Robert Musil and yours truly in Berlin (private)

27 September, 2015 at 22:34 | Posted in Varia | Leave a comment

20150925_164013Berlin has lately become a kind of second home to me, so it was time for a new sojourn there. Regular blogging is resumed tomorrow.

Modern economics — an assumption-making Nintendo game

23 September, 2015 at 12:52 | Posted in Economics | 2 Comments

In advanced economics the question would be: ‘What besides mathematics should be in an economics lecture?’ In physics the familiar spirit is Archimedes the experimenter. aaaaafeynBut in economics, as in mathematics itself, it is theorem-proving Euclid who paces the halls …

Economics … has become a mathematical game. The science has been drained out of economics, replaced by a Nintendo game of assumption-making …

Most thoughtful economists think that the games on the blackboard and the computer have gone too far, absurdly too far. It is time to bring economic observation, economic history, economic literature, back into the teaching of economics.

Economists would be less arrogant, and less dangerous as experts, if they had to face up to the facts of the world. Perhaps they would even become as modest as the physicists.

D. McCloskey

Relevance is not irrelevant

23 September, 2015 at 10:40 | Posted in Economics | 1 Comment

What is science? One brief definition runs: “A systematic knowledge of the physical or material world.” Most definitions emphasize the two elements in this definition: (1) “systematic knowledge” about (2) the real world. Without pushing this definitional question to its metaphysical limits, I merely want to suggest that if economics is to be a science, it must not only develop analytical tools but must also apply them to a world that is now observable or that can be made observable through improved methods of observation and measurement. Or in the words of the Hungarian mathematical economist Janos Kornai, “In the real sciences, the criterion is not whether the proposition is logically true and tautologically deducible from earlier assumptions. The criterion of ‘truth’ is, whether or not the proposition corresponds to reality” …


One of our most distinguished historians of economic thought, George Stigler, has stated that: “The dominant influence upon the working range of economic theorists is the set of internal values and pressures of the discipline. The subjects of study are posed by the unfolding course of scientific developments.” He goes on to add: “This is not to say that the environment is without influence …” But, he continues, “whether a fact or development is significant depends primarily on its relevance to current economic theory.” What a curious relating of rigor to relevance! Whether the real world matters depends presumably on “its relevance to current economic theory.” Many if not most of today’s economic theorists seem to agree with this ordering of priorities …

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 … The theoretical analysis in much of this literature rests on assumptions that also fly in the face of the facts … Another related recent development in which theory proceeds with impeccable logic from unrealistic assumptions to conclusions that contradict the historical record, is the recent work on rational expectations …

I have scolded economists for what I think are the sins that too many of them commit, and I have tried to point the way to at least partial redemption. This road to salvation will not be an easy one for those who have been seduced by the siren of mathematical elegance or those who all too often seek to test unrealistic models without much regard for the quality or relevance of the data they feed into their equations. But let us all continue to worship at the altar of science. I ask only that our credo be: “relevance with as much rigor as possible,” and not “rigor regardless of relevance.” And let us not be afraid to ask — and to try to answer the really big questions.

Robert A. Gordon

What went wrong with economics?

21 September, 2015 at 10:35 | Posted in Economics | 5 Comments

realty-check-aheadInternal coherence is one way of adjudicating among theories, but so is correspondence to everyday life. Too much realism may kill analysis, but too little realism is unscientific. If theoretical coherence alone were all that mattered, then the only constraint on theoretical exercises would be the human imagination. Interesting
puzzles would replace pragmatic solutions to problems encountered in the world — arguably, an accurate characterization of most contemporary economic theory. Economists must steer a course between (allegedly) pure description and the mere recording of events, on the one side, and self-indulgent mental gymnastics on the other …

Parsimony won out over thoroughness … By myopically pursuing only the formal aspects of the discipline, economics was reduced to its present state, in which we continually know more and more about less and less.

Peter Boettke

Mainstream economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

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. Although the deductivist mathematical modeling method makes conclusions follow with certainty from given assumptions, that should be of little interest to scientists, since what happens with certainty in a model world is no warrant for the same to hold in real world economies.

Mainstream 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 modeling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability.

To have valid evidence is not enough. What economics needs is sound evidence. Theories and models being “coherent” or “consistent with” data do not make the theories and models success stories.

No realism please. We’re Chicago economists!

20 September, 2015 at 16:52 | Posted in Economics | Leave a comment

neoliberalism-meme-keanuSamuelson’s reconciliation of the micro-economic ideal type with involuntary unemployment was repudiated, along with Keynesian prescriptions, in favor of a view that there could be no involuntary unemployment , hence that government action was unnecessary. The result was a doctrinaire derivation of the laissez-faire conclusions that had been overturned by the formalist revolution; economics was now cleansed of Keynesian impurities that had been introduced in the interest of realism.

Peter Boettke

Efficient Market Hypothesis — an intellectually lazy ideology

20 September, 2015 at 10:21 | Posted in Economics | 1 Comment

Both Brad DeLong and Noah Smith have posts up on their blogs commenting on the status of the Efficient Market Hypothesis. As so often the really interesting questions however drown in the usual mumbo jumbo “the model is the message” pseudo science of four-factor models with two mispricing factors being better-performing than three-factor models …

Diane Coyle has a much more accurate view of what it’s all about:

I would defend using the assumption of rational choice as long as one realises that it is not a description of reality.

But there is one area where for 30 years economists – and others – have been making that mistake. That is unfortunately, of course, in the financial markets. Practitioners and policy makers acted as if the strong form of the Efficient Markets Hypothesis held true – in other words that prices instantly reflect all relevant information about the future – even though this evidently defies reality …

spock_in_2012_by_rabittooth-d4p2io9I think an honest conventionally-trained economist has to at least acknowledge that we grew intellectually lazy about this. Although we all knew at some level that the rational choice assumption was being made to bear too much weight, very few economists openly challenged its everyday use in justifying public policy decisions. Very few of us put this weight on it in our own work. But not all that many economists challenged its pervasive use in the public policy world …

The financial and economic crisis also spells a crisis for certain areas of economics, or approaches to economics. Financial economics and macroeconomics are particularly vulnerable. They are the subject areas where the consequences of the standard assumptions have been most damaging, because they are actually least valid. Financial market traders are not remotely like Star Trek’s Mr Spock, making rational calculations unaffected by emotion or by the decisions of other people. Macroeconomics – the study of how millions of individual decisions aggregate into economy-wide measures – is essentially ideological. How macroeconomists answer a question like ‘What will be the effect of cutting the budget deficit on growth next year?’ depends on their political views. This is not remotely a scientific area of the discipline. The consensus about macroeconomics during what’s been described as ‘the Great Moderation’ of the 1990s has entirely broken down.

Diane Coyle

Backfiring expectations

19 September, 2015 at 18:54 | Posted in Economics | Leave a comment

Economist Brian Arthur has made important contributions to our understanding of inductive versus deductive approaches to problem solving. Arthur notes that you can solve only the easiest problems deductively … But humans are superb at recognizing and matching patterns. We’re inductive machines.


Arthur offers a model of inductive reasoning, effectively picking up where Lord Keynes left off. The model is based on the El Farol bar in Santa Fe, New Mexico … Attending the El Farol when it isn’t too crowded is fun … But the bar is a turn-off when it is packed.

To make the problem more concrete, Arthur suggests that the bar has a hundred-person capacity and that with sixty people or fewer it is not crowded and with more than sixty it is … This problem has two notable features. First, the problem is too complicated for a deductive solution. As individuals can only look at past attendance, there are a large number of legitimate expectational models. The potential bar goers must use an inductive approach. Second, common expectations backfire. If all believe most will go, nobody will go. And if all believe nobody will go, all will go. Like Keynes’s beauty contest, the issue is not just what you believe but rather what you believe others to believe.

Michael J. Mauboussin

Thank God Eric Schüldt is back!

19 September, 2015 at 10:12 | Posted in Varia | Leave a comment

radioI dessa tider — när ljudrummet dränks i den kommersiella radions tyckmyckentrutade ordbajseri och fullständigt intetsägande melodifestivalskval — har man ju nästan gett upp.

Men det finns ljus i mörkret! I radions P2 går varje lördagmorgon ett vederkvickelsens och den seriösa musikens Lördagsmorgon i P2.

Så passa på och börja dagen med en musikalisk örontvätt och rensa hörselgångarna från kvarvarande musikslagg. Här kan man till exempel lyssna på musik av Jonathan Roberts, John Tavener, Arvo Pärt och Stefan Nilsson. Att i tre timmar få lyssna till sådan musik ger sinnet ro och får hoppet att återvända. Tack public-service-radio.

Och tack för Eric Schüldt! Äntligen är han tillbaka för att under höstmörkret vederkvicka våra utsvultna själar med gudomlig musik. En programledare som har något att säga och inte bara låter foderluckan glappa hela tiden — vilken lisa för själen!


18 September, 2015 at 19:57 | Posted in Varia | Leave a comment


Applied econometrics — a messy business

18 September, 2015 at 11:14 | Posted in Statistics & Econometrics | 1 Comment

The applied econometrician is like a farmer who notices that the yield is
somewhat higher under the trees where birds roost, and he uses this for evidence
that bird droppings increase the yield. However, when he presents his findings … another farmer … objects that he used the same data but came up with the conclusion that moderate amounts of shade increase the yields … A bright chap … then observes that these two hypotheses are indistinguishable, given the available data …

51pDIwWiNLL__SX313_BO1,204,203,200_The obvious response of course, albeit one that econometricians occupied with
fitting a line to given sets of data rarely contemplate, is to add the ‘available
data.’ Specifically, the aim must be to draw consequences for, and seek out
observations on, actual phenomena which allow the causal factor responsible to
be identified. If, for example, bird droppings is a relevant causal factor then we
could expect higher yields wherever birds roost. Perhaps there is a telegraph
wire that crosses the field which is heavily populated with roosting birds, but
which provides only negligible shade … The fact that it is not possible to
state categorically at this abstract level the precise conditions under which
substantive theories can be selected amongst, i.e., without knowing the contents
of the theories themselves or the nature or context of the conditions upon which
they bear, is an unfortunate fact of all science …

Science is a messy business. It requires an abundance of ingenuity, as well as patience, along with skills that may need to be developed on the job.

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