It’s not the debt we need to fix, stupid! It’s our thinking.

23 Jul, 2021 at 15:22 | Posted in Economics | Leave a comment

The ad nauseam repeated claim that our public debt is excessive and that we have to balance the public budget is nothing but absolute nonsense. The harder politicians — usually on the advice of mainstream establishment economists — try to achieve balanced budgets for the public sector, the less likely they are to succeed in their endeavour.darling-let-s-get-deeply-into-debt And the more the citizens have to pay for the concomitant austerity policies these wrong-headed politicians and economists recommend as ‘the sole solution.’

Public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt ‘cancels’ itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren ‘repay’ the public debt these payments will be made to our children and grandchildren.

To both Keynes and Lerner — as to today’s MMTers — it was evident that the state has the ability to promote full employment and a stable price level — and that it should use its powers to do so. If that means that it has to take on debt and underbalance its budget — so let it be! Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals — full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity and balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

wvickreyWe are not going to get out of the economic doldrums as long as we continue to be obsessed with the unreasoned ideological goal of reducing the so-called deficit. The ‘deficit’ is not an economic sin but an economic necessity …

We have the resources in terms of idle manpower and idle plants to do so much, while the preachers of austerity, most of whom are in little danger of themselves suffering any serious consequences, keep telling us to tighten our belts and refrain from using the resources that lay idle all around us.

Alexander Hamilton once wrote “A national debt, if it be not excessive, would be for us a national treasure.” William Jennings Bryan used to declaim, “You shall not crucify mankind upon a cross of gold.” Today’s cross is not made of gold, but is concocted of a web of obfuscatory financial rectitude from which human values have been expunged.

William Vickrey

The real crises we are facing

22 Jul, 2021 at 17:07 | Posted in Economics | Leave a comment

The fact that 21 percent of all children in the United States live in poverty—that’s a crisis. The fact that our infrastructure is graded at a D+ is a crisis. The fact that inequality today stands at levels last seen during America’s Gilded Age is a crisis. The fact that the typical American worker has seen virtually no real wage growth since the 1970s is a crisis. The fact that forty-four million Americans are saddled with $1.7 trillion in student loan debt is a crisis. And the fact that we ultimately won’t be able to “afford” anything at all if we end up exacerbating climate change and destroying the life on this planet is perhaps the biggest crisis of them all.

These are real crises. The national deficit is not a crisis.

Can a government go bankrupt?
No. You cannot be indebted to yourself.

Can a central bank go bankrupt?
No. A central bank in a monetary sovereign country can always ‘print’ more money.

Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.

Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.

Does maintaining full employment mean the government has to increase its debt?
No.

It is true that 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.

Alan Kirman debunking mainstream economics

19 Jul, 2021 at 15:36 | Posted in Economics | 1 Comment

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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.

Alan Kirman presents a forceful critique of mainstream economics in general, and more specifically, of the kind of assumptions that  mainstream macroeconomic DSGE modelling (New Classical, ‘New Keynesian’, RBC, etc.) is built on. For most heterodox critics of mainstream economics the themes are probably well-known. That said, let me just give some brief comments on what Kirman at the end of the interview presents as an alternative to mainstream orthodoxy — 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 people like Alan Kirman. 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.

Why economics has failed so miserably

18 Jul, 2021 at 16:01 | Posted in Economics | 1 Comment

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The economy is — as emphasised by both Keynes and Soros — pervaded by genuine uncertainty and reflexivity. The uncertainty makes the future difficult to anticipate and reflexivity often makes our expectations about the future something that actually changes the future. They both severely undermine the explanations and predictions that are made  within the standard economic models.

Don’t buy into the inflation scare

15 Jul, 2021 at 23:18 | Posted in Economics | 5 Comments

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La France en crise

13 Jul, 2021 at 12:14 | Posted in Economics | 1 Comment

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Deductivism — the original sin in mainstream economics

7 Jul, 2021 at 16:25 | Posted in Economics | 4 Comments

Mathematics, especially through the work of David Hilbert, became increasingly conceived as a practice concerned with formulating systems comprising sets of axioms and their deductive consequences, with these systems in effect taking on a life of their own …

Confusion of sign and object is original sin coeval with the word.The emergence of the axiomatic method removed at a stroke various hitherto insurmountable constraints facing those who would mathematise the discipline of economics … In particular it was no longer regarded as necessary, or even relevant, to economic model construction to consider the nature of social reality …

The result was that in due course deductivism in economics, through morphing into mathematical deductivism on the back of developments within the discipline of mathematics, came to acquire a new lease of life, with practitioners (once more) potentially oblivious to any inconsistency between the ontological presuppositions of adopting a mathematical modelling emphasis and the nature of social reality.

Tony Lawson

To be ‘analytical’ and ‘logical’ is something most people find recommendable. These words have a positive connotation. Scientists think deeper than most other people because they use ‘logical’ and ‘analytical’ methods. In dictionaries, logic is often defined as “reasoning conducted or assessed according to strict principles of validity” and ‘analysis’ as having to do with “breaking something down.”

anBut that’s not the whole picture. As used in science, analysis usually means something more specific. It means to separate a problem into its constituent elements so to reduce complex — and often complicated — wholes into smaller (simpler) and more manageable parts. You take the whole and break it down (decompose) into its separate parts. Looking at the parts separately one at a time you are supposed to gain a better understanding of how these parts operate and work. Built on that more or less ‘atomistic’ knowledge you are then supposed to be able to predict and explain the behaviour of the complex and complicated whole.

In economics, that means you take the economic system and divide it into its separate parts, analyse these parts one at a time, and then after analysing the parts separately, you put the pieces together.

The ‘analytical’ approach is typically used in economic modelling, where you start with a simple model with few isolated and idealized variables. By ‘successive approximations,’ you then add more and more variables and finally get a ‘true’ model of the whole.

This may sound like a convincing and good scientific approach.

But there is a snag!

The procedure only really works when you have a machine-like whole/system/economy where the parts appear in 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 their ‘analytical’ approach, economic ‘analysis’ becomes uninformative nonsense.

Using ‘logical’ and ‘analytical’ methods in social sciences means that economists succumb to the fallacy of composition — the belief that the whole is nothing but the sum of its parts.  In society and in the economy this is arguably not the case. An adequate analysis of society and economy a fortiori cannot proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts.

Mainstream economics is built on using the ‘analytical’ method. The models built with this method presuppose that social reality is ‘closed.’ Since social reality is known to be fundamentally ‘open,’ it is difficult to see how models of that kind can explain anything about what happens in such a universe. Postulating closed conditions to make models operational and then impute these closed conditions to society’s real structure is an unwarranted procedure that does not take necessary ontological considerations seriously.

In face of the kind of methodological individualism and rational choice theory that dominate mainstream economics we have to admit that even if knowing the aspirations and intentions of individuals are necessary prerequisites for giving explanations of social events, they are far from sufficient. Even the most elementary ‘rational’ actions in society presuppose the existence of social forms that it is not possible to reduce to the intentions of individuals. Here, the ‘analytical’ method fails again.

The overarching flaw with the ‘analytical’ economic approach using methodological individualism and rational choice theory is basically that they reduce social explanations to purportedly individual characteristics. But many of the characteristics and actions of the individual originate in and are made possible only through society and its relations. Society is not a Wittgensteinian ‘Tractatus-world’ characterized by atomistic states of affairs. Society is not reducible to individuals, since the social characteristics, forces, and actions of the individual are determined by pre-existing social structures and positions. Even though society is not a volitional individual, and the individual is not an entity given outside of society, the individual (actor) and the society (structure) have to be kept analytically distinct. They are tied together through the individual’s reproduction and transformation of already given social structures.

Since at least the marginal revolution in economics in the 1870s it has been an essential feature of economics to ‘analytically’ treat individuals as essentially independent and separate entities of action and decision. But, really, in such a complex, organic and evolutionary system as an economy, that kind of independence is a deeply unrealistic assumption to make. To simply assume that there is strict independence between the variables we try to analyze doesn’t help us the least if that hypothesis turns out to be unwarranted.

To be able to apply the ‘analytical’ approach, economists have to basically assume that the universe consists of ‘atoms’ that exercise their own separate and invariable effects in such a way that the whole consist of nothing but an addition of these separate atoms and their changes. These simplistic assumptions of isolation, atomicity, and additivity are, however, at odds with reality. In real-world settings, we know that the ever-changing contexts make it futile to search for knowledge by making such reductionist assumptions. Real-world individuals are not reducible to contentless atoms and so not susceptible to atomistic analysis. The world is not reducible to a set of atomistic ‘individuals’ and ‘states.’ How variable X works and influence real-world economies in situation A cannot simply be assumed to be understood or explained by looking at how X works in situation B. Knowledge of X probably does not tell us much if we do not take into consideration how it depends on Y and Z. It can never be legitimate just to assume that the world is ‘atomistic.’ Assuming real-world additivity cannot be the right thing to do if the things we have around us rather than being ‘atoms’ are ‘organic’ entities.

If we want to develop new and better economics we have to give up on the single-minded insistence on using a deductivist straitjacket methodology and the ‘analytical’ method. To focus scientific endeavours on proving things in models is a gross misapprehension of the purpose of economic theory. Deductivist models and ‘analytical’ methods disconnected from reality are not relevant to predict, explain or understand real-world economies

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.

Models may help us think through problems. But we should never forget that the formalism we use in our models is not self-evidently transportable to a largely unknown and uncertain reality. The tragedy with mainstream economic theory is that it thinks that the logic and mathematics used are sufficient for dealing with our real-world problems. They are not! Model deductions based on questionable assumptions can never be anything but pure exercises in hypothetical reasoning.

The world in which we live is inherently uncertain and quantifiable probabilities are the exception rather than the rule. To every statement about it is attached a ‘weight of argument’ that makes it impossible to reduce our beliefs and expectations to a one-dimensional stochastic probability distribution. If “God does not play dice” as Einstein maintained, I would add “nor do people.” The world as we know it has limited scope for certainty and perfect knowledge. Its intrinsic and almost unlimited complexity and the interrelatedness of its organic parts prevent the possibility of treating it as constituted by ‘legal atoms’ with discretely distinct, separable and stable causal relations. Our knowledge accordingly has to be of a rather fallible kind.

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? Even if there always has to be a trade-off between theory-internal validity and external validity, we have to ask ourselves if our models are relevant.

‘Human logic’ has to supplant the classical — formal — logic of deductivism if we want to have anything of interest to say of the real world we inhabit. Logic is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, in which concepts and entities are without clear boundaries and continually interact and overlap. In this world, I would say we are better served with a methodology that takes into account that the more we know, the more we know we do not know.

Mathematics and logic cannot establish the truth value of facts. Never has. Never will.

Paul Krugman’s gadget version of Keynesianism

6 Jul, 2021 at 08:57 | Posted in Economics | 12 Comments

krugmanPaul Krugman has often been criticized by people like yours truly for getting things pretty wrong on  the economics of  John Maynard Keynes.

When Krugman has responded to the critique, by himself rather gratuitously portrayed as about “What Keynes Really Meant,” the overall conclusion is — “Krugman Doesn’t Care.”

Responding to a post up here on this blog, Krugman writes:

Surely we don’t want to do economics via textual analysis of the masters. The questions one should ask about any economic approach are whether it helps us understand what’s going on, and whether it provides useful guidance for decisions.

So I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you.

The reason for this rather debonair attitude seems to be that history of economic thought may be OK, but what really counts is if reading Keynes gives birth to new and interesting insights and ideas.

No serious economist would question that explaining and understanding “what’s going on” in our economies is the most important task economists can set themselves — but it is not the only task.  And to compare one’s favourite economic gadget model to what “austerians” and other madmen from Chicago have conjured up, well, that’s like playing tennis with the nets down, and we have to have higher aspirations as scientists.

Although I have a lot of sympathy for Krugman’s view on authority, there is also a somewhat disturbing and unbecoming coquetting in his attitude towards the great forerunners he is discussing. Krugman is a great economist, but it smacks not so little of hubris to simply say “if where you take the idea is very different from what the great man said somewhere else in his book, so what?” Physicists arguing like that when discussing Newton, Einstein, Bohr or Feynman would not be taken seriously.

Krugman’s comment on this issue is interesting, however, because it sheds light on a kind of inconsistency in his own art of argumentation. Krugman has in more than one article criticized mainstream economics for using to much (bad) mathematics and axiomatics in their model-building endeavours. But when it comes to defending his own position on various issues, he usually himself ultimately falls back on the same kind of models. Models that actually, when it comes to methodology and assumptions, have a lot in common with the kind of model-building he otherwise criticizes. And although Krugman repeatedly says that he is a strong believer in “simple models,” those models are far from simple.

But I think the absolute all-time low in Krugman’s response is this remarkable passage:

Has declaring uncertainty to be unquantifiable, and mathematical modeling in any form foolish, been productive? Remember, that’s what the Austrians say too.

23e17eb61f800c21ca20e84926a714a278a62f70f97c7ed404223ffa5adfbd3eI won’t comment on the shameful guilt-by-association part of the quote, but re uncertainty it’s absolutely gobsmacking how Krugman manages to mix up the ontological question — is the economy permeated by calculable risk or by genuine and often not calculable uncertainty  — with the epistemological question — how do we manage to analyze/understand/explain/model such an economy. Here Krugman seems to say — much in the spirit of Robert Lucas — that if reality is uncertain and non-ergodic, well then let’s just pretend it’s ergodic and susceptible to standard probabilistic analysis, so that we can go on with our FORTRAN programs and mathematical models! In other areas of science that would rightfully be considered fraud, but in “modern” mainstream economics it’s obviously thought of as an unprobematic and justified procedure.

And then, of course, not really trying to clinch the deep theoretical issue at stake, Krugman for the n:th time puts forward his IS-LM gadget interpretation of economics.

Being able to model a “gadget world” — a world that somehow could be considered real or similar to the real world — is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or lack of realism has to be qualified.

No matter how many convoluted refinements of concepts made in the gadget model, if the “successive approximations” do not result in models similar to reality in the appropriate respects (such as structure, isomorphism etc), the surrogate gadget system becomes a substitute system that does not bridge to the world, but rather misses its target.

So — constructing gadgets like IS-LM macroeconomic models as “stylized facts” somehow “successively approximating” macroeconomic reality, is a rather unimpressive attempt at legitimizing using fictitious idealizations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies. Many of the model assumptions made in IS-LM models and “New Keynesian” DSGE models are restrictive  rather than harmless and could a fortiori anyway not in any sensible meaning be considered approximations at all.

Where does all this leave us? Well, I for one, is not the least impressed by Krugman’s gadget interpretation of economics. And if labels are as uninteresting as he says — well, then I suggest Krugman and other “New Keynesians” stop calling themselves Keynesians at all. I’m pretty sure Keynes would have appreciated not having his theories and thoughts being referred to by people having preciously little to do with those theories and thoughts.

Studying great forerunners like Keynes may help us to construct better and more relevant economic models – models that really help us to explain and understand reality. So when Krugman writes

we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility

I would certainly recommend him to compare his own statement with what Keynes himself wrote:

Though we all started out in the same direction, we soon parted company into two main groups. What made the cleavage that thus divided us?

On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes … These economists did not, of course, believe that the system is automatic or immediately self-adjusting, but they did maintain that it has an inherent tendency towards self-adjustment, if it is not interfered with, and if the action of change and chance is not too rapid.

John Maynard KeynesThose on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting. They believed that the failure of effective demand to reach the full potentialities of supply, in spite of human psychological demand being immensely far from satisfied for the vast majority of individuals, is due to much more fundamental causes …

The gulf between these two schools of thought is deeper, I believe, than most of those on either side of it realize. On which side does the essential truth lie?

The strength of the self-adjusting school depends on its having behind it almost the whole body of organized economic thinking and doctrine of the last hundred years. This is a formidable power. It is the product of acute minds and has persuaded and convinced the great majority of the intelligent and disinterested persons who have studied it. It has vast prestige and a more far-reaching influence than is obvious. For it lies behind the education and the habitual modes of thought, not only of economists but of bankers and business men and civil servants and politicians of all parties …

Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy … they must attack them in their citadel … Now I range myself with the heretics. I believe their flair and their instinct move them towards the right conclusion. But I was brought up in the citadel and I recognize its power and might … For me, therefore, it is impossible to rest satisfied until I can put my finger on the flaw in the part of the orthodox reasoning that leads to the conclusions that for various reasons seem to me to be inacceptable. I believe that I am on my way to do so. There is, I am convinced, a fatal flaw in that part of the orthodox reasoning that deals with the theory of what determines the level of effective demand and the volume of aggregate employment …

John Maynard Keynes (1935)

Economics — a severe case of misplaced idolatry of ‘rigour’

3 Jul, 2021 at 17:48 | Posted in Economics | Leave a comment

be-relevantThere is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.

Empirical evidence — still — only plays a minor role in mainstream economics, where models largely function as a substitute for empirical evidence.

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 modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. That has, so far, not happened.

Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists and other DSGE modellers — there still are some real Keynesian macroeconomists to read. One of them — Axel Leijonhufvud — writes:

For many years now, the main alternative to Real Business Cycle Theory has been a somewhat loose cluster of models given the label of New Keynesian theory. New Keynesians adhere on the whole to the same DSGE modeling technology as RBC macroeconomists but differ in the extent to which they emphasise inflexibilities of prices or other contract terms as sources of shortterm adjustment problems in the economy. The “New Keynesian” label refers back to the “rigid wages” brand of Keynesian theory of 40 or 50 years ago. Except for this stress on inflexibilities this brand of contemporary macroeconomic theory has basically nothing Keynesian about it …

I conclude that dynamic stochastic general equilibrium theory has shown itself an intellectually bankrupt enterprise. But this does not mean that we should revert to the old Keynesian theory that preceded it (or adopt the New Keynesian theory that has tried to compete with it). What we need to learn from Keynes … are about how to view our responsibilities and how to approach our subject.

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 — and no matter how brilliantly silly DSGE models you come up with, they do not help us working with the fundamental issues of modern economies. Using DSGE models only confirms Robert Gordon‘s  dictum that today

rigor competes with relevance in macroeconomic and monetary theory, and in some lines of development macro and monetary theorists, like many of their colleagues in micro theory, seem to consider relevance to be more or less irrelevant.

Top Economics Blogs

3 Jul, 2021 at 09:29 | Posted in Economics | 3 Comments

New outlook … | LARS P. SYLLMainstream economics has sadly made economics increasingly irrelevant to the understanding of the real world. Trying to contribute in making economics a more realist and relevant science, yours truly launched this blog in March 2011.

Now, ten years later and with millions of page views on it, yours truly is — together with people like e.g. Greg Mankiw and Paul Krugman — ranked on INOMICS’ The Top Economics Blogs list.

I am — of course — truly awed, honoured and delighted.

There are many excellent economics blogs out there … The blogs we’ve listed — in no particular order — are the ones we here at INOMICS turn to when we’re looking for interesting, informative, and occasionally offbeat articles on a wide range of economic topics …

1. Random Observations for Students of Economics

Greg Mankiw uses his blog predominantly to keep in touch with his own students, but it also serves as an excellent source of information on many economics topics to those currently studying …

7. Naked Capitalism

Naked Capitalism is a blog written by several different writers, all of whom have credentials writing and studying economics …

13. Paul Krugman

Paul Krugman, a household name and heavyweight economist in the modern age, writes a regular column for the New York Times on macroeconomics, trade, healthcare, social policy and politics  …

22. Lars P. Syll

Lars Pålsson Syll is a professor at Malmö University in Sweden who focuses on the philosophy and methodology of economics, theories of distributive justice, and critical realist social science. An avowed critic of neoliberalism and market fundamentalism, his blog covers a wide range of topics in English, French, German and Swedish.

Randomization — method or madness?

1 Jul, 2021 at 09:48 | Posted in Economics | Leave a comment

Amazon.com: Randomized Control Trials in the Field of Development: A  Critical Perspective eBook: Bédécarrats, Florent, Guérin, Isabelle,  Roubaud, François: Kindle StoreBill Gates has recently been promoting chicken ownership to address poverty in Africa. In an open letter, Professor Blattman of University of Chicago pointed out that cash transfers may be more cost effective than chickens said: “It would be straightforward to run a study with a few thousand people in six countries, and eight or twelve variations, to understand which combination works best, where, and with whom. To me that answer is the best investment we could make to fight world poverty. The scholars at Innovations for Poverty Action who ran the livestock trial in Science agree with me. In fact, we’ve been trying, together, to get just such a comparative study started.” [emphasis added]

I think it is important for the development community to stop and reflect on how we, as a development community, arrived at this two-fold madness. First the madness that Bill Gates, a genius, a humanitarian, an important public intellectual, could be even semiseriously talking about chickens. Second, the madness about method, that the response of Chris Blattman, also a genius, an academic at a top global university, and also an important public intellectual would respond not “Chickens? Really?” but rather that the “best investment” to “fight world poverty” is using the right method to study the competing program and design elements of chickens versus cash transfers.

That this is madness is, I hope, obvious.

Lant Pritchett

Taking the con out of RCTs

30 Jun, 2021 at 11:20 | Posted in Economics | Leave a comment

rcDevelopment actions and interventions (policies/programs/projects/practices) should be based on the evidence. This truism now comes with a radical proposal about the meaning of “the evidence.” In development practice, where there are hundreds of complex, sometimes rapidly changing, contexts seemingly innocuous phrases like “rely on the rigorous evidence” are taken to mean: “Ignore evidence from your context and rely in your context on evidence that was ‘rigorous’ for another place, another time, another implementing organization, another set of interacting policies, another set of local social norms, another program design and do this without any underlying model or theory that guides your understanding of the relevant phenomena.” …

The advocates of RCTs and the use and importance of rigorous evidence, who are mostly full-time academics based in universities, have often taken a condescending, if not outright ad hominem, stance towards development practitioners. They have often treated arguments against exclusive reliance on RCT evidence, like that the world is complex, getting things done in the real world is a difficult craft, that RCTs don’t address key issues, that results cannot be transplanted across contexts, not as legitimate arguments but as the self-interested pleadings of “bureaucrats” who don’t care about “the evidence” or development outcomes. Therefore, it is striking that it is the practitioner objections about external validity that are actually technically right about the unreliability of RCTs for making context-specific predictions and it is the academics that are wrong, and this in the technical domain that supposedly is the acamedicians comparative advantage.

Lant Pritchett

Just as econometrics, the use of randomization often promises more than it can deliver, basically because it requires assumptions that in practice are not possible to maintain. And just like econometrics, randomization is basically a deductive method. Given the assumptions, these methods deliver deductive inferences. The problem, of course, is that we will never completely know when the assumptions are right. And although randomization may contribute to controlling for confounding, it does not guarantee it, since genuine ramdomness presupposes infinite experimentation and we know all real experimentation is finite. And even if randomization may help to establish average causal effects, it says nothing of individual effects unless homogeneity is added to the list of assumptions. Causal evidence generated by randomization procedures may be valid in ‘closed’ models, but what we usually are interested in, is causal evidence in the real target system we happen to live in.

As Pritchett shows, does a conclusion established in population X hold for target population Y only under very restrictive conditions. ‘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 population/system. The causal background assumptions made have to be justified, and without licenses to export, the value of ‘rigorous’ and ‘precise’ methods — and ‘on-average-knowledge’ — is despairingly small.

‘New Keynesian’ macroeconomics — worse than useless

24 Jun, 2021 at 17:26 | Posted in Economics | 4 Comments

Mainstream macroeconomics can only progress if it gets rid of the DSGE albatross around its neck. It is better to do it now than to wait for another 20 years because the question is not whether but when DSGE modeling will be discarded. DSGE modeling is a story of a death foretold …

New Keynesian' macroeconomics | LARS P. SYLLGetting rid of DSGE models is critical because the hegemonic DSGE program is crowding out alternative macro methodologies that do work … DSGE practitioners, who with a mixture of bluff and bluster act as gatekeeper, judge, jury, and executioner in all macroeconomic matters, are a block on the road to progress. The roadblock has to be removed. The failed and failing DSGE models have to go if mainstream macroeconomics wants to become a force for the common good again.

Servaas Storm

Servaas’ article is a marvellous final take down of the ridiculous aspirations of New-Classical-New-Keynesian macroeconomic modelling. DSGE models are worse than useless — and still, mainstream economists seem to be überimpressed by the ‘rigour’ brought to macroeconomics by New-Classical-New-Keynesian DSGE models and its rational expectations and microfoundations!

It is difficult to see why.

‘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 decisive empirical evidence has been presented. DSGE models are nothing but a joke.

keynes-right-and-wrong

Proving things ‘rigorously’ in DSGE models is at most a starting-point for doing an interesting and relevant economic analysis. Forgetting to supply export warrants to the real world makes the analysis an empty exercise in formalism without real scientific value.

Mainstream economists think there is a gain from the DSGE style of modelling in its capacity to offer the one and only structure around which to organise discussions. To me, that sounds more like a religious theoretical-methodological dogma, where one paradigm rules in divine hegemony. That’s not progress. That’s the death of economics as a science.

As David Hand tells us — building models based on questionable ontological or epistemological assumptions may be fine in mathematics and religion, but it certainly is not science:

impIf you want absolute truth then you must look to pure mathematics or religion, but certainly not to science … Science is all about possibilities. We propose theories, conjectures, hypotheses and explanations. We collect evidence and data, and we test the theories against this new evidence … It’s the very essence of science that its conclusions can change, that is, that its truths are not absolute. The intrinsic good sense of this is contained within the remark reportedly made by the eminent economist John Maynard Keynes, responding to the criticism that he had changed his position on monetary policy during the 1930s Depression: “When the facts change, I change my mind. What do you do, sir?”

DSGE models belong — as Servaas suggests — in the Museum of Implausible Economic Models. Making adjustments to Ptolemaic epicycles or trying to amend and elaborate on flat earth theories and models is both stupid and tragic. It’s a waste of time and effort. As we all know there are better alternatives.

Economics — a science in need of a paradigm shift

24 Jun, 2021 at 00:38 | Posted in Economics | 6 Comments

The methodology and ideology of modern economics are built into the frameworks of educational methods, and absorbed by students without any explicit discussion. In particular, the logical positivist philosophy is a deadly poison which I ingested during my Ph.D. training at the Economics Department in Stanford in the late 1970s. It took me years and years to undo these effects …

Paradigm Shift in EconomicsModern economics is much like this. It starts by making assumptions which are dramatically in conflict with everything we know about human behavior (and firm behavior) and applies mathematical reasoning to situations where it cannot be applied, quantifying the unquantifiable and coming to completely absurd and ridiculous conclusions. Nonetheless, speaking from personal experience, the brainwashing is powerful and effective. It is a slow and painful process to undo …

Unlike the older generation, for younger and more flexible minds, it is possible to take off glasses manufactured in the Euclidean factory, and put on non-Euclidean glasses. Nonetheless, it is still a disconcerting and uncomfortable experience, which will not be undertaken unless there is some expectation of a great reward for this struggle and sacrifice. The costs of paradigm shift must be paid upfront – one loses the ability to talk to the mainstream when one describes the world using an alien framework. The rewards are in the future, and highly speculative and uncertain. Nonetheless, for reasons explained elsewhere, it seems essential to make the effort – the survival of humanity is at stake.

Asad Zaman

What is money? (II)

21 Jun, 2021 at 18:28 | Posted in Economics | 16 Comments

Currently the credit theory dominates monetary theorizing and policy debate. So, policy analyses implicitly make assumptions about money as if its properties qua  money were those of a form of debt credit.

Meme: "Money is money!" - All Templates - Meme-arsenal.comCurrently prominent examples include Minsky as well as proponents of Modern Money Theory (MMT). Hyman Minsky, who has been as infl uential as any money theorist in recent times, coined in passing, in a substantive piece, the familiar and frequently repeated aphorism that ‘everyone can create money; the problem is to get it accepted’ . Underpinning this clearly is the credit theory. If the nature of money lies in the nature of credit/debt, then any and all credit/debt is money, even that momentarily accepted between friends or relatives. So, anyone can indeed create money. Credit theorists must accept this. Alfred Mitchell Innes, perhaps the most influential credit theorist, embraced this. He thought that, therefore, any credit/debt ought to serve as a general means of payment. Minsky clearly does not accept the latter implication and was pointing to a problem of how a money qua  a form of debt is to become accepted. MMT proponents follow suit. The story they tell is very much like the one outlined just now re government debt and taxation. In my view, no aspect of the story withstands scrutiny. It is bank debt (positioned as money) not government debt that is involved in money constitution, government taxes and fines are not a debt in any technical or legal sense, and it is far from obvious that people accept to hold money just because they have to use some of it to pay taxes, etc.

Tony Lawson

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