socio-economic structures without standardly having to assume equilibria, non-emergence, Walrasian auctioneers, representative agents, rational expectations, etc., etc..

Agent-based models come in different degrees of realism and are usually conceptualised as different kinds of self-organising complex systems. But one thing they all have in common is reliance on mathematical formalism. In essence the agent-based modelling endeavour in macroeconomics is an attempt at providing new alternative mathematical models where many of the bizarre and ridiculous known-to-be ‘unrealistic’ assumptions in standard DSGE models are replaced with other less ‘unrealistic’ assumptions. But the idea that mathematical modelling as such is always appropriate to apply is never seriously questioned. And that’s where I find it hard to follow. One set of mathematical tractability assumptions are substituted for another. But what if the mathematical modelling in itself is the problem? What if the use of mathematical-formalistic modelling in itself biases your research efforts in specific directions? If it is the mathematical-formalistic approach in itself that is the problem, we only end up with different models based on the same unquestioned mathematical modelling strategy. From my own critical realist perspective I can’t see that mathematical modelling is the self-evidently appropriate way to perform analyses of societies and economies. The kind of ‘closures’ demanded of the target systems for warranting the analyses, I would argue, simply often aren’t there.

As a critique of mainstream economics, yours truly fully appreciates the work done by the ‘complexity’ economists. But although their alternative agent-based models in many ways are superior to the more traditional mainstream ‘Walt Disney’ kind of models, I am not convinced that their unquestioned attachment to mathematical-formalist modelling is the right way to move forward in making economics a more realist and relevant science.

Keynes’s Copernican revolution in economics

16 Aug, 2021 at 12:06 | Posted in Economics | Comments Off on Keynes’s Copernican revolution in economics

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A small ray of hope

16 Aug, 2021 at 11:46 | Posted in Economics | 1 Comment

a_ray_of_hope_by_kaslito-d5yo5t0

I overheard a conversation between two high school students this morning.

The first person was asking about which classes the second was going to take next. One of those mentioned was microeconomics.

“Oh, that’s easy” said the first, “You just have to remember that it’s all rubbish — they want you to believe that people are rational, and that there’s all this perfection in the world.”

“Really?” responded the second, “That’s really dumb. I wonder why they do that?”

“It doesn’t matter, it’s economics”

“Well maybe I’ll take history instead, at least I might learn something useful.”

Peter Radford

Robert Lucas and his Keynesian credentials

7 Aug, 2021 at 08:38 | Posted in Economics | 8 Comments

In his Keynote Address to the 2003 History of Political Economy Conference, Robert Lucas said:

Well, I’m not here to tell people in this group about the history of
monetary thought. I guess I’m here as a kind of witness from a vanished
culture, the heyday of Keynesian economics. It’s like historians rushing
to interview the last former slaves before they died, or the last of the
people who remembered growing up in a Polish shtetl. I am going to tell
you what it was like growing up in a day when Keynesian economics
was taught as a solid basis on which macroeconomics could proceed.

keynesdanceMy credentials? Was I a Keynesian myself? Absolutely. And does my
Chicago training disqualify me for that? No, not at all. David Laidler
[who was present at the conference] will agree with me on this, and I will
explain in some detail when I talk about my education. Our Keynesian
credentials, if we wanted to claim them, were as good as could be obtained
in any graduate school in the country in 1963.

I thought when I was trying to prepare some notes for this talk
that people attending the conference might be arguing about Axel
Leijonhufvud’s thesis that IS-LM was a distortion of Keynes, but I didn’t
really hear any of this in the discussions this afternoon. So I’m going to
think about IS-LM and Keynesian economics as being synonyms. I remember
when Leijonhufvud’s book2 came out and I asked my colleague
Gary Becker if he thought Hicks had got the General Theory right with
his IS-LM diagram. Gary said, “Well, I don’t know, but I hope he did,
because if it wasn’t for Hicks I never would have made any sense out of
that damn book.” That’s kind of the way I feel, too, so I’m hoping Hicks
got it right.

Mirabile dictu! I’m a Keynesian — although I haven’t understood anything of what Keynes wrote, but I’ve read anoher guy who said he had read his book, so I hope for the best and assume he got it right (which Hicks actually didn’t, and was intellectually honest to admit in at least three scientific publications published about twenty years before Lucas statement). In truth a very scientific attitude. No wonder the guy after having deluded himself into believing (?) being a Keynesian — although actually only elaborating upon a model developed and then disowned by John Hicks — got the “Nobel prize” in economics …

Japan’s economic woes

5 Aug, 2021 at 11:50 | Posted in Economics | 1 Comment

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