Ekonomiutbildningarna måste förnyas

8 Dec, 2019 at 13:14 | Posted in Economics | Leave a comment

Dagens ekonomiutbildningar måste bli mer verklighetsanknutna och framför allt lära ut den roll som pengaskapare som bankväsendet har i ekonomin – om vi ska undvika framtida kriser.

Stockholm_School_of_Economics_-_HandelshögskolanProfessorer och Lärarkårer på Ekonomiutbildningar, Banker och deras roll i skapandet av pengar är en väsentlig del av moderna, finansialiserade ekonomier. Likväl ges dagens ekonomistudenter en långtifrån fullgod bild av saken. Som personer med makt att påverka nästa generation ekonomer, är det av stor vikt att ni ser över bankers roll i ekonomiämnet och bringar detta i linje med samtida forskning. Ekonomistuderande behöver förstå hur banker fungerar i verkligheten för att kriser av det slag vi redan har upplevt ska kunna undvikas och för att kunna organisera ekonomin bättre i framtiden.

Över hela världen fortsätter läroböcker i ekonomi, några av dem från 1960-talet, att lära ut en modell i vilken affärsbanker inte är mer än mellanhänder. Banker antas då bara flytta runt existerande pengar, som smörjmedel i en maskin. Många ekonomikurser sätter sin lit till dessa modeller, utan att bry sig om empirin som motsäger dem. Det resulterar i en obalanserad syn på hur det monetära systemet fungerar och bankernas roll i ekonomin …

Världen över fordrar ekonomistuderande från nätverket Rethinking Economics samt medlemmar från rörelsen International Movement for Monetary Reform (IMMR), bland annat Positiva Pengar i Sverige, att lärare och föreläsare tar itu med denna lucka i utbildningen …

Vi stöder helt och fullt de studerande i detta. Vi vill se professorer och fakultet möta studenternas krav och undersöka hur en mer grundläggande förståelse av bankernas roll i det monetära systemet och den moderna ekonomin kan bli en integrerad del av ekonomiundervisningen. Dagens ekonomistuderande är framtidens makthavare, opinionsbildare, politiker, finansiärer och företagsledare. Om de globalt ska kunna bidra till stabila och produktiva ekonomier, måste de ha en realistisk bild av banker och pengaskapande.

Steve Keen, Kate Raworth, Lars P Syll, Samuel Kazen Orrefur, m fl

Uber and the gender pay gap

7 Dec, 2019 at 18:48 | Posted in Economics | Leave a comment

uberUber has conducted a study of internal pay differentials between men and women, which they describe as “gender blind” … The study found a 7% pay gap in favor of men. They present their findings as proof that there are issues unrelated to gender that impact driver pay. They quantify the reasons for the gap as follows:

Where: 20% is due to where people choose to drive (routes/neighborhoods).

Experience: 30% is due to experience …

Speed: 50% was due to speed, they claim that men drive slightly faster, so complete more trips per hour …

The company’s reputation has been affected by its sexist and unprofessional corporate culture, and its continued lack of gender balance won’t help. Nor, I suspect, will its insistence, with research conducted by its own staff to prove it, that the pay gap is fair. This simply adds insult to obnoxiousness.

But then, why would we have expected any different? The Uber case study’s conclusions may actually be almost the opposite of what they were trying to prove. Rather than showing that the pay gap is a natural consequence of our gendered differences, they have actually shown that systems designed to insistently ignore differences tend to become normed to the preferences of those who create them.

Avivah Wittenberg-Cox

Spending a couple of hours going through a JEL survey of modern research on the gender wage gap, yours truly was struck almost immediately by how little that research really has accomplished in terms of explaining gender wage discrimination. With all the heavy regression and econometric alchemy used, wage discrimination is somehow more or less conjured away …

Trying to reduce the risk of having established only ‘spurious relations’ when dealing with observational data, statisticians and econometricians standardly add control variables. The hope is that one thereby will be able to make more reliable causal inferences. But if you do not manage to get hold of all potential confounding factors, the model risks producing estimates of the variable of interest that are even worse than models without any control variables at all. Conclusion: think twice before you simply include ‘control variables’ in your models!

That women are working in different areas than men, and have other educations than men, etc., etc., are not only the result of ‘free choices’ causing a gender wage gap, but actually to a large degree itself the consequence of discrimination.

The gender pay gap is a fact that, sad to say, to a non-negligible extent is the result of discrimination. And even though many women are not deliberately discriminated against, but rather ‘self-select’ (sic!) into lower-wage jobs, this in no way magically explains away the discrimination gap. As decades of socialization research has shown, women may be ‘structural’ victims of impersonal social mechanisms that in different ways aggrieve them.

Happiness management

6 Dec, 2019 at 22:42 | Posted in Economics | Leave a comment


The ergodicity problem in economics (wonkish)

6 Dec, 2019 at 15:59 | Posted in Economics | 5 Comments

A surprising reframing of economic theory follows directly from asking the core ergodicity question: is the time average of an observable equal to its expectation value?

ergAt a crucial place in the foundations of economics, it is assumed that the answer is always yes — a pernicious error. To make economic decisions, I often want to know how fast my personal fortune grows under different scenarios. This requires determining what happens over time in some model of wealth. But by wrongly assuming ergodicity, wealth is often replaced with its expectation value before growth is computed. Because wealth is not ergodic, nonsensical predictions arise. After all, the expectation value effectively averages over an ensemble of copies of myself that cannot be accessed.

This key error is patched up with psychological arguments about human behaviour. The consequences are numerous, but over the centuries their root cause has become invisible in the growing formalism. Observed behaviour deviates starkly from model predictions. Paired with a firm belief in its models, this has led to a narrative of human irrationality in large parts of economics. Scientifically, this deserves some reflection: the models were exonerated by declaring the object of study irrational.

Ole Peters / Nature Physics

Paul Samuelson once famously claimed that the ‘ergodic hypothesis’ is essential for advancing economics from the realm of history to the realm of science. But is it really tenable to assume — as Samuelson and most other mainstream economists — that ergodicity is essential to economics?

Ole Peters’ article shows why ergodicity is such an important concept for understanding the deep fundamental flaws of mainstream economics:

Sometimes ergodicity is mistaken for stationarity. But although all ergodic processes are stationary, they are not equivalent.

Let’s say we have a stationary process. That does not guarantee that it is also ergodic. The long-run time average of a single output function of the stationary process may not converge to the expectation of the corresponding variables — and so the long-run time average may not equal the probabilistic (expectational) average.

Say we have two coins, where coin A has a probability of 1/2 of coming up heads, and coin B has a probability of 1/4 of coming up heads. We pick either of these coins with a probability of 1/2 and then toss the chosen coin over and over again. Now let H1, H2, … be either one or zero as the coin comes up heads or tales. This process is obviously stationary, but the time averages — [H1 + … + Hn]/n — converges to 1/2 if coin A is chosen, and 1/4 if coin B is chosen. Both these time averages have a probability of 1/2 and so their expectational average is 1/2 x 1/2 + 1/2 x 1/4 = 3/8, which obviously is not equal to 1/2 or 1/4. The time averages depend on which coin you happen to choose, while the probabilistic (expectational) average is calculated for the whole “system” consisting of both coin A and coin B.

Instead of arbitrarily assuming that people have a certain type of utility function — as in mainstream theory — time average considerations show that we can obtain a less arbitrary and more accurate picture of real people’s decisions and actions by basically assuming that time is irreversible. When our assets are gone, they are gone. The fact that in a parallel universe it could conceivably have been refilled, are of little comfort to those who live in the one and only possible world that we call the real world.

Time average considerations show that because we cannot go back in time, we should not take excessive risks. High leverage increases the risk of bankruptcy. This should also be a warning for the financial world, where the constant quest for greater and greater leverage — and risks — creates extensive and recurrent systemic crises.

Häften för Kritiska Studier har fyllt 50

5 Dec, 2019 at 17:31 | Posted in Economics, Politics & Society | Leave a comment

polomarkÅr 1968 utkom det första numret av Häften för kritiska studier. Under de femtio år som gått sedan dess har mer än 200 nummer utkommit. För att fira detta tog några av tidskriftens redaktions-medlemmar ett initiativ till en jubileumsskrift som kommer ut nästa månad.

Yours truly har ett bidrag med i skriften och tänkte därför ta tillfället i akt att säga något lite mer personligt om denna fantastiska tidskrift som alltid legat mig varmt om hjärtat.

Som en tämligen intellektuellt brådmogen 13-åring började jag läsa — och snart prenumerera på — HfKS. Jag vågar väl inte påstå att jag alltid fullt ut förstod de tankedigra och många gånger ‘djupa’ artiklar tidskriften var fylld med, men tillräckligt för att jag skulle lockas att läsa mer och förkovra mig. Mitt intresse stod tidigt till ekonomin, och jag minst speciellt ett par artiklar som handlade om handelsteori (som en av jubileumsskriftens bidragsgivare, Jan Otto Andersson författat.)

Tidskriften gav god ammunition när jag några år senare på gymnasiet också dristade att ifrågasätta en samhällskunskapslärare (nybakad nationalekonom från Lund) som försökte få oss alla att tänka inom den traditionella neoklassiska teoriramen.hfDet var ju inget som gjorde en populär i lärarens ögon, men svaren uteblev ofta och förstärkte min övertygelse att de heterodoxa teorier HfKS introducerade hade fog för sig i kritiken av den förhärskande teoriuppfattningen.

På 90-talet kom jag själv att publicera ett flertal artiklar i tidskriften. För dem av oss som ville utveckla och publicera något annat än den vanliga färdigtuggade ekonomigröten vi matades med på de nationalekonomiska institutionerna gav HfKS oss möjlighet att göra våra röster hörda.

Nu så här när HfKS fyllt 50 år kan man inte heller annat än bli imponerad av det oförtröttliga arbete och kulturgärning den ständige redaktörn för tidskriften — Göran Fredriksson — bestått oss med. Få tidskrifter kan stoltsera med att ha en redaktör som varit med på ‘resan’ under ett halvt sekel!

John Hassler — etablissemangsekonom med dimljuset på

5 Dec, 2019 at 12:43 | Posted in Economics | Leave a comment

Det finns dåliga idéer. Men så finns det osannolikt dåliga idéer, du kan knappt föreställa dig hur någon kan ha tänkt tanken. Som att Jimmie Åkesson vill etablera omskolningsläger – ”internatskolor” – där stökiga ungdomar ska marschera i takt och fostras till präktig svenskhet …

dumstrut1Sedan kommer professor John Hassler med ett förslag som är helt uppåt väggarna knasigt … Sverige har en förmögenhet på mer än 1 300 miljarder kronor som vi skulle kunna använda till att bromsa klimatkrisen. Men politikerna väljer att tvångsmässigt betala av en krympande statsskuld.

Hassler är frustrerad. Men han har en idé: Sverige måste låna. Det kan göras till en fast tioårig ränta på minus 0,02 procent. Bra! Låna för att börja satsa tungt? Nej, han vill konstruera en global aktiefond. Mindre bra …

Det är som om han anar att många kommer tycka att det är besynnerligt att frigöra 1 000 miljarder bara för att slänga dem på roulettbordet, när vi skulle kunna investera direkt i svensk infrastruktur.

”Orsaken är att pengarna för närvarande med stor sannolikhet skulle hamna i investeringsprojekt med låg samhällsekonomisk avkastning”, skriver Hassler i Svenska Dagbladet – utan att berätta hur han uppskattat denna sannolikhet eller vilka projekt han menar.

1 000 miljarder är nästan 100 gånger mer än liggande klimat- och miljöbudget. 50 miljarder är nästan fem gånger mer.

Andreas Gustavsson / ETC

Efter att ha tagit del av herr Hasslers analys, slog det mig att jag nog hört det här förut …

Consistency and rationality

4 Dec, 2019 at 00:00 | Posted in Economics | 7 Comments

consistentAxioms of ‘internal consistency’ of choice, such as the weak and the strong axioms of revealed preference … are often used in decision theory, micro-economics, game theory, social choice theory, and in related disciplines …

Can a set of choices really be seen as consistent or inconsistent on purely internal grounds, without bringing in something external to choice, such as the underlying objectives or values that are pursued or acknowledged by choice? …

The presumption of inconsistency may be easily disputed, depending on the context, if we know a bit more about what the person is trying to do. Suppose the person faces a choice at a dinner table between having the last remaining apple in the fruit basket (y) and having nothing instead (x), forgoing the nice-looking apple. She decides to behave decently and picks nothing (x), rather than the one apple (y). If, instead, the basket had contained two apples, and she had encountered the choice between having nothing (x), having one nice apple (y) and having another nice one (z), she could reasonably enough choose one (y), without violating any rule of good behavior. The presence of another apple (z) makes one of the two apples decently choosable, but this combination of choices would violate the standard consistency conditions, including Property a, even though there is nothing particularly “inconsistent” in this pair of choices (given her values and scruples) … We cannot determine whether the person is failing in any way without knowing what he is trying to do, that is, without knowing something external to the choice itself.

Amartya Sen

Being able to model a credible world, a world that somehow could be considered somehow ‘similar’ to the real world is not the same as investigating the real world. The minimalist demand on models in terms of ‘credibility’ and ‘consistency’ has to give away to stronger epistemic demands. Claims in a ‘consistent’ model do not per se give a warrant for exporting the claims to real-world target systems.

Questions of external validity are important more specifically also when it comes to microfounded macro models. It can never be enough that these models somehow are regarded as internally consistent. One always also has to pose questions of consistency with the data. Internal consistency without external validity is worth nothing.

Yours truly has 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.

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.

To have ‘consistent’ models and ‘valid’ evidence is not enough. What economics needs are real-world relevant models and sound evidence. Aiming only for ‘consistency’ and ‘validity’ is setting the economics aspirations level too low for developing a realist and relevant science.

Economics is not mathematics or logic. It’s about society. The real world.

Transmogrifying Keynes

2 Dec, 2019 at 15:11 | Posted in Economics | 1 Comment

econtalkThe other day, on the way home after having attended an economics conference, yours truly tried to beguile the way by listening to a podcast of EconTalk where Garett Jones of George Mason University talked with EconTalk host Russ Roberts about the ideas of Irving Fisher on debt and deflation.

Jones’s thoughts on Fisher were thought-provoking and interesting, but in the middle of the discussion Roberts started to ask questions on the relation between Fisher’s ideas and those of Keynes, saying more or less something like “Keynes generated a lot of interest in his idea that the labour market doesn’t clear … because the price for labour does not adjust, i. e. wages are ‘sticky’ or ‘inflexible’.”

This is of course pure nonsense. For although Keynes in General Theory devoted substantial attention to the subject of wage rigidities, he certainly did not hold the view that wage rigidity was the reason behind high unemployment and other macroeconomic problems. To Keynes, recessions, depressions and faltering labour markets were not basically a problem of “sticky wages.”

Since unions/workers, contrary to classical assumptions, make wage-bargains in nominal terms, they will – according to Keynes – accept lower real wages caused by higher prices, but resist lower real wages caused by lower nominal wages. However, Keynes held it incorrect to attribute “cyclical” unemployment to this diversified agent behaviour. During the depression money wages fell significantly and – as Keynes noted – unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment.

In any specific labour market, lower wages could, of course, raise the demand for labour. But a general reduction in money wages would leave real wages more or less unchanged. The reasoning of the classical economists was, according to Keynes, a flagrant example of the “fallacy of composition.” Assuming that since unions/workers in a specific labour market could negotiate real wage reductions via lowering nominal wages, unions/workers, in general, could do the same, the classics confused micro with macro.

Lowering nominal wages could not – according to Keynes – clear the labour market. Lowering wages – and possibly prices – could, perhaps, lower interest rates and increase investment. But to Keynes, it would be much easier to achieve that effect by increasing the money supply. In any case, wage reductions were not seen by Keynes as a general substitute for an expansionary monetary or fiscal policy.

Even if potentially positive impacts of lowering wages exist, there are also more heavily weighing negative impacts – management-union relations deteriorating, expectations of on-going lowering of wages causing delay of investments, debt deflation et cetera.

So, what Keynes actually did argue in General Theory, was that the classical proposition that lowering wages would lower unemployment and ultimately take economies out of depressions was ill-founded and basically wrong.

To Keynes, flexible wages would only make things worse by leading to erratic price-fluctuations. The basic explanation for unemployment is insufficient aggregate demand, and that is mostly determined outside the labour market.

To mainstream neoclassical theory, the kind of unemployment that occurs is voluntary, since it is only adjustments of the hours of work that these optimizing agents make to maximize their utility. Keynes, on the other hand, writes in General Theory:

The classical theory … is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemployment, which is in the above sense involuntary, cannot occur … Writers in the classical tradition, overlooking the special assumption underlying their theory, have been driven inevitably to the conclusion, perfectly logical on their assumption, that apparent unemployment (apart from the admitted exceptions) must be due at bottom to a refusal by the unemployed factors to accept a reward which corresponds to their marginal productivity …

Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment – if there be such a thing (and who will deny it?). The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight – as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required to-day in economics. We need to throw over the second postulate of the classical doctrine and to work out the behaviour of a system in which involuntary unemployment in the strict sense is possible.

gtUnfortunately, Roberts’s statement is not the only example of this kind of utter nonsense on Keynes. Similar distortions of Keynes’s views can be found in, e. g., the economics textbooks of the “New Keynesian” – a grotesque misnomer – Greg Mankiw. How is this possible? Probably because these economists have but a very superficial acquaintance with Keynes’s own works, and rather depend on second-hand sources like Hansen, Samuelson, Hicks and the likes.

Fortunately, there is a solution to the problem. Keynes books are still in print. Read them!!

Rethinking economics in Copenhagen

1 Dec, 2019 at 13:25 | Posted in Economics | Leave a comment


Maurice Allais on empirics and theory

30 Nov, 2019 at 14:08 | Posted in Economics | 6 Comments

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 the model and lose sight of reality.

Mainstream — neoclassical — economics has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. Hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modelling 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 aspirations level too low for developing a realist and relevant science.

What is (wrong with) mainstream economics?

28 Nov, 2019 at 21:15 | Posted in Economics | 13 Comments

If you want to know what is neoclassical economics — or mainstream economics as we call it nowadays — and turn to Wikipedia you are told that

fund neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by cost-constrained firms employing available information and factors of production, in accordance with rational choice theory.

The basic problem with this definition of neoclassical (mainstream) economics — arguing that its differentia specifica is its use of demand and supply, utility maximization and rational choice — is that it doesn’t get things quite right. As we all know, there is an endless list of mainstream models that more or less distance themselves from one or the other of these characteristics. So the heart of mainstream economic theory lies elsewhere.

The essence of mainstream economic theory is its almost exclusive use of a deductivist methodology. A methodology that is more or less used without a smack of argument to justify its relevance.

The theories and models that mainstream economists construct describe imaginary worlds using a combination of formal sign systems such as mathematics and ordinary language. The descriptions made are extremely thin and to a large degree disconnected to the specific contexts of the targeted system than one (usually) wants to (partially) represent. This is not by chance. These closed formalistic-mathematical theories and models are constructed for the purpose of being able to deliver purportedly rigorous deductions that may somehow 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 economic models are rather based on formalistic mathematical tractability. In the models they appear as unrealistic 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 can move from (partial) falsehoods in theories and models to truth in real-world target systems does not take us very far unless a thorough explication of the relation between theory, model and the real world target system is made. If models assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. 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.

Henry Louis Mencken once wrote that “there is always an easy solution to every human problem – neat, plausible and wrong.” And mainstream economics has indeed been wrong. Its main result, so far, has been to demonstrate the futility of trying to build a satisfactory bridge between formalistic-axiomatic deductivist models and real-world target systems. Assuming, for example, perfect knowledge, instant market clearing and approximating aggregate behaviour with unrealistically heroic assumptions of representative actors, just will not do. The assumptions made, surreptitiously eliminate the very phenomena we want to study: uncertainty, disequilibrium, structural instability and problems of aggregation and coordination between different individuals and groups.

The punch line is that most of the problems that mainstream economics is wrestling with, issues from its attempts at formalistic modelling per se of social phenomena. Reducing microeconomics to refinements of hyper-rational Bayesian deductivist models is not a viable way forward. It will only sentence to irrelevance the most interesting real-world economic problems.

If the ultimate criterion of success of a deductivist system is to what extent it predicts and coheres 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. Deductivist models and methods disconnected from reality are not relevant to predict, explain or understand real-world economic target systems. These systems do not conform to the restricted closed-system structure the mainstream modelling strategy presupposes.

Mainstream economic theory still today consists mainly of investigating economic models. It has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in mainstream economic theory, where models largely function as substitutes for empirical evidence.

What is wrong with mainstream economics is not that it employs models per se, but that it employs poor models. They are poor because they do not bridge to the real-world target systems in which we live. Hopefully humbled by the manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on mathematical deductivist modelling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

Macroeconomic uncertainty

27 Nov, 2019 at 10:16 | Posted in Economics | 2 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 catastrophe!

Randomised controlled trials — a retreat from the bigger questions

24 Nov, 2019 at 19:13 | Posted in Economics | 1 Comment

Unknown1Nobel prizes are usually given in recognition of ideas that are already more or less guaranteed a legacy. But occasionally they prompt as much debate as admiration. This year’s economics award, given to Abhijit Banerjee, Esther Duflo and Michael Kremer … recognised the laureates’ efforts to use randomised controlled trials (RCTs) to answer social-science questions … RCT evangelists sometimes argue that their technique is the “gold standard”, better able than other analytical approaches to establish what causes what. Not so, say some other economists … Results are contextually dependent in ways that are hard to discern; a finding from a study in Kenya might not reveal much about policy in Guatemala … 

Advanced economies grew rich as a result of a broad transformation that affected everything from the aspirations of working people to the functioning of the state, not by making a series of small, technocratic changes, no matter how well-supported by evidence …

Indeed, some economists have a sneaking suspicion that the rise of RCTs represents a pivot not just to smaller questions but also to smaller ambitions … Researchers are still guided by theory, which shapes the empirical questions that get asked and whether results are interpreted as capturing some deeper aspect of an economy’s nature. But a world in which economists are mostly policy-tweakers—or “plumbers”, in Ms Duflo’s phrase—is very different from the one to which many economists once aspired.

The Economist

It is nowadays widely believed among mainstream economists that the scientific value of randomization — contrary to other methods — is totally uncontroversial and that randomized experiments are free from bias. When looked at carefully, however, there are in fact few real reasons to share this optimism on the alleged ’experimental turn’ in economics. Strictly seen, randomization does not guarantee anything.

‘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. Causes deduced in an experimental setting still have to show that they come with an export-warrant to their target populations.

the-right-toolThe almost religious belief with which its propagators — like Duflo, Banerjee and Kremer — portray it, cannot hide the fact that RCTs cannot be taken for granted to give generalizable results. That something works somewhere is no warranty for us to believe it to work for us here or even that it works generally.

The present RCT idolatry is dangerous. Believing there is only one really good evidence-based method on the market — and that randomization is the only way to achieve scientific validity — blinds people to searching for and using other methods that in many contexts are better. RCTs are simply not the best method for all questions and in all circumstances. Insisting on using only one tool often means using the wrong tool.

This year’s ‘Nobel prize’ winners think that economics should be based on evidence from randomised experiments and field studies. Duflo et consortes want to give up on ‘big ideas’ like political economy and institutional reform and instead go for solving more manageable problems the way plumbers do. But that modern time ‘marginalist’ approach sure can’t be the right way to move economics forward and make it a relevant and realist science. A plumber can fix minor leaks in your system, but if the whole system is rotten, something more than good old fashion plumbing is needed. The big social and economic problems we face today is not going to be solved by plumbers performing RCTs.

Economics — enslaved by the wrong theory

22 Nov, 2019 at 16:18 | Posted in Economics | 8 Comments

The more I learned about economics, the more I discovered a landscape that is surpassingly strange. Like the land of Mordor, it is dominated by a single theoretical edifice that arose like a volcano early in the 20th century and still dominates the landscape. The edifice is based upon a conception of human nature that is profoundly false, defying the dictates of common sense, before we even get to the more refined dictates of psychology and evolutionary theory. Yet, efforts to move the theory in the direction of common sense are stubbornly resisted.

kickThere is plenty of dissent among economists, and some of the best are working the hardest for change. The folks who award the Nobel Prize in economics don’t like the edifice that much either, and often add their weight by awarding the prize to the contrarians. Yet, even with all that talent, effort, and the prestige associated with the Nobel Prize, the edifice remains standing in one spot like a volcano adding to its own height and spewing out toxic policies. Why does it resist change? One reason is ideological, as we shall see, but another reason involves path dependence. Neoclassical economics provides an outstanding example of the “you can’t get there from here” principle in academic cultural evolution. It will never move if we try to change it incrementally. It must be replaced wholesale with a more realistic conception of human nature.

David Sloan Wilson

Indeed — mainstream economics has to be replaced wholesale!

What most mainstream economists try to do in face of the obvious theoretical and behavioural inadequacies of the theory, is to marginally mend it. But that cannot be the right attitude when facing scientific anomalies. When models are plainly wrong, you’d better replace them! Instead of mending the broken pieces it would be much better to concentrate on developing descriptively accurate models.

Let me just take one example — expected utility theory — to show how right Wilson is in his argumentation.

Expected utility theory is seriously flawed since it does not take into consideration the basic fact that people’s choices are influenced by changes in their wealth. Where standard microeconomic theory assumes that preferences are stable over time, behavioural economists have forcefully again and again shown that preferences are not fixed, but vary with different reference points. How can a theory that doesn’t allow for people having different reference points from which they consider their options have a (typically unquestioned) axiomatic status within economic theory?

Much of what experimental and behavioural economics come up with, is really bad news for mainstream economic theory. It unequivocally shows that expected utility theory is nothing but transmogrifying truth.

But mainstream economists do not see this​ since they have the weird idea that economics is nothing but a smorgasbord of ‘thought experimental’ models. For every purpose you may have, there is always an appropriate model to pick.

But, really, there have​ to be some limits to the flexibility of a theory!

If you freely can substitute any part of the core and auxiliary sets of assumptions and still consider that you deal with the same theory, well, then it’s not a theory, but a chameleon.

The big problem with the mainstream cherry-picking view of models is of course that the theories and models presented get totally immunized against all critique.  A sure way to get rid of all kinds of ‘anomalies,’ yes, but at a far too high price. So people do not behave optimizing? No problem, we have models that assume satisficing! So people do not maximize expected utility? No problem, we have models that assume … etc., etc …

A theory that accommodates for any observed phenomena whatsoever by creating a new special model for the occasion, and a fortiori having no chance of being tested severely and found wanting, is of little real value. It must be replaced wholesale with more relevant and realistic theory.

The Rhetoric of Deirdre McCloskey’s Rhetoric

22 Nov, 2019 at 13:14 | Posted in Economics | 1 Comment

This is not new to most of you of course. You are already steeped in McCloskey’s Rhetoric. Or you ought to be. After all economists are simply telling stories about the economy. Sometimes we are taken in. Sometimes we are not.

spin-meme-generator-dont-say-capitalism-replace-it-with-either-economic-freedom-or-free-market-3ba401Unfortunately McCloskey herself gets a little too caught up in her stories. As in her explanation as to how she can be both a feminist and a free market economist:

“The market is the great liberator of women; it has not been the state, which is after all an instrument of patriarchy … The market is the way out of enslavement from your dad, your husband, or your sons. … The enrichment that has come through allowing markets to operate has been a tremendous part of the learned freedom of the modern women.”

Notice the binary nature of the world in this story. There are only the market (yea!) and the state (boo!). There are no other institutions. Whole swathes of society vanish or are flattened into insignificance. The state is viewed as a villain that the market heroically battles against to advance us all.

It is a ripping tale.

It is shallow and utterly misleading.

Peter Radford

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