Krugman and ‘neutral money’

5 October, 2018 at 09:21 | Posted in Economics | 5 Comments

Paul Krugman has repeatedly over the years argued that we should continue to use mainstream hobby horses like IS-LM and AS-AD models. Here’s one example:

Neutrality-of-moneySo why do AS-AD? … 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. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I seriously doubt that Keynes would have been impressed by having his theory being characterized by​ catchwords like “tendency to return to full employment” and “money is neutral in the long run.”


One of Keynes’ central tenets — in clear contradistinction to the beliefs of mainstream economists — is that there is no strong automatic tendency for economies to move toward full employment levels in monetary economies.

Money does not matter in mainstream macroeconomic models. That is true. According to the ‘classical dichotomy,’ real variables — output and employment — are independent of monetary variables, and so enables mainstream economics to depict the economy as basically a barter system.

But in the real world in which we happen to live, money certainly does matter. Money is not neutral and money matters in both the short run and the long run:

Banks are authorized to create credit, ex nihilo (“out of nothing”) so credit (money) cannot be neutral. In creating credit, a bank creates money that a borrower uses to purchase goods and services that add to aggregate demand and economic growth. Banks are not limited to acting only as intermediaries that move money from savers to borrowers. Importantly, banks also determine how credit and money are allocated. In the real world​, money creation distinguishes banks from other financial intermediaries (e.g., shadow banks) that can extend credit but do not possess the authority to create money. Within the financial sector, only banks are granted this authority. Money is a form of credit, an obligation to pay. In Werner’s (2012) words, “banks are the creators of the money supply” and “this is the missing link that causes credit rationing to have macroeconomic consequences.” In short, finance (banking, money and credit) matter!

John Balder


Kurt Waldheim and national amnesia

4 October, 2018 at 09:42 | Posted in Politics & Society | Leave a comment

kurt-waldheim-kv5F--1248x698@abcKurt Waldheim war kein Verbrecher. Jedenfalls kein Verbrecher großen Stils. Er war Karrierist und Opportunist, ein Nazi und Antisemit, der nach dem Krieg erfolgreich seine Vergangenheit umdeutete, sich als Opfer der Nazis hinstellte und es damit sehr weit brachte. Er war, mit einem Wort, Österreicher.

Was Waldheim interessant macht, ist nicht die Tatsache, dass er mit seiner Vergangenheit zehn Jahre lang UN-Generalsekretär sein konnte …

Bemerkenswert ist auch nicht, dass er in der konservativen Österreichischen Volkspartei (ÖVP) Karriere machen und sogar zum Präsidenten der Republik Österreich gewählt werden konnte. Jedes Volk hat die Politiker, die es verdient, und die individuelle Amnesie Waldheims entsprach der kollektiven Amnesie der Nation.

Alan Posener/Die Welt


4 October, 2018 at 00:08 | Posted in Education & School | Leave a comment

When Diane Reay, Cambridge University professor of education, started researching her book about working class children’s experiences of education, she had no idea just how much inequality she would uncover in state schools today … She expected to find the English state system was providing roughly the same education for all. “But it doesn’t” …

miseduReay’s background informs her book and her opinions. The daughter of a coalminer, and the eldest of eight, she grew up on a council estate and received free school meals. She then spent 20 years working as a teacher in London primary schools before moving into academia and ending up at Cambridge …

“I learned as a small child I had to work at least twice as hard as the middle class children to achieve the same result. When I did show ambition – to go to LSE to be a political researcher – I was told it wasn’t appropriate.”

How much has changed? “This government is making inequality in education worse, not better,” she says.

Donna Ferguson/The Guardian

Die Soziale Spaltung wird durch Privatschulen zementiert

4 October, 2018 at 00:01 | Posted in Education & School | Leave a comment

inklusion_by_thomas_plassmann_6Der Bildungswissenschaftler Marcel Helbig hat für das Wissenschaftszentrum in Berlin die soziale Spaltung in Deutschland messbar gemacht. In seiner aktuellen Studie … hat er zusammen mit seiner Kollegin Stefanie Jähnen gewaltige Datenmengen aus 74 deutschen Städten ausgewertet. Er wollte wissen, wie sich einkommensschwache Menschen auf die Stadtgebiete verteilen. Das Ergebnis: Bis auf wenige Ausnahmen ist die Segregation in Deutschland gestiegen. Arme und Reiche, aber auch Akademiker und Arbeiter bleiben immer mehr unter sich. “In Berlin leben etwa 25 Prozent der armen Kinder in Gebieten, in denen sich Armut massiv ballt”, sagt Helbig. Umgekehrt gebe es Viertel, in denen Kinder gar keine armen Menschen mehr kennen. “Diese soziale Spaltung wird durch Privatschulen noch zementiert”, sagt der Forscher. Denn die boomen: In den vergangenen 20 Jahren hat sich die Zahl der Privatschüler um 30 Prozent erhöht, die Anzahl der privaten Grundschulen sogar vervierfacht. “Das ist ein ernsthafter Hinweis darauf, dass Privatschulen genutzt werden, um sich bestimmten sozialen Gruppen zu entziehen”, sagt Helbig …

“Die sozialen Unterschiede sind da am größten, wo ein gewisses Abgrenzungsbedürfnis gegenüber Hartz-IV- oder Migrantenfamilien vorhanden ist”, sagt der Bildungsforscher Helbig. “Ich habe absolutes Verständnis dafür, dass die Eltern das Beste für ihre Kinder wollen – aber gesamtgesellschaftlich betrachtet wird so Ungleichheit noch verstärkt.”

Fabienne Hurst/Die Zeit

Give the public debt some respect and end austerity!

3 October, 2018 at 14:05 | Posted in Economics | 12 Comments

The claim that our public debt is excessive has been used as a major justification for austerity – cuts in spending. That massive debt, we are told, 1) must be repaid, 2) threatens our country with bankruptcy, and 3) is a burden on future generations. All these are wrong. Let me explain why …

austerity-george-osborne-desktopBritain’s national currency is managed by our central bank, the Bank of England, owned by the citizens of the United Kingdom (that is, our elected government). As a result, the British government can never default on its bonds. Our government can replace maturing public bonds with new ones. Should private buyers, households and businesses, refuse to purchase the new bonds at the interest rate set by the British government, our government can sell them to the Bank of England …

The debt is nothing more than pieces of paper that the government promises to buy back on a specific date. These pieces of paper can be bought back with new pieces of paper (new bonds) with later buy-back dates. If the private owners of the debt paper do not want the new bonds (new debt paper), our government can sell those new bonds to the Bank of England for cash and use the cash to pay the bond holders.

John Weeks

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few ask the question if maybe there is also a problem if public debt becomes too low.

darling-let-s-get-deeply-into-debtThe government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued — especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure — in a longer run — good borrowing preparedness and a sustained (government) bond market.

The question if public debt is good and that we may actually have too little of it is one of our time’s biggest questions. Giving the wrong answer to it will be costly.

Keynes als Investor

3 October, 2018 at 13:31 | Posted in Economics | Leave a comment

BF-AC563A_INVES_D_20120330211508Lange prägten Legenden das Bild des Investors Keynes. Sein Biograf Donald Moggridge etwa berichtet, dass Keynes das Volumen der King’s Chapel, der weltberühmten gotischen Kapelle des Colleges, schätzen ließ, in der Absicht, dort Getreide einzulagern, um es später mit Gewinn zu verkaufen.

Wie Keynes wirklich für das College investiert hat, haben kürzlich zwei Ökonomen untersucht. David Chambers (Cambridge) und Elroy Dimson (London) konnten Abrechnungen und Jahresberichte aus dem Archiv des King’s College einsehen und so die Anlagestrategie von Keynes im Detail rekonstruieren. Ihre Analyse kratzt am Mythos, denn sie zeigt: Keynes hatte anfangs wenig Erfolg. Vor allem aber dokumentiert sie, wie Keynes seine Strategien über die Jahre anpasste und mit welchen er schließlich eine fulminante Rendite erzielte. Diese Lehren sind noch heute von Interesse.

Friedemann & Tilman Bieber/Die Zeit

Why every economics paper should come with a warning label

2 October, 2018 at 18:48 | Posted in Economics | 6 Comments

e8f9b7fec248157b1989085deaa05dde-d7bu3k6It should be part of the academic competences of trained economists to be able to be clear about what their models are for; what the models are about; what the models are capable of doing, and what not; how reliable the models are; what sorts of criticisms have been levelled against the models and how the criticisms have been responded; what alternative models there are; etc. The challenge is not easy, and it is clear that it has not been met with sufficient exuberance and success. The capacity of writing “warning labels” would be part of the needed professional competence. Such warning labels would alert the relevant audiences to the capabilities and limitations of the models …

Exceptional amongst the social sciences is the role of the economics discipline in contemporary society, the intellectual and political authority economics enjoys regardless of its failures. Above, I cited Colander’s confession, “we pretend we understand more than we do” and we could add that economists do so in order to – or with the consequence of – protecting and promoting their socially acknowledged authority. In the worst case, there is a nightmarish scenario on which the more economists are consulted for policy advice, the more they need to pretend to know, and so the higher the likelihood of policies going astray. Avoiding the nightmare would require some smart restructuring of the institutions of the economics discipline.

Uskali Mäki

Was Deutschland vom schwedischen Schulsystem lernen kann — fast nichts!

2 October, 2018 at 15:32 | Posted in Education & School | Leave a comment

1531004351Die vorliegende Darstellung der gegenwärtigen Bildungsdebatte in Schweden und einiger der ihr zugrunde liegenden Entwicklungen verfolgt eine doppelte Zielsetzung. Zum einen will sie gegebenenfalls zu einem etwas nüchterneren, realistischeren Blick auf die schwedische Schule beitragen. Noch immer wird Schweden von manchen Betrachtern und Betrachterinnen zu einer Art „pädagogischem Utopia“ verklärt, in dem z.B. Reformen keine negativen Nebenfolgen haben … Das auf diese Weise entstehende Schweden-Bild besteht so zu einem guten Teil aus Projektionen von Vorstellungen der „guten Schule“ der deutschen Betrachterinnen und Betrachter … Hier möchte der Artikel ein Stück weit Aufklärungsarbeit leisten.

Zum anderen können manche der gegenwärtig in Schweden zu beobachtenden Entwicklungen vorsichtige Aufschlüsse auf möglicherweise in Deutschland zu erwartende Entwicklungen geben. Auch in Deutschland ist der Privatschulsektor in sprunghaftem Wachstum begriffen und werden Schulwahlmöglichkeiten erweitert … Sicherlich ist die Situation aufgrund abweichender Rahmenbedingungen nicht ohne Weiteres übertragbar; dennoch kann der Blick auf Schweden das Bewusstsein für Fragen wie die der zunehmenden sozialen Segregation im Schulsystem und der Auswirkungen der Einführung von Marktelementen auch im deutschen Schulsystem schärfen.

Kathleen Falkenberg/Bettina Vogt/Florian Waldow

The challenges of tractability in economic modelling

2 October, 2018 at 10:55 | Posted in Theory of Science & Methodology | Leave a comment

tractable-2There is a general sense in which the whole idea of model and model-based science derive from the need for tractability. The real world out there is far too intractable to be examined directly … therefore one directly examines the more tractable model worlds … Many of these tractability-enhancing assumptions are made because the math that is being used requires it. They enhance the mathematical tractability of models. This is not riskless … They can be quite harmful if tractability and negligibility do not go hand in hand, that is, if the unrealisticness of a tractability-enhancing assumption is not negligible. The dominance of mere tractability in models may have unfortunate consequences.

Uskali Mäki

Using ‘simplifying’ tractability assumptions — rational expectations, common knowledge, representative agents, linearity, additivity, ergodicity, etc — because otherwise they cannot ‘manipulate’ their models or come up with ‘rigorous ‘ and ‘precise’ predictions and explanations, does not exempt economists from having to justify their modelling choices. Being able to ‘manipulate’ things in models cannot per se be enough to warrant a methodological choice. If economists do not think their tractability assumptions make for good and realist models, it is certainly a just question to ask for clarification of the ultimate goal of the whole modelling endeavour.

Take for example the ongoing discussion on rational expectations as a modelling assumption. Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies are those based on rational expectations and representative actors models. As yours truly has tried to show in On the use and misuse of theories and models in mainstream economics there is really no support for this conviction at all. If microfounded macroeconomics has nothing to say about the real world and the economic problems out there, why should we care about it? The final court of appeal for macroeconomic models is not if we — once we have made our tractability assumptions — can ‘manipulate’ them, but the real world. And as long as no convincing justification is put forward for how the inferential bridging de facto is made, macroeconomic modelbuilding is little more than hand-waving that give us rather a little warrant for making inductive inferences from models to real-world target systems.

Mainstream economists construct closed formalistic-mathematical theories and models for the purpose of being able to deliver purportedly rigorous deductions that may somehow by be exportable to the target system. By analyzing a few causal factors in their ‘laboratories’ they hope they can perform ‘thought experiments’ and observe how these factors operate on their own and without impediments or confounders.

Unfortunately, this is not so. The reason for this is that economic causes never act in a socio-economic vacuum. Causes have to be set in a contextual structure to be able to operate. This structure has to take some form or other, but instead of incorporating structures that are true to the target system, the settings made in economic models are rather based on formalistic mathematical tractability. In the models they often appear as unrealistic ‘tractability’ assumptions, usually playing a decisive role in getting the deductive machinery to deliver precise’ and ‘rigorous’ results. This, of course, makes exporting to real-world target systems problematic, since these models – as part of a deductivist covering-law tradition in economics – are thought to deliver general and far-reaching conclusions that are externally valid. But how can we be sure the lessons learned in these theories and models have external validity when based on highly specific unrealistic assumptions? As a rule, the more specific and concrete the structures, the less generalizable the results. Admitting that we in principle can move from (partial) falsehoods in theories and models to truth in real-world target systems do not take us very far unless a thorough explication of the relation between theory, model and the real world target system is made. To have a deductive warrant for things happening in a closed model is no guarantee for them being preserved when applied to an open real-world target system.

If the ultimate criteria for success of a deductivist system are to what extent it predicts and cohere with (parts of) reality, modern mainstream economics seems to be a hopeless misallocation of scientific resources. To focus scientific endeavours on proving things in models is a gross misapprehension of what an economic theory ought to be about. Real-world economic systems do not conform to the restricted closed-system structure the mainstream modelling strategy presupposes.

What is wrong with mainstream economics is not that it employs models per se. What is wrong is that it employs poor models. They — and the tractability assumptions on which they to a large extent build on — are poor because they do not bridge to the real-world target system in which we live.

Spelteori och politik

1 October, 2018 at 15:49 | Posted in Economics | Leave a comment

Ekonomistas har Jesper Roine några ‘spelteoretiska resonemang’ kring den pågående och utdragna regeringsbildningen i vårt land:

The Median Voter Theorem.010Det överlägset mest kända resultatet när det gäller att applicera spelteori på politik är det så kallade medianväljar-teoremet. Enkelt uttryckt säger det att om politik kan beskrivas som att inta en position på en vänster-högerskala och två partier (eller ”block”) konkurrerar om väljarnas stöd så tenderar politiken att konvergera mot det som föredras av medianväljaren. Anledningen är enkel att förstå; om någon placerar sig någon annanstans än i mitten så kan motståndaren alltid placera lite till höger (eller vänster) och få stöd av den majoritet av väljarstödet som per definition finns där. Bara placeringen i mitten har egenskapen att ingen kan ändra sin position och därigenom få ett ökat stöd.

Nu kan man förstås invända att politik är långt mer komplicerat än så här och det är ju sant.

Ja, nog kan man med fog invända att “politik är långt mer komplcerat än så här.” Problemet med det mesta av de ‘spelteoretiska resonemang’ som Roine för är — tack och lov — att de har väldigt lite med verklig spelteori att göra. Som yours truly skriver i Real-World Economics Review artikeln Why game theory never will be anything but a footnote in the history of social science :

Lars Pålsson Syll_06Heavy use of formalism and mathematics easily foster the view that a theory is scientific. But although game theory may produce ‘absolute truths’ in imaginary model worlds, in the real world the game theoretic models are nothing but fables. Fables much reminiscent of the models used in logic, but also like them, delivering very little of value for social sciences trying to explain and understand real-life phenomena. The games that game theory portrays are model constructs, models without significant predictive capacity simply because they do not describe an always much more complex and uncertain reality …

Although some economists consider it useful to apply game theory and use game theoretical definitions, axioms, and theorems and (try to) test if real-world phenomena ‘satisfy’ the axioms and the inferences made from them, we have argued that that view is without warrant. When confronted with the real world we can (hopefully) judge if game theory really tells us if things are as postulated. The final court of appeal for models is the real world, and as long as no convincing justification is put forward for how the inferential bridging de facto is made, model building is little more than hand-waving that give us rather little warrant for making inductive inferences from the model world to the real world.

The real challenge in social science is to accept uncertainty and still try to explain why different kinds of transactions and social interactions take place. Simply conjuring problems away by assuming patently unreal things and treating uncertainty as if it was possible to reduce to stochastic risk, is like playing tennis with the net down. That is not the kind of game that scientists working on constructing a relevant and realist science want to play.

Chicago economics — utterly and completely wrong

1 October, 2018 at 11:01 | Posted in Economics | 5 Comments

Savings-and-InvestmentsEvery dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.

John Cochrane

The problem with this view is, of course, that it is utterly and completely wrong!

What Cochrane is reiterating here is nothing but Say’s law, basically saying that savings are equal to investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. As some of my Swedish forerunners — Gunnar Myrdal and Erik Lindahl — stressed more than 80 years ago, it’s really a question of ex-ante and ex-post adjustments. And as further stressed by a famous English economist about the same time, what happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

william-vickrey-1914-1996As long as there are plenty of idle resources lying around, and monetary authorities behave sensibly … those with a prospect for profitable investment can be enabled to obtain financing. Under these circumstances, each additional dollar of deficit will in the medium long run induce two or more additional dollars of private investment. The capital created is an increment to someone’s wealth and ipso facto someone’s saving. “Supply creates its own demand” fails as soon as some of the income generated by the supply is saved, but investment does create its own saving, and more. Any crowding out that may occur is the result, not of underlying economic reality, but of inappropriate restrictive reactions on the part of a monetary authority in response to the deficit.

William Vickrey Fifteen Fatal Fallacies of Financial Fundamentalism

As could be expected there is no room in Chicago economics for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, 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.

Robert Lucas and other Chicago economists have again and again dismissed 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 in their attempts to explain away the fact that the latest economic crises shows 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 and Cochrane to concede that, but it is still a fact that ought to be embarrassing. My rational expectation is that 30 years from now, no one will know who Robert Lucas or John Cochrane was. John Maynard Keynes and William Vickrey, on the other hand, will still be known as two of the masters of economics.

Vad säger oss — egentligen — statistiska regressioner?

30 September, 2018 at 20:16 | Posted in Statistics & Econometrics | Leave a comment

En grupp ‘högpresterande’ elever — Ada, Beda, och Cissi — söker in till en friskola. Ada och Beda blir antagna och börjar på den. Cissi blir också antagen, men väljer att gå på en kommunal skola. En annan grupp ‘lågpresterande’ elever — bestående av Dora och Eva — söker och blir både antagna till en friskola, men Eva väljer att gå på en kommunal skola.

drunkOm vi nu tittar på hur de presterar på ett kunskapsprov får vi följande resulatat: Ada — 22, Beda — 20, Cissi — 22, Dora — 12, Eva — 6. I den första gruppen får vi en provresultatskillnad mellan de elever som går på friskola och eleven som går i kommunal skola på -1 ((22+20)/2 – 22). I den andra gruppen blir provresultatskillnaden mellan eleven som väljer att gå på friskola och eleven som väljer gå i kommunal skola 6 (12-6). Den genomsnittliga provresultatskillnaden för grupperna tagna tillsammans är 2.5 ((-1+6)/2). Om man kör en vanlig OLS regression på datan — Skattade Provresultat = α + ß*Skolform + ζ*Grupptillhörighet — så får vi α = 8, ß = 2 och ζ = 12.

Kruxet med regressionsparameterskattningen är att det viktade genomsnittsvärdet — 2 — egentligen inte säger speciellt mycket om de gruppspecifika effekterna, där vi i den ena gruppen har en negativ ‘effekt’ av att gå i friskola och i den andra en positiv ‘effekt.’ Återigen har vi ett exempel där verklighetens heterogenitet riskerar ‘maskeras’ när man använder traditionell regressionsanalys för att skatta kausala ‘effekter.’

Curve-fitting methods

30 September, 2018 at 15:24 | Posted in Statistics & Econometrics | 1 Comment



30 September, 2018 at 13:24 | Posted in Varia | Leave a comment


Die Dynamik des Rechtsrucks

30 September, 2018 at 11:44 | Posted in Politics & Society | 1 Comment

Zehn Jahre lang, Woche für Woche, wurde ich merkwürdigerweise nicht müde, diese Nachweise immer und immer wieder abzuliefern. All die Jahre meinte ich, durch meine Tätigkeit als politische Kommentatorin unmittelbaren Einfluss auf den Meinungsbildungsprozess nehmen zu müssen … Erst werden sie reden, dann werden sie handeln. Wir müssen Rassisten, wo immer sie auftauchen, entlarven. Auf keinen Fall schweigen, nicht wegducken.

GERMANY-POLITICS-BUNDESTAGLangsam stellt sich aber heraus, dass die Dynamik des Rechtsrucks gerade aus diesem Reaktionsmuster erwächst. Weil sie genau wissen, dass wir anderen darauf konditioniert sind zu reagieren, werfen die Menschenfänger und Angstverbreiter ständig Köder aus, um Empörung und damit allgemeine Aufmerksamkeit zu generieren. Je mehr wir uns über ihre Provokationen entrüsten, umso mehr fühlen sich die Rechtspopulisten bestätigt und umso mehr gewinnen sie Sympathien in neuen Wählerschichten. Schließlich können sie sich so als Opfer von Zensur darstellen. Ihnen wird angeblich das Wort verboten. Ach Gottchen.

Schweigt man dazu, käme es einer Duldung gleich. Wenn man reagiert, hat man das Spiel in Kenntnis der Methode mitgespielt. Wie also Einspruch erheben? Der Schlüssel ist, die Methode Widerspruch ohne Konsequenz in Widerspruch durch Konsequenz zu ändern. Nur so lässt sich die Dynamik durchbrechen, indem man die Grenzüberschreitung als nicht hinnehmbare Haltung auch sichtbar macht.

Mely Kiyak

How do models relate to reality?

30 September, 2018 at 10:42 | Posted in Economics | 2 Comments


De Evige Tre

29 September, 2018 at 18:01 | Posted in Varia | Leave a comment


New Keynesian nonsense ‘proofs’

28 September, 2018 at 15:32 | Posted in Economics | 3 Comments

New Keynesians use mathematics to ‘prove’ some very odd stuff … Take, for example, a paper by Campbell Leith and Simon Wren-Lewis entitled Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy. The thrust of the paper is that our particular form of party-based democracy naturally leads to ‘deficit bias’ … The authors identify the root problem to be one of ‘heterogeneity’ — the fact that different political parties will have different views about how to run the country. Let’s look at a snippet from the paper to see how they use maths to support this earth-shattering discovery:

leith wren

This lays bare a fundamental problem with the New Keynesians. Their model reduces the economy — the complexity of which is beyond the limits of human understanding — to a ridiculously simple model which bears no relation to reality. They then selectively prime the model with whatever data provides the desired answer. In this case they have defined a model economy with only two household types and then assume that a political party will ‘solely represent’ the interest of one of them. Is that really what politicians do?

Alan Hutchison

The Leith​ & Wren-Lewis paper is nothing but nonsense on stilts. And worse still — this kind of math-wanking is supposed to be taken seriously!

‘New Keynesian’ economists would be wise to — at least once — read what Keynes himself​ had to say about the kind of  nonsense-methodology they are using:

But I am unfamiliar with the methods involved and it may be that my impression that nothing emerges at the end which has not been introduced expressly or tacitly at the beginning is quite wrong … It seems to me essential in an article of this sort to put in the fullest and most explicit manner at the beginning the assumptions which are made and the methods by which the [results] are derived; and then to state at the end what substantially novel conclusions have​ been arrived at …
Quotation-Kenneth-Boulding-mathematics-economics-Meetville-Quotes-152829I cannot persuade myself that this sort of treatment of economic theory has anything significant to contribute. I suspect it of being nothing better than a contraption proceeding from premises which are not stated with precision to conclusions which have no clear application … [This creates] a mass of symbolism which covers up all kinds of unstated special assumptions.

Letter from Keynes to Frisch 28 November 1935

Requiem for my friend (personal)

28 September, 2018 at 10:21 | Posted in Varia | Leave a comment

Bengt Nilsson In Memoriam

A friend is someone who knows all about you and still loves you

Erdogan und die andere Türkei

27 September, 2018 at 18:28 | Posted in Politics & Society | Leave a comment


Instrumentalvariabler och heterogenitet — en kommentar (wonkish)

27 September, 2018 at 17:30 | Posted in Statistics & Econometrics | Leave a comment

Användandet av instrumentalvariabler används numera flitigt bland ekonomer och andra samhällsforskare. Inte minst när man vill försöka gå bakom statistikens ‘korrelationer’ och också säga något om ‘kausalitet.’

causation1Tyvärr brister det ofta rejält i tolkningen av de resultat man får med hjälp av den vanligaste metoden som används för detta syfte — statistisk regressionsanalys.

Ett exempel från skolområdet belyser detta väl.

Ibland hävdas det bland skoldebattörer och politiker att friskolor skulle vara bättre än kommunala skolor. De sägs leda till bättre resultat. Alltså: om vi tänker oss att man skulle låta elever från friskolor och kommunala skolor genomföra gemensamma prov så skulle friskolelever prestera bättre (fler rätt på provräkningar e d).

För argumentets skull antar vi att man för att ta reda på om det verkligen förhåller sig på detta sätt även i Malmö, slumpmässigt väljer ut högstadieelever i Malmö och låter dem skriva ett prov. Resultatet skulle då i vanlig regressionsanalytisk form kunna bli

Provresultat = 20 + 5*T,

där T=1 om eleven går i friskola, och T=0 om eleven går i kommunal skola. Detta skulle innebära att man får bekräftat antagandet — friskoleelever har i genomsnitt 5 poäng högre resultat än elever på kommunala skolor i Malmö.

Nu är ju politiker (förhoppningsvis) inte dummare än att de är medvetna om att detta statistiska resultat inte kan tolkas i kausala termer eftersom elever som går på friskolor typiskt inte har samma bakgrund (socio-ekonomiskt, utbildningsmässigt, kulturellt etc) som de som går på kommunala skolor (relationen skolform-resultat är ‘confounded’ via ‘selection bias.’)

För att om möjligt få ett bättre mått på skolformens kausala effekter väljer Malmös politiker  föreslå att man via lottning gör det möjligt för 1000 högstadieelever att bli antagna till en friskola. ‘Vinstchansen’ är 10%, så 100 elever får denna möjlighet. Av dessa antar 20 erbjudandet att gå i friskola. Av de 900 lotterideltagare som inte ‘vinner’ väljer 100 att gå i friskola.

Lotteriet uppfattas ofta av skolforskare som en ’instrumentalvariabel’ och när man så genomför regressionsanalysen med hjälp av denna visar sig resultatet bli

Provresultat = 20 + 2*T.

Detta tolkas standardmässigt som att man nu har fått ett kausalt mått på hur mycket bättre provresultat högstadieelever i Malmö i genomsnitt skulle få om de istället för att gå på kommunala skolor skulle välja att gå på friskolor.

Men stämmer det? Nej!

Om inte alla Malmös skolelever har exakt samma provresultat (vilket väl får anses vara ett rätt långsökt ‘homogenitetsantagande’) så gäller den angivna genomsnittliga kausala effekten bara de elever som väljer att gå på friskola om de ’vinner’ i lotteriet, men som annars inte skulle välja att gå på en friskola (på statistikjargong kallar vi dessa ’compliers’). Att denna grupp elever skulle vara speciellt intressant i det här exemplet är svårt att se med tanke på att den genomsnittliga kausala effekten skattad med hjälp av instrumentalvariabeln inte säger någonting alls om effekten för majoriteten (de 100 av 120 som väljer en friskola utan att ha ‘vunnit’ i lotteriet) av de som väljer att gå på en friskola.

Slutsats: forskare måste vara mycket mer försiktiga med att tolka vanliga statistiska regressionsanalyser och deras ‘genomsnittsskattningar’ som kausala. Verkligheten uppvisar en hög grad av heterogenitet. Och då säger oss regressionsanalysens konstanta ‘genomsnittsparametrar’ i regel inte ett smack!

RBC — nothing but total horseshit!

27 September, 2018 at 14:26 | Posted in Economics | Leave a comment

tobin_2049712cThey try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

James Tobin

Real Business Cycle theory basically says that economic cycles are caused by technology-induced changes in productivity. It says that employment goes up or down because people choose to work more when productivity is high and less when it’s low. This is, of course, nothing but pure nonsense — and how on earth those guys that promoted this theory (Thomas Sargent et consortes) could be awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is really beyond comprehension.

In yours truly’s History of Economic Theories (4th ed, 2007, p. 405) it was concluded that

the problem is that it has turned out to be very difficult to empirically verify the theory’s view on economic fluctuations as being effects of rational actors’ optimal intertemporal choices … Empirical studies have not been able to corroborate the assumption of the sensitivity of labour supply to changes in intertemporal relative prices. Most studies rather point​ to expected changes in real wages having only rather little influence on the supply of labour.

Rigorous models lacking relevance is not to be taken seriously. Or as Keynes had it — It is better to be vaguely right than precisely wrong …

When should we believe the unconfoundedness assumption?

26 September, 2018 at 09:38 | Posted in Statistics & Econometrics | 1 Comment

Economics may be an informative tool for research. But if its practitioners do not investigate and make an effort of providing a justification for the credibility of the assumptions on which they erect their building, it will not fulfil its task. There is a gap between its aspirations and its accomplishments, and without more supportive evidence to substantiate its claims, critics — like yours truly — will continue to consider its ultimate arguments as a mixture of rather unhelpful metaphors and metaphysics.

In mainstream economics, there is an excessive focus on formal modelling and statistics. The models and the statistical (econometric) machinery build on — often hidden and non-argued for — assumptions that are unsupported by data and whose veracity is highly uncertain.

Econometrics fails miserably over and over again. One reason is that the unconfoundedness assumption does not hold. Another important reason why it does is that the error term in the regression models used is thought of as representing the effect of the variables that were omitted from the models. The error term is somehow thought to be a ‘cover-all’ term representing omitted content in the model and necessary to include to ‘save’ the assumed deterministic relation between the other random variables included in the model. Error terms are usually assumed to be orthogonal (uncorrelated) to the explanatory variables. But since they are unobservable, they are also impossible to empirically test. And without justification of the orthogonality assumption, there is, as a rule, nothing to ensure identifiability:

Paul-Romer-727x727With enough math, an author can be confident that most readers will never figure out where a FWUTV (facts with unknown truth value) is buried. A discussant or referee cannot say that an identification assumption is not credible if they cannot figure out what it is and are too embarrassed to ask.

Distributional assumptions about error terms are a good place to bury things because hardly anyone pays attention to them. Moreover, if a critic does see that this is the identifying assumption, how can she win an argument about the true expected value the level of aether? If the author can make up an imaginary variable, “because I say so” seems like a pretty convincing answer to any question about its properties.

Paul Romer

Keynes e il ruolo dello stato nell’economia

25 September, 2018 at 19:48 | Posted in Economics | Leave a comment


Regression analysis — a constructive critique

25 September, 2018 at 08:34 | Posted in Statistics & Econometrics | Leave a comment

As a descriptive exercise, all is well. One can compare the average salary of men and women, holding constant potential confounders. The result is a summary of how salaries differ on the average by gender, conditional on the values of one or more covariates. Why the salaries may on the average differ is not represented explicitly in the regression model …

berkMoving to causal inference is an enormous step that needs to be thoroughly considered. To begin, one must ponder … whether the causal variable of interest can be usefully conceptualized as an intervention within a response schedule framework [a formal structure in which to consider what the value of the response y would be if an input x were set to some vaue]. Once again consider gender. Imagine a particular faculty member. Now imagine intervening so that the faculty member’s gender could be set to ‘male.’ One would do this while altering nothing else about this person …

Clearly, the fit between the requisite response schedule and the academic world in which salaries are determined fails for at least two reasons: The idea of setting gender to male or female is an enormous stretch, and even, if gender could be manipulated, it is hard to accept that only gender would be changed. In short, the causal story is in deep trouble even before the matter of holding constant surfaces …

This is not to imply that it never makes sense to apply regression-based adjustments in causal modeling. The critical issue is that the real world must cooperate by providing interventions that could be delivered separately …

As a technical move, it is easy to apply regression-based adjustmens to confounders. Whether it is sensible to do so is an entirely different matter …

The most demanding material [is] the examination of what it means to ‘hold constant’ … The problem [is] the potential incongruence between the mechanics of regression-based adjustments and the natural or social world under study.

Why capitalism​ always will create bullshit jobs

24 September, 2018 at 14:02 | Posted in Economics | Comments Off on Why capitalism​ always will create bullshit jobs


Re-examining economic laws

24 September, 2018 at 11:25 | Posted in Economics | 2 Comments

In mainstream economics, there is a lot of talk about ‘economic laws.’ The crux of these laws that allegedly do exist in economics, is that they only hold ceteris paribus. That fundamentally means that these laws only hold when the right conditions are at hand for giving rise to them. Unfortunately, from an empirical point of view, those conditions are only at hand in artificially closed nomological models purposely designed to give rise to the kind of regular associations that economists want to explain. But — since these laws do not exist outside these socio-economic machines, what is the point in constructing thought experimental models showing these non-existent laws? When the almost endless list of narrow and specific assumptions necessary to allow the ‘rigorous’ deductions are known to be at odds with reality, what good do these models do?

Deducing laws in theoretical models is of no avail if you cannot show that the models — and the assumptions they build on — are realistic representations of what goes on in real life.

Conclusion? Instead of restricting our methodological endeavours at building ever more rigorous and precise deducible models, we ought to spend much more time improving our methods for choosing models!

julianThere is a difference between having evidence for some hypothesis and having evidence for the hypothesis relevant for a given purpose. The difference is important because scientific methods tend to be good at addressing hypotheses of a certain kind and not others: scientific methods come with particular applications built into them … The advantage of mathematical modelling is that its method of deriving a result is that of mathematical​ proof​: the conclusion is guaranteed to hold given the assumptions. However, the evidence generated in this way is valid only in abstract model worlds while we would like to evaluate hypotheses about what happens in economies in the real world … The upshot is that valid evidence does not seem to be enough. What we also need is to evaluate the relevance of the evidence in the context of a given purpose.

Why does someone have to die?

19 September, 2018 at 15:55 | Posted in Varia | Comments Off on Why does someone have to die?

Sad, sad, sad, news reached me today of my oldest and dearest friend.
No more blogging this week.

The mainstream-heterodoxy divide in Swedish economics

19 September, 2018 at 09:49 | Posted in Economics | Comments Off on The mainstream-heterodoxy divide in Swedish economics

20180919_094444_001-132514322.jpgIn situations with a dominant style of thought and marginal heterodoxies, this creates an exclusionary mechanism that tends to favour the dominant style. I have shown how this is expressed in the analysed evaluation reports through the consensus on a disciplinary conception of quality that aligns with the disciplinary style of reasoning … Sometimes, reviewers are even explicit about work being outside of the mainstream as a sufficient argument against it, which amounts to a sort of pure boundary work that doesn’t spend time on elaborate justification.

How to control confounding (wonkish)

18 September, 2018 at 17:55 | Posted in Statistics & Econometrics | Comments Off on How to control confounding (wonkish)


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