Mainstream economics — a form of brain damage

3 Oct, 2022 at 09:43 | Posted in Economics | 1 Comment

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It is difficult to understand why mainstream economists keep on using their unreal and irrelevant models! Sure, you get academic accolades and give the impression of having something deep and ‘scientific’ to say, but that should count for nothing if you’re in the truth business. As long as that kind of modelling output doesn’t come with the accompanying warning text “NB! This is model-based results based on tons of more or less unsubstantiated assumptions,” we should keep on scrutinising and criticising it.

Yours truly appreciates scientists like David Suzuki. With razor-sharp intellects, they immediately go for the essentials. They have no time for bullshit. And neither should we.

Free trade delusions

29 Sep, 2022 at 13:51 | Posted in Economics | 10 Comments

Trump, the death of 'free trade' and the rise of bilateral trade agreementsWe must ask why economists still ignore the obvious reality that application of their standard free trade model failed to generate broad-based income gains. Why do many still turn a blind eye to the mounting evidence of the social, economic, and human costs of the globalization experiment? Some were genuinely misled by the fancy algebra. But many know their models are irrelevant. They were seduced by the surprising willingness of political leaders to believe their sophistries and appoint them to positions of money, power, and influence … Paul Samuelson, himself a lifelong skeptic of free trade, once said that economics advances funeral by funeral. Old economists find it hard to give up on the theories that made their careers.

I will give the final word to John Maynard Keynes, who was also a free trade skeptic:

“Free trade assume that if you throw men out of work in one direction you re-employ them in another. As soon as that link is broken the whole of the free trade argument brakes down.”

Jeff Ferry

Thought-provoking and interesting. But I think Ferry misses the most powerful argument against the Ricardian free trade paradigm — what counts today is not comparative advantage, but absolute advantage.

David_Ricardo

Since Ricardo’s days, the assumption of internationally immobile factors of production has been made totally untenable in our globalised world. Our modern corporations maximize their profits by moving capital and technologies to where it is cheapest to produce. So we’re actually in a situation today where absolute — not comparative — advantages rule the roost when it comes to free trade.

And in that world, what is good for corporations is not necessarily good for nations.

Riksbankens usla prognoser

28 Sep, 2022 at 14:35 | Posted in Economics | 1 Comment

Ekonomiexperter har oftast fel i sina prognoser - Dagens PSNationalekonomer hävdar ofta — vanligtvis med hänvisning till Milton Friedman och hans metodologiska individualism — att det inte gör så mycket om de antaganden som deras modeller bygger på är realistiska eller ej. Vad som betyder något är om de prognoser som modellerna resulterar i visar sig vara riktiga eller ej.

Om det verkligen är så, är den enda slutsats vi kan dra att dessa modeller och prognoser hör hemma i papperskorgen. För oj vad fel de har haft!

Riksbanken har sedan 2007 använt sig av så kallade räntebanor som prognosmedel. Genomslaget har blivit stort — trots att det är lätt att konstatera att prognoserna genomgående slagit rejält fel. Som de flesta andra prognosmakare missade Riksbanken både finanskrisen år 2007 och dess allvarliga effekter. Men också under de senaste åren har Riksbankens ränte- och inflationsprognoser visat sig vara usla.

Inte minst under åren 2021 och 2022 har Riksbankens inflationsprognoser fått en allt sämre träffsäkerhet. Under de här åren har prognoserna i genomsnitt avvikit från utfallet med mer än en procentenhet på tre månaders sikt. Klart underkänt.

För några år sedan bjöd yours truly in fondförvaltaren Alf Riple — med bakgrund som chefsanalytiker på Nordea och rådgivare på norska Finansdepartementet — att föreläsa på min kurs Finanskriser – orsaker, förlopp och konsekvenser. Enligt Alf fanns det ingen anledning att vara speciellt förvånad över Riksbankens usla prognoser:

ripleVad är värst, en dålig prognos eller ingen prognos? Svaret är enkelt. Så fort du exponeras för en prognos är du i en sämre position än du var innan …

Expertprognoser gör med all sannolikhet mer skada än nytta. Det är därför det lönar sig att snabbt bläddra förbi tidningsartiklar med rubriker som ‘Så kommer börsen gå i år’ …

Tänk dig att du har som jobb att sköta ditt företags valutaväxlingar … Du måste bestämma att antingen säkra växelkursen redan nu, eller vänta tills beloppet anländer och växla till den kurs som gäller då … Som tur är har du analytikernas dollarprognoser till hjälp. De gör det inte ett dugg lättare att förutspå dollarkursen. Men de kan hjälpa dig ändå.

Om du lyckas göra rätt spelar inte analyserna någon större roll. Men om dollarn faller som en sten och du har valt att inte säkra växelkursen, kommer företagsledningen att vilja veta varför du har sumpat bort företagets pengar … Du kan dra en lång historia om historiska valutatrender, ekonomisk tillväxt, betalningbalans och ränteskillnader. Till slut kommer alla att hålla med om att du agerade rätt mot bakgrund av den information du hade på förhand.

Analyserna gör att du kommer undan. Särskilt de som hade mest fel … Prognoserna har inget ekonomiskt värde, vare sig för företaget eller samhället. Värdet är att de räddar ditt skinn.

Med andra ord — dessa arrogant självsäkra ekonomer med sina ‘rigorösa’ och ‘precisa’ matematisk-statistiska-ekonometriska modeller har genomgående fel. Och det är alla vi andra som får betala för det!

Liz Truss’ trickle-down economics

22 Sep, 2022 at 22:45 | Posted in Economics | 6 Comments

U.K. Prime Minister Liz Truss has said she’s ready to make “unpopular decisions” such as tax cuts and boosting bonuses for wealthy bankers to grow the economy, even though they obviously benefit the wealthiest more than the poor

ECONOMICS

Truss and her conservative government are to give U.K. corporations and shareholders a gift. The only trickle-down to workers to be going on is probably best described in the picture below …

The gender pay gap and discrimination

16 Sep, 2022 at 15:26 | Posted in Economics | Leave a comment

The Gender Pay Gap: It's Complicated – WHUS RadioSpending 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 have shown, women may be ‘structural’ victims of impersonal social mechanisms that in different ways aggrieve them.

Looking at wage discrimination from a graph theoretical point of view one could arguably identify three paths between gender discrimination (D) and wages (W):

  1. D => W
  2. D => OCC => W
  3. D => OCC <= A => W

where occupation (OCC) is a mediator variable and unobserved ability (A) is a variable that affects both occupational choice and wages. The usual way to find out the effect of discrimination on wages is to perform a regression ‘controlling’ for OCC to get what one considers a ‘meaningful’ estimate of real gender wage discrimination:

W = a + bD + cOCC

The problem with this procedure is that conditioning on OCC not only closes the mediation path (2) but — since OCC is a ‘collider’ — opens up the backdoor path (3) and creates a spurious and biased estimate. Forgetting that may even result in the gender discrimination effect being positively related to wages! So if we want to go down the standard path (controlling for OCC) we certainly also have to control for A if we want to have a chance of identifying the causal effect of gender discrimination on wages. And that may, of course, be tough going, since A often (as here) is unobserved and perhaps even unobservable …

Uncertainty

15 Sep, 2022 at 13:47 | Posted in Economics | Leave a comment

Analytical Economics: 9780674281622: Economics Books @ Amazon.comIt may be argued … that the betting quotient and credibility are substitutable in the same sense in which two commodities are: less bread but more meat may leave the consumer as well off as before. If this were, then clearly expectation could be reduced to a unidimensional concept … However, the substitutability of consumers’ goods rests upon the tacit assumption that all commodities contain something — called utility — in a greater or less degree; substitutability is therefore another name for compensation of utility. The crucial question in expectation then is whether credibility and betting quotient have a common essence so that compensation of this common essence would make sense.

Just like Keynes underlined with his concept of ‘weight of argument,’ Georgescu-Roegen, with his similar concept of ‘credibility,’ underscores the impossibility of reducing uncertainty to risk and thereby being able to describe choice under uncertainty with a unidimensional probability concept.

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. Who 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 of 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 both Georgescu-Roegen and Keynes convincingly argued, 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 many activities, relations, processes, and events are of the Georgescu-Roegen-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.

Some 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 disaster.

The danger of teaching the wrong thing all too well

11 Sep, 2022 at 12:46 | Posted in Economics | 1 Comment

It is well known that even experienced scientists routinely misinterpret p-values in all sorts of ways, including confusion of statistical and practical significance, treating non-rejection as acceptance of the null hypothesis, and interpreting the p-value as some sort of replication probability or as the posterior probability that the null hypothesis is true …

servicemanIt is shocking that these errors seem so hard-wired into statisticians’ thinking, and this suggests that our profession really needs to look at how it teaches the interpretation of statistical inferences. The problem does not seem just to be technical misunderstandings; rather, statistical analysis is being asked to do something that it simply can’t do, to bring out a signal from any data, no matter how noisy. We suspect that, to make progress in pedagogy, statisticians will have to give up some of the claims we have implicitly been making about the effectiveness of our methods …

It would be nice if the statistics profession was offering a good solution to the significance testing problem and we just needed to convey it more clearly. But, no, … many statisticians misunderstand the core ideas too. It might be a good idea for other reasons to recommend that students take more statistics classes—but this won’t solve the problems if textbooks point in the wrong direction and instructors don’t understand what they are teaching. To put it another way, it’s not that we’re teaching the right thing poorly; unfortunately, we’ve been teaching the wrong thing all too well.

Andrew Gelman & John Carlin

Teaching both statistics and economics, yours truly can’t but notice that the statements “give up some of the claims we have implicitly been making about the effectiveness of our methods” and “it’s not that we’re teaching the right thing poorly; unfortunately, we’ve been teaching the wrong thing all too well” obviously apply not only to statistics …

And the solution? Certainly not — as Gelman and Carlin also underline — to reform p-values. Instead, we have to accept that we live in a world permeated by genuine uncertainty and that it takes a lot of variation to make good inductive inferences.

Sounds familiar? It definitely should!

The standard view in statistics — 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 in his seminal A Treatise on Probability (1921), ‘more of the same’ is not what is important when making inductive inferences. It’s a question of ‘more but different’ — i.e., variation.

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’). Running 10 replicative experiments does not make you as ‘sure’ of your inductions as when running 10 000 varied experiments — even if the probability values are the same.

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.’

Svensk inflationsberäkning — rena skämtet!

28 Aug, 2022 at 19:14 | Posted in Economics | Comments Off on Svensk inflationsberäkning — rena skämtet!

Girig-Sverige - Natur & KulturDen andra saken som framgår tydligt vid en titt på statistiken är vad som saknas i KPI: prisuppgången på bostäder.

Posten boende står visserligen för hela 25 procent av indexet. Kostnaden har sedan mellan 1996 och 2021 stigit med drygt 40 procent.

Vänta nu här, säger alla som tillbringat mer än fem minuter pà sajten Hemnet de senaste 15 åren. Är det inte en alleles for låg siffra?

Visst är det så. Det genomsnittliga kvadratmeterpriset på bostadsrätter i Sverige har enligt Svensk Mäklarstatistik stigit med 800 procent mellan 1996 och 2021. Villapriserna har ökat med 435 procent och i Stockholm med 550 procent, visar statistik från SCB.

Varför har inte detta drivit upp inflationen?

Den enkla förklaringen är att priset på den enskilt största affären i de flesta människors liv, bostaden, inte ingår i KPI. Det som räknas med är hyror, avgifter och räntekostnader för bostadsrätter samt drifts- och räntekostnader för villor …

Samtidigt som stigande bostadspriser ersatt vädret som det kanske vanligaste samtalsämnet svenskar emellan och lett till att hushållen dragit på sig några tusen miljarder i bolån, är det alltså en icke-fràga för SCB vid beräkning av inflationen och därmed för Riksbanken när den sätter sin ränta.

Brauchen wir eine Übergewinnsteuer?

25 Aug, 2022 at 14:08 | Posted in Economics | Comments Off on Brauchen wir eine Übergewinnsteuer?
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Economics as ideology

25 Aug, 2022 at 11:26 | Posted in Economics | Comments Off on Economics as ideology

Study proves trickle-down didn't trickle | PoliticsNCTax cuts for the wealthy were supposed to stimulate growth and make everyone better off. There was dispute about this within the profession, but there were also many economists who provided intellectual support for the claim that tax cuts will create growth and widespread prosperity. The evidence from the Bush and Reagan tax cuts does not support this claim, but it is still made by some economists and this gives those who are serving wealthy interests or who want to force government to shrink by starving it of revenue the cover they need for their arguments …

We do need more humility about what we do and do not know, more willingness to change our minds when the evidence disagrees with our favorite theoretical model, and the willingness to acknowledge disagreement within the profession. But most of all we need to take a strong stand against those inside and outside the profession who misuse economic theory and empirical results for political and ideological purposes.

Mark Thoma

You never hear anyone at our seminars telling the lecturer that the assumptions on which his models are built are only made for ideological reasons. But that does not necessarily mean — whether on the surface or not — that academic analysis is judged on its merits. What it means is that we have a catechism that no one dares to question. And that catechism has become hegemonic for particular reasons, one of which may very well be of an ideological nature. When the neoclassical theory was developed in the late 19th century one of the reasons was that some economists — e.g. Böhm-Bawerk — thought that the Ricardian (labour value) tradition had become too radical and could be used as a dangerous weapon in the class struggle. Marginalism was explicitly seen as a way to counter that.

Even though some economists seem to think that facts are bound to win in the end, yours truly begs to differ.

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

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

So, given this lack of empirical evidence, why do mainstream economists still stick to using these kinds of theories and models building on blatantly ridiculous assumptions? Well, one reason, I would argue, is of an ideological nature. Those models and the assumptions they build on standardly have a neoliberal or market-friendly bias. I guess that is also one of the — ideological — reasons those models and theories are so dear to many Chicago economists and ‘New Keynesian’ macroeconomists …

What’s the point of all science?

12 Aug, 2022 at 14:44 | Posted in Economics | 1 Comment

Method in Social Science: A Realistic Approach by Andrew Sayer (1992-05-03):  Amazon.com: BooksThe point of all science, indeed all learning and reflection, is to change and develop our understandings and reduce illusion. This is not just an external and contingent sociological condition of learning but its constitutive force, which not only drives it but shapes its form. Without this universal necessary condition, none of the particular methodological and ethical norms of science and learning in general has any point. Learning, as the reduction of illusion and ignorance, can help to free us from domination by hitherto unacknowledged constraints, dogmas and falsehoods.

Jürgen Habermas and Hans Albert on the weaknesses of mainstream economics

11 Aug, 2022 at 13:41 | Posted in Economics | 5 Comments

On the Logic of the Social Sciences | Jurgen Habermas, Shierry Weber  Nicholsen, Jerry A. Stark | Paperback Octavo The weaknesses of social-scientific normativism are obvious. The basic assumptions refer to idealized action under pure maxims; no empirically substantive lawlike hypotheses can be derived from them. Either it is a question of analytic statements recast in deductive form or the conditions under which the hypotheses derived could be definitively falsified are excluded under ceteris paribus stipulations. Despite their reference to reality, the laws stated by pure economics have little, if any, information content. To the extent that theories of rational choice lay claim to empirical-analytic knowledge, they are open to the charge of Platonism (Modellplatonismus). Hans Albert has summarized these arguments: The central point is the confusion of logical presuppositions with empirical conditions. The maxims of action introduced are treated not as verifiable hypotheses but as assumptions about actions by economic subjects that are in principle possible. The theorist limits himself to formal deductions of implications in the unfounded expectation that he will nevertheless arrive at propositions with empirical content. Albert’s critique is directed primarily against tautological procedures and the immunizing role of qualifying or “alibi” formulas.

This critique of normative-analytic methods argues that general theories of rational action are achieved at too great a cost when they sacrifice empirically verifiable and descriptively meaningful information … Against the recent normativism of pure economics, Albert adduces the old viewpoint that an economic theory must make assumptions about the actions of subjects in their social roles … The system of exchange relationships is so little isolated from society as a whole that the social behavior of economic subjects cannot be comprehended independently of the institutional context, that is, the extra-economic motivational patterns: “Immunization against· the influence of so-called extra-economic factors leads to immunization against experience as such.”

Seen from a deductive-nomological perspective, typical economic models (M) usually consist of a theory (T) — a set of more or less general (typically universal) law-like hypotheses (H) — and a set of (typically spatio-temporal) auxiliary assumptions (A). The auxiliary assumptions give ‘boundary’ descriptions such that it is possible to deduce logically (meeting the standard of validity) a conclusion (explanandum) from the premises T & A. Using this kind of model game theorists are (portrayed as) trying to explain (predict) facts by subsuming them under T, given A. An obvious problem with the formal-logical requirements of what counts as H is the often severely restricted reach of the ‘law.’ In the worst case, it may not be applicable to any real, empirical, relevant, situation at all. And if A is not true, then M does not really explain (although it may predict) at all. Deductive arguments should be sound – valid and with true premises – so that we are assured of having true conclusions. Constructing game theoretical models assuming ‘common knowledge’ and ‘rational expectations,’ says nothing of situations where knowledge is ‘non-common’ and  expectations are ‘non-rational.’

Building theories and models that are ‘true’ in their own very limited ‘idealized’ domain is of limited value if we cannot supply bridges to the real world. ‘Laws’ that only apply in specific ‘idealized’ circumstances —  in ‘nomological machines’ — are not the stuff that real science is built of.

When confronted with the massive empirical refutations of almost all models they have set up, many game theorists react by saying that these refutations only hit A (the Lakatosian ‘protective belt’), and that by ‘successive approximations’ it is possible to make the models more readily testable and predictably accurate. Even if T & A1 do not have much of empirical content if by successive approximation we reach, say, T & A25, we are to believe that we can finally reach robust and true predictions and explanations.

Hans Albert’s ‘Model Platonism’ critique shows that there is a strong tendency for modelers to use the method of successive approximations as a kind of ‘immunization,’ taking for granted that there can never be any faults with the theory. Explanatory and predictive failures hinge solely on auxiliary assumptions. That the kind of theories and models used by game theorists should all be held non-defeasibly corroborated, seems, however — to say the least — rather unwarranted.

Retreating into looking upon models and theories as some kind of ‘conceptual exploration,’ and giving up any hopes whatsoever of relating theories and models to the real world is pure defeatism. Instead of trying to bridge the gap between models and the world, they simply decide to look the other way.

To yours truly, this kind of scientific defeatism is equivalent to surrendering our search for understanding and explaining the world we live in. It cannot be enough to prove or deduce things in a model world. If theories and models do not directly or indirectly tell us anything about the world we live in — then why should we waste any of our precious time on them?

Ekonomi och matematik

11 Aug, 2022 at 10:01 | Posted in Economics | 1 Comment

Nationalekonomin har under de senaste femtio åren kommit att i allt högre grad innebära ett granskande av världen genom “matematikens järngaller”. Precis som Bertrand Russell har många ekonomer hoppats på att med tiden konstruera “en matematik för mänskligt beteende som är lika exakt som matematiken för maskiner.” För ekonomerna har detta ofta kommit att innebära att om ett fenomen inte låter sig passas in i gallret så avvisas det som falskt. Och tyvärr har trivialitet och irrelevans ofta blivit det pris de fått betala för formalism och deduktivism.

Fotolia_44095455_XSDe regler som gäller för manipulerandet av matematiska storheter behöver inte motsvaras av de regler och lagar som styr det verkliga systemet. Detta är säkert också en av orsakerna till att så många matematiska ekonomiska teorier varit utan framgång. Istället för att okritiskt anamma en matematisk representationsform borde man fråga sig vilka förutsättningar som de reala processerna och objekten måste uppfylla för att matematiska representationer av dem ska vara adekvata.

Att ekonomisk vetenskap är mer kvantitativ än andra samhällsvetenskaper beror till en viss del på att dess studieobjekt naturligt till stor del är kvantitativa (pengar, räkenskaper, löner, vinster, m m). Detta kan dock inte utgöra ett försvar för att driva matematiseringen in absurdum eller för att avstå från att fråga sig vad de matematiska modellerna och kvantitativa måtten är modeller för och mått av.

Att så mycket av dagens ekonomiska vetenskap — fortfarande — struntar i att söka orsaksrelationer och istället nöjer sig med att fastslå korrelationer och ömsesidiga samband beror till del på det matematiska språk man använder sig av. Matematik kan användas för att kalkylera och för logisk härledning. Men axiom och teorem förklarar per se inte ett fenomen i termer av orsak. Det matematiska språket räcker ofta inte till för våra förklaringsaspirationer.

En av de främsta orsakerna till att många ekonomiska fenomen aldrig fått någon förklaring kan vara att många i sig intressanta egenskaper hos ekonomin (processer, strukturer, etc) bara beaktas i den mån de låter sig reduceras till regelbundna händelser och matematiskt identifierbara mönster.

Matematik kan inte representera interna relationer och strukturer. De som utvecklar de ekonomiska matematiska modellerna har därför en tendens att avstå från förklaringar av vad det ekonomiska handlandet beror på och nöjer sig i stället med att kalkylera och beräkna effekterna av handlandet. Detta gör att de matematiska ekonomerna ofta förblir påfallande omedvetna om de samhälleliga relationer och strukturer som styr de variabler man laborerar med i sina modeller. Komplext handlande reduceras till en kombination av enkla handlingar, som i sin tur reduceras till responser på stimuli – som om stimuli och respons var oberoende av det kontextuella sammanhanget. Kunskap om kvalitativa förhållanden kastas bort för att man i stället ska kunna koncentrera sig på tillvarons kvantifierbara dimensioner. Resultatet blir allt för ofta att modeller och matematik får bli ett substitut för tänkande. Den franske 1800-talsdiplomaten Charles Talleyrand hävdade att människor fått talets gåva för att dölja sina tankar. Ibland kan man tyvärr få intrycket att ekonomernas matematiska modeller fyller samma funktion.

Matematiseringsvågen har gjort ekonomerna alltför fixerade vid sina formella, matematiska modeller. Ställda inför kritiken att de inte löser verkliga problem reagerar många av dagens matematiska ekonomer likt Saint-Exupérys Store Geograf som på den Lille Prinsens frågor svarar att han är för upptagen med sitt vetenskapliga arbete för att kunna säga något om verkligheten. Ställd inför den ekonomiska teorins uppenbart dåliga verklighetsförankring retirerar man till modellernas underbara värld. Istället för att konstruera teorier utifrån empiriska fakta överger man den verkliga världen och bevisar saker om tänkta världar. Istället för att acceptera att en lägre grad av säkerhet är oundviklig ägnar man sig åt axiomatiska och rationalistiska modellkonstruktioner som möjliggör säker kunskap. Om målet är kunskap om den verkliga världen, är värdet av dessa dock minst sagt oklart.

Hade nationalekonomerna varit lika exakta och matematiska när de väl använder sina modeller på verkligheten som när de bygger modellerna, hade det kanske inte varit så farligt. Men i stället är det oftast så att de är extremt oansvariga när de etablerar sambandet mellan teori och verklighet. De samband de menar sig kunna bevisa i sina ”tänkta” ekonomier används kritiklöst för att hävda saker om verkliga ekonomier. Problemet är alltså att ekonomerna sällan etablerar ett samband mellan sina teorier och verkligheten, och när de väl gör det sker det på ett felaktigt sätt.

De antaganden som nationalekonomerna utgår från i form av jämvikt, rationalitet och kalkylerbara risker är som jag visat i dålig överensstämmelse med verkligheten, där ojämvikt, irrationalitet och genuin osäkerhet är legio. Detta väljer dock många nationalekonomer att blunda för med hänvisning till Milton Friedmans tes att antagandenas realism är betydelselös så länge teorins förutsägelser är korrekta. Den ekonomiska teorins bristande överensstämmelse med verkligheten förnekas inte. En nobelpristagare i ekonomi – Robert Lucas – medger till exempel att teorin beskriver en “patenterat artificiell värld” med “robotimitationer av människor”. Andra förespråkare har framhållit att den självklart är overklig och till och med att detta skulle vara meningen med den.

Men när förutsägelserna sällan eller aldrig slår in, vad gör man då? Det naturliga vore kanske att se sig om efter andra, bättre teorier. Bygga nytt. Men nationalekonomerna drar i stället oftast åt skyddsbältet ännu hårdare om teorins kärna och reparerar. Man går in i redskapsboden – och stannar där inne. Där hänger man sig i världsfrånvändhet åt avancerade teknisk-matematiska analyser som inte tillför någon substantiellt ny kunskap om verklighetens ekonomi. Medan de ekonomiska problemen ute i verkligheten växer, leker man glatt vidare med den matematiska verktygslådans senaste inneprylar.

Matematiseringen skapar också en ny obegriplighet. Den snäva inriktningen på att bygga abstrakta matematiska modeller och teorier, där precision, elegans och förfining får gå före relevans, leder till att man saknar överblick och att nationalekonomin idag mer bidrar till den tillämpade matematikens utveckling än till samhällsvetenskapernas. I stället för att göra matematiken till ett självändamål hävdar kritiker att de som tvingas leva i den av de möjliga världar som kallas den verkliga nog hade varit mer betjänta av att man försökt bidra till lösandet av verkliga problem. Kanske var det detta den amerikanske ekonomen Kenneth Boulding avsåg när han kallade den moderna nationalekonomin för “en icke-existerande världs himmelska mekanik”.

Dumb and Dumber — the Chicago economics version

8 Aug, 2022 at 12:24 | Posted in Economics | Comments Off on Dumb and Dumber — the Chicago economics version

dumb_aSome years ago, in a lecture on the US recession, Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturns in the US economy and its future prospects.

Lucas shows that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big — but more minor — dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery from where the US economy is today, maintaining that past experience would suggest an “automatic” recovery if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian-type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. As usual in the New Classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply-side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But — if left to run its course unimpeded by European-type welfare state activities — the free market will fix it all.

In a rather cavalier manner — without a hint of argument or presentation of empirical facts — Lucas dismisses even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead — “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” — this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do over and over again in their attempts to explain away the fact that the latest economic crises show how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be government.

Chicago economics is a dangerous pseudo-scientific zombie ideology that ultimately relies on the poor having to pay for the mistakes of the rich. Trying to explain business cycles in terms of rational expectations has failed blatantly. Maybe it would be asking too much of freshwater economists like Lucas to concede that, but it’s still a fact that ought to be embarrassing.

shackleIf at some time my skeleton should come to be used by a teacher of osteology to illustrate his lectures, will his students seek to infer my capacities for thinking, feeling, and deciding from a study of my bones? If they do, and any report of their proceedings should reach the Elysian Fields, I shall be much distressed, for they will be using a model which entirely ignores the greater number of relevant variables, and all of the important ones. Yet this is what ‘rational expectations’ does to economics.

G. L. S. Shackle

Yanis Varoufakis on the irrelevance of mainstream economics

3 Aug, 2022 at 09:39 | Posted in Economics | 1 Comment

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Varoufakis is undoubtedly right — there is indeed something about the way mainstream economists construct their models that obviously doesn’t sit right.

One might have hoped that humbled by the manifest failure of its theoretical pretences during the latest economic-financial crises, the one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. But — empirical evidence still only plays a minor role in mainstream economic theory, where models largely function as a substitute for empirical evidence.

If macroeconomic models — no matter of what ilk — build on microfoundational assumptions of 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 hypotheses of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. Incompatibility between actual behaviour and the behaviour in macroeconomic models building on representative actors and rational expectations microfoundations is not a symptom of ‘irrationality.’ It rather shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality.

A gadget is just a gadget — no matter how many brilliantly silly mathematical models you come up with, they do not help us work with the fundamental issues of modern economies. The mainstream economics project is — mostly because of its irrelevance — seriously harmful to most people, but also seriously harmless for those who benefit from the present status quo of our societies.

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