Jon Elster on deductivist modeling leading economics astray

20 March, 2015 at 09:55 | Posted in Economics | 4 Comments

To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe. These are necessary conditions, not sufficient ones. Rational-choice theory often fails on both counts. The theory may be indeterminate, and people may be irrational.

mcgregor4_clip_image002_0000In what was perhaps the first sustained criticism of the theory, Keynes emphasized indeterminacy, notably because of the pervasive presence of uncertainty. His criticism applied especially to cases where agents have to form expectations about the behavior of other agents or about the development of the economy in the long run. In the wake of the current economic crisis, this objection has returned to the forefront. Before the crisis, going back to the 1970s, the main objections to the theory were based on pervasive irrational behavior. Experimental psychology and behavioral economics have uncovered many mechanisms that cause people to deviate from the behavior that rational-choice theory prescribes.

Disregarding some more technical sources of indeterminacy, the most basic one is embarrassingly simple: how can one impute to the social agents the capacity to make the calculations that occupy many pages of mathematical appendixes in the leading journals of economics and political science and that can be acquired only through years of professional training?

I believe that much work in economics and political science that is inspired by rational-choice theory is devoid of any explanatory, aesthetic or mathematical interest, which means that it has no value at all. I cannot make a quantitative assessment of the proportion of work in leading journals that fall in this category, but I am confident that it represents waste on a staggering scale.

Jon Elster

Att försvara mänskliga rättigheter måste få kosta

20 March, 2015 at 08:29 | Posted in Politics & Society | 1 Comment

Diskussionens vågor går i dessa dagar höga vad gäller de diplomatiska relationerna med Saudiarabien och hur de lämpligen hanteras. De flesta verkar hålla med om att t ex tusen piskrapp plus 10 års fängelse inte känns som ett riktigt proportionerligt straff för lite bloggande kritik mot religiösa ledare.

wallstrom-ta36ae68-jpgLåt oss försiktigt sammanfatta det som att det finns en del som tyder på att Saudiarabien inte är bäst i klassen avseende mänskliga rättigheter.

Enigheten är mindre framträdande när det gäller hur den svenska regeringen hanterat kopplade saker den senaste tiden.

Heidi Avellan [Sydsvenskan] har ju inte gjort sig känd som en fanatisk Löfvensupporter och menade i en krönika 13/3 att även det utrikespolitiska nu dragits in i det pågående rödgröna haveriet. I ett försök att knyppla ihop en liberal hållning vad gäller mänskliga rättigheter med kritik mot utrikesministerns förmodade klumperier skriver Avellan att Margot Wallströms kritik var berättigad, men diplomatiskt illa formulerad.

Det är svårt undgå slutsatsen att det som stört harmonin är att kritiken, som alltså ansågs befogad, faktiskt uppmärksammades av Saudiarabien. Om Wallström bara hade uttalat kritiken för sig själv inne på någon toalett i Sagerska palatset, medan Stefan Löfven med någon vag fras om hur mycket bättre världen vore med mer mänskliga rättigheter löst upp avtalet när löptiden ändå runnit ut, så hade saken varit utagerad. Fingerspitzgefühl.

Det är naturligtvis sant, men det man måste fråga sig är om sådant fjäderlätt diplomatiskt tryck från en liten stat som Sverige är meningsfullt annat än för att hjälpa liberalt sinnade samhällsdebattörer att sova en smula bättre om natten: nå, vi har i alla fall gjort något.

Kanske det kanske, men man har väl knappast gjort mindre om man med avsevärt uppkäftigare diplomati fått massvis med internationell uppmärksamhet och uppenbarligen gjort diplomatiskt intryck på motparten? Om inget annat så komplicerar det i vart fall Avellans påstående att Sveriges röst i världen har försvagats av Wallströms agerande.

Till syvende och sist så kokar allt ner till en enkel fråga: Får det någonsin kosta något – kosta något på riktigt – att försvara mänskliga rättigheter diplomatiskt? Den frågan borde vara lätt att besvara för en liberalt sinnad debattör såvida inte ett rödgrönt skynke skymmer sikten i lite för många frågor förstås.

Mikael Sundström

Dags att skingra myterna om statsskulden

19 March, 2015 at 19:31 | Posted in Economics | 1 Comment

Vid en analys av den svenska depressionens förlopp är det viktigt att ha klart för sig att statsskuldens snabba tillväxt inte har utgjort någon orsak till krisen utan istället varit ett symptom på nedgången i ekonomin. I själva verket skulle krisen ha blivit djupare om inte mycket stora underskott i de offentliga finanserna släppts fram … Krisförloppet innebar en överflyttning av en given skuldbörda från privat till offentlig sektor. Någon ökning av folkhushållets totala skuldsättning har inte kommit till stånd.

debtEn nödvändig privat skuldsanering utgör alltså kärnan i den svenska depressionen … Man måste också fråga sig hur krisen skulle ha utvecklat om den offentliga sektorn inte hade accepterat att utgöra en — förhoppningsvis tillfällig — ‘parkeringsplats’ för den privata sektorns alltför stora skulder …

De stora budgetunderskotten kan ses som ett resultat av en omfattande ‘socialisering,’ där den offentliga sektorn kortsiktigt bidrar till att lyfta av den privata en alltför stor skuldbörda …

Statsskuldsutvecklingen spelar idag en viktig pedagogisk roll som indikator på den fara som ligger i dröjsmål med det ekonomisk-politiska reformarbetet. Endast under hotet om statsbankrutt förefaller Sveriges riksdag förmögen att fatta beslut om begränsningar av statens utgiftsåtaganden.

Hans Tson Söderström

Tyvärr lika sant idag som för 20 år sedan — och det säger en hel del om kvalitén på den svenska statsskuldsdebatten bland politiker och ekonomer.

 

The core problem with DSGE models

18 March, 2015 at 17:37 | Posted in Economics | 2 Comments

[DSGE] models ‘force’ behavioral changes through adjustment mechanisms that operate in narrowly parameterized equilibrium spaces. So violations of key model assumptions are introduced economically ‘one by one’ …

fubar1-2This modeling convention … makes it virtually impossible to incorporate concerns that are central to heterodox economics: liquidity preference, power in finance, predatory behavior, illiquid asset markets, increasing inequality in income and wealth …

One possibly decisive structural change has yet to be — and perhaps cannot be — acknowledged through DSGE modeling: the fact that most nations in the global North are simultaneously pursuing austerity policies. It is obvious in trade theory that every nation in a global trading system cannot maintain a surplus on current account. But this obvious result, which is an implication of a regime in which nation after nation is pursuing austerity macroeconomic policies, cannot be expressed in a macroeconomics based on models that focus almost completely on intertemporal coordination, while ignoring point-in-time structural interconnections.

Gary Dymski

Alesina and the deficit mania — poor research

18 March, 2015 at 13:34 | Posted in Economics | 1 Comment

The obsession with government budget deficits since the crisis of 2008 and the subsequent recession illustrates the damage done by mistaken economic ideas. In the rich West, tens of millions of people lost jobs that could have been saved …

81peE0DWJoLThe media focused on the politics of the budget debate, but economic ideas had a central role in the outcome. Believers in Say’s law predominated … The most prominent research was led by Alberto Alesina of Harvard University, where conservative economists had displaced much of the formerly pro-government liberal faculty of the 1960s … Cut deficits, went Alesina’s argument, and you will restore the business confidence to invest fully the excess savings; spending cuts were more effective than tax increases in reducing deficits.

Alesina’s research was poor. Most important, his analysis, which started in the early 1990s, didn’t distinguish the economic conditions under which austerity policies were adopted. Essentially, Alesina’s optimistic conclusions about austerity expansions applied only when economies were already strengthening or their currencies were falling in value sufficiently to spur export — conditions not applicable to either the United States or most of Europe.

Alan Kirman on the fundamental micro-macro difference

18 March, 2015 at 13:12 | Posted in Economics | Leave a comment

 

What the Eurozone crisis has taught us

17 March, 2015 at 19:11 | Posted in Economics | Leave a comment

Ever since the establishment of the modern nation-state in the late eighteenth and nineteenth centuries, the creation of the euro was perhaps the first significant experiment in modern times in which there was an attempt to separate money from the state, that is, to denationalize currency, as some right-wing ideologues and founders of modern neoliberalism, such as Friedrich von Hayek, had defended. resized_creepy-willy-wonka-meme-generator-oh-you-have-your-own-money-you-are-soooooo-cool-a958dcWhat the Eurozone crisis teaches is that this perception of how the monetary system works is quite wrong, because, in times of crisis, the democratic state must be able to spend money in order to meet its obligations to its citizens. The denationalization or “supra-nationalization” of money with the establishment that happened in the Eurozone took away from elected national governments the capacity to meaningfully manage their economies. Unless governments in the Eurozone are able to renegotiate a significant control and access money from their own central banks, the system will be continually plagued with crisis and will probably collapse in the longer term.

Mario Seccareccia

Keynes letter to President Roosevelt

17 March, 2015 at 17:33 | Posted in Economics | 5 Comments

The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

John Maynard Keynes

[h/t Constance]

‘Sound finance’ — a sign of obstinate ignorance

17 March, 2015 at 16:59 | Posted in Economics | 1 Comment

To many conservative and neoliberal politicians and economists there seems to be a spectre haunting the United States and Europe today — Keynesian ideas on governments pursuing policies raising effective demand and supporting employment. And some of the favourite arguments used among these Keynesophobics to fight it are the confidence argument and the doctrine of ‘sound finance.’

Is this witless crusade against economic reason new? Not at all. In 1943 a famous Polish economist wrote the following in a classic essay on ‘sound finance':

kale It should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called ‘economic experts’ closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives …

Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article …

We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

Michal Kalecki Political aspects of full employment

David K. Levine’s sad gibberish

16 March, 2015 at 22:17 | Posted in Economics | 4 Comments

50cf9626f2deeIn the wake of the latest financial crisis many people have come to wonder why economists never have been able to predict these manias, panics and crashes that haunt our economies.

In responding to these warranted wonderings, some economists – like theoretical economist David K. Levine in the article Why Economists Are Right: Rational Expectations and the Uncertainty Principle in Economics in the Huffington Post – have maintained that
 

it is a fundamental principle that there can be no reliable way of predicting a crisis.

To me this is a totally inadequate answer. And even trying to make an honour out of the inability of one’s own science to give answers to just questions, is indeed proof of a rather arrogant and insulting attitude.

Fortunately yours truly is not the only one racting to this guy’s arrogance:

Steve Blough trolls me this morning over on the Twitter Machine about the truly remarkable ignorance of economics professor David K. Levine:

I confess I am embarrassed for my great-grandfather Roland Greene Usher, who sweated blood all his life trying to help build Washington University in St. Louis into a great university, that WUSTL now employs people like David K. Levine:

Levine, you see, appears to believe that we live not in a monetary but in a barter economy. And so Levine claims that the Friedmanite-monetarist expansionary policies to fight recessions that recommended by Milton Friedman cannot, in fact, work:

David K. Levine: The Keynesian Illusion:
I want to think here of a complete economy peopled by real people … a phone guy who makes phones, a burger flipper, a hairdresser and a tattoo artist…. The burger flipper only wants a phone, the hairdresser only wants a burger, the tattoo artist only wants a haircut and the phone guy only wants a tattoo…. Each can produce one phone, burger, haircut or tattoo…. The phone guy produces a phone, trades it to the tattoo artist in exchange for a tattoo, who trades the phone to the hairdresser in exchange for a haircut, who trades it to burger flipper in exchange for a burger. All are employed… everyone is happy.

Now suppose that the phone guy suddenly decides he doesn’t like tattoos enough to be bothered building a phone…. Catastrophe. Everyone is unemployed…. The stupid phone guy… is lazy and doesn’t want to work…. The burger flipper would like to work making burgers if he can get a phone, the hairdresser would like cut hair if he could get a burger and the tattoo artist would like to work if he could get a haircut and yet all are unemployed …

Maybe the government should follow Keynes’s [note: Levine means “Milton Friedman’s” here] advice and print some money…. Then the phone guy can buy a tattoo, and the tattoo guy can buy a haircut and the haircutter can buy a burger, and the burger flipper — ooops… he can’t buy a phone because there are no phones…. [Perhaps] the burger flipper realizes he shouldn’t sell the burger because he can’t buy anything he wants… and we are right back… with everyone unemployed…. Maybe he doesn’t realize that and gets left holding the bag… a Ponzi scheme…. It seems like a poor excuse for economic policy that our plan is that we hope the burger flipper will be a fool and be willing to be left holding the bag.

DKL’s argument that Friedmanite-monetarist expansionary policies cannot cure a downturn is, I believe, correct — if the downturn is caused by a sudden outbreak of worker laziness, an adverse supply shock that reduces potential output.

Expansionary monetary policy in such a situation will indeed produce inflation. People’s expectations of the prices at which they will be able to buy are disappointed on the upside as too much money chases too few goods. It is not clear to me why DKL calls this a “Ponzi scheme” rather than “unanticipated inflation”.

But does anybody — save DKL — believe that an extraordinary and contagious outbreak of worker laziness is what caused the downturn that began in 2008?

No.

Everybody else believes that the downturn that began in 2008 occurred not because of a supply shock in which workers suddenly became lazy but because of a demand shock in which the financial crisis caused nearly everybody in the economy to try to rebuild their stocks of safe, liquid, secure financial assets. Everybody else believes that the right way to model the economy is not the barter economy of DKL — trading phones for tattoos, etc. — but as a monetary economy, in which people hold stocks of financial assets and trade them for currently-produced goods and services.

This matters.

This matters a lot.

Brad DeLong

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