The lack of positive results in econometrics

September 17, 2019 3 comments

from Lars Syll

For the sake of balancing the overly rosy picture of econometric achievements given in the usual econometrics textbooks today, it may be interesting to see how Trygve Haavelmo — with the completion (in 1958) of the twenty-fifth volume of Econometrica — assessed the role of econometrics in the advancement of economics.

Haavelmo intro 2We have found certain general principles which would seem to make good sense. Essentially, these principles are based on the reasonable idea that, if an economic model is in fact “correct” or “true,” we can say something a priori about the way in which the data emerging from it must behave. We can say something, a priori, about whether it is theoretically possible to estimate the parameters involved. And we can decide, a priori, what the proper estimation procedure should be … But the concrete results of these efforts have often been a seemingly lower degree of accuracy of the would-be economic laws (i.e., larger residuals), or coefficients that seem a priori less reasonable than those obtained by using cruder or clearly inconsistent methods. Read more…

Economics’ billiard-ball model

September 16, 2019 2 comments

“The social extension of atomistic methods . . . is not, of course, really a scientific project at all, though it uses scientific language.  It is a distortion that tends to discredit the whole idea of science by exploiting it to draw dubious political and moral conclusions.  This distortion itself has become obvious over the very notion of an atom – the idea of an impenetrable, essentially separate unit as the ultimate form of matter.  We know that today’s physicists no longer use this billiard-ball model.  They now conceive of particles in terms of their powers and their interaction with other particles, not as inert separate objects.  The seventeenth-century idea of a world constructed out of ultimately disconnected units has proved to be simply mistake.  Instead, physicists now see many levels of complexity; many different patterns of connection.

At an obvious level it follows that we ought no longer to be impressed by social atomism, or by behaviourism, in the way that we once were.  We can see now that it cannot have been scientific to impose on social affairs a pattern which turns out to have been so inadequate for physics.  But the moral goes much deeper.  It is one that would still hold even if physics had not changed.  That moral is that, quite generally, social and psychological problems cannot be solved by imposing on them irrelevant patterns imported from the physical sciences, merely because they are seductively simple.”

Mary Midgley, p.7-8, Science and Poetry

Central bank independence — institutionalizing monetary handcuffs

September 14, 2019 7 comments

from Lars Syll

hqb813cpgmtyImposing a hard target can bind the central bank, but the government must then act on failures to hit the target. Why would it if it is self-interested? If it does, that amounts to saying it is not selfish, which undermines the argument that independence is needed. The same argument can be used to deconstruct independence itself. Suppose independence is a solution to time inconsistency. Why would a selfish politician ever agree to independence in the first place? If they did, that would be tantamount to saying they are not selfish, in which case independence is not needed. In other words, only non-self-interested politicians choose independence, making independence redundant …

Even if the banker is honest, there still remains the fundamental question of why would selfish politicians go against their own interests and appoint a conservative independent central banker? Doing so is tantamount to proving they are not selfish, in which case there is no need for an independent central bank. Read more…

“Our economic fundamentals are strong.”

September 13, 2019 2 comments

from David Ruccio


Rigged: How globalization and the rules of the modern economy were structured to make the rich richer

September 12, 2019 3 comments

from Dean Baker

Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich RicherThe richest 1% have done extraordinarily well over the last four decades. But income has stagnated for the majority. This was not an accident. It was by design.

My book, Rigged, highlights five areas where US policies were deliberately structured to redistribute income upwards.

  1. IP laws were strengthened, making patent & copyright monopolies longer and stronger

This hugely increased the share of GDP that goes to sectors like pharmaceuticals, medical equipment, computers, and software. And it made stakeholders in these sectors hugely wealthy.

But it was unnecessary. Alternative mechanisms for financing innovation and creative work – such as direct public funding for pharmaceutical research, with new drugs selling as generics – would not have led to the same sort of upward redistribution.v Read more…

Kitchen sink econometrics

September 11, 2019 11 comments

from Lars Syll

When I present this argument … one or more scholars say, “But shouldn’t I control for everything I can in my regressions? If not, aren’t my coefficients biased due to excluded variables?” This argument is not as persuasive as it may seem initially. First of all, if what you are doing is misspecified already, then adding or excluding other variables has no tendency to make things consistently better or worse … The excluded variable argument only works if you are sure your specification is precisely correct with all variables included. But no one can know that with more than a handful of explanatory variables.
piled-up-dishes-in-kitchen-sinkStill more importantly, big, mushy linear regression and probit equations seem to need a great many control variables precisely because they are jamming together all sorts of observations that do not belong together. Countries, wars, racial categories, religious preferences, education levels, and other variables that change people’s coefficients are “controlled” with dummy variables that are completely inadequate to modeling their effects. The result is a long list of independent variables, a jumbled bag of nearly unrelated observations, and often a hopelessly bad specification with meaningless (but statistically significant with several asterisks!) results. Read more…

WEA Commentaries is looking for a co-editor

September 11, 2019 Comments off

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Combatting global warming and austerity

September 10, 2019 4 comments

from Dean Baker

In the United States, proposals for a Green New Deal have been getting considerable attention in recent months as activists have pressed both members of Congress and Democratic presidential candidates to support aggressive measures to combat global warming. There clearly is much more that we can and must do in the immediate future to prevent enormous damage to the planet.

However, major initiatives in the United States to combat global warming will almost certainly require some increases in taxes. There is likely some slack in the U.S. economy (perhaps we’ll see more slack as a result of Donald Trump’s misfires in his trade war), but a major push involving hundreds of billions of dollars of additional annual spending (2-3 percent of GDP) will almost certainly necessitate tax increases. This doesn’t mean we shouldn’t move quickly to take steps to save the planet, but these steps will have some cost.

In contrast, most of Europe is in a situation where it could easily make large commitments toward increased spending on clean energy, mass transit, and conservation at essentially no economic cost. In fact, a Green New Deal Agenda in Europe is likely to lead to increased employment and output. The big difference is that Europe is much further from facing constraints on its economy. It has plenty of room to expand output and employment without seeing inflation become a problem.  Read more…

Necessary inventions …

September 10, 2019 15 comments

from Lars Syll


The quasi-peaceable gentleman of leisure, then, not only consumes of the staff of life beyond the minimum required for subsistence and physical efficiency, but his consumption also undergoes a specialisation as regards the quality of the goods consumed. He consumes freely and of the best, in food, drink, narcotics, shelter, services, ornaments, apparel, weapons and accoutrements, amusements, amulets, and idols or divinities.

Thorstein Veblen

Government-granted patent monopolies are driving up drug prices

September 9, 2019 5 comments

from Dean Baker

Most of the leading Democratic presidential contenders have put forward a plan to reduce drug prices. But for some reason, none of them have embraced the simple idea of not making drugs expensive in the first place. Specifically, none of the contenders have proposed moving away from the current system of financing the research and development of new drugs through government-granted patent monopolies.

The point is a simple one that should be obvious to people in policy debates. Drugs are almost invariably cheap to manufacture. Drugs that sell as generics, with free-market competition, are rarely expensive. The drugs that cost tens or hundreds of thousands of dollars annually are almost always subject to patent monopolies or some related form of government protection.

If all drugs were sold in a free market, individual patients would not have to struggle to pay for the drugs they need and there would be enormous savings to the economy. We will spend roughly $460 billion in 2019 on prescription drugs. In a free market, these drugs would likely sell for less than $80 billion.

The annual savings of $380 billion is almost 1.9 percent of GDP. It is more than five times the annual food stamp budget. In other words, it is a significant savings. Read more…

The pretense-of-knowledge syndrome in economics

September 8, 2019 9 comments

from Lars Syll

What does concern me about my discipline … is that its current core — by which I mainly mean the so-called dynamic stochastic general equilibrium approach — has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one …

While it often makes sense to assume rational expectations for a limited application to isolate a particular mechanism that is distinct from the role of expectations formation, this assumption no longer makes sense once we assemble the whole model. Agents could be fully rational with respect to their local environments and everyday activities, but they are most probably nearly clueless with respect to the statistics about which current macroeconomic models expect them to have full information and rational information. Read more…

Game theory for humans with hearts

September 7, 2019 14 comments

from Asad Zaman

The following is a slightly revised excerpt of Section 1.2 from my paper on “Empirical Evidence Against Utility Theory“ – Game theorists rule out Humans with hearts by assumption. The excerpt provides some empirical evidence (not needed by anyone except economists) that human actually do have hearts, and this actually affects their behavior! surprise, surprise!

The “Goeree-Holt Humans with Hearts” (GHHwH) Game: Conventional game theory operates under the assumption that both players (A-player labelled Aleena, and B-player labelled Babar) are heartless human beings. They have no emotions; rather, they are disembodied brains floating in vats. For more explanation and discussion, see “Homo Economics: Cold, Calculating, and Callous“. Below we discuss a game described in Goeree, Jacob K. and Charles A. Holt (2001). “Ten Little Treasures of Game Theory and Ten Intuitive Contradictions,” American Economic Review, vol. 91(5): 1402-1422. They do not provide a name for this game, so we will call it the GH Humans with Hearts game; it is a convenient way to prove the human beings do not behave like homo economicus. Furthermore, this assertion is not a surprise to anyone except economists, who are trained to think like economists. This means deep training in learning to model human behaviour as heartless, which blinds them to the complex realities of human behaviour.  read more

A guide to econometrics

September 6, 2019 17 comments

from Lars Syll

kennedyguide1. Thou shalt use common sense and economic theory.
2. Thou shalt ask the right question.
3. Thou shalt know the context.
4. Thou shalt inspect the data.
5. Thou shalt not worship complexity.
6. Thou shalt look long and hard at thy results.
7. Thou shalt beware the costs of data mining.
8. Thou shalt be willing to compromise.
9. Thou shalt not confuse statistical significance with substance.
10. Thou shalt confess in the presence of sensitivity.

“Sociopathic societies”

September 5, 2019 12 comments

from Ken Zimmerman

Greed is a personality disorder. While it is sometimes correct that without greed humans would still be living in caves, it is also correct that left unchecked, the insatiable desire for more and better material things can be destructive. These are the warning signs of uncontrolled greed.

The first sign of the greed syndrome is overly self-centered behavior. Greedy people are always saying “me, me, me” with very little regard for the needs and feelings of others. Envy and greed are like twins. While greed is a strong desire for more and more possessions (such as wealth and power), envy goes one step further as a strong desire by greedy people for the possessions of others.

Greedy people lack empathy. Caring—being concerned about the feelings of others—is not part of their way of life. As such, they have little qualms about causing pain to others. Their inability to empathize, their lack of genuine interest in the ideas and feelings of others, and their unwillingness to take personal responsibility for their behavior and actions makes interaction with them very difficult.

Greedy people are never satisfied. They look at the world as a zero-sum game. Instead of thinking that everyone would benefit as the pie gets larger, they view the pie as a constant and want the largest piece. They truly believe that they deserve more, even if it comes at someone else’s expense. Read more…

On the irrelevance of economics

September 5, 2019 59 comments

from Lars Syll

I believe that as an economic theorist, I have very little to say about the real world and that there are very few models in economic theory that can be used to provide serious advice. However, economic theory has real effects. I cannot ignore the fact that our work as teachers and researchers influences students’ minds and does so in a way with which I am not comfortable. Can we find a way to be relevant without being charlatans?

stunAs economic theorists, we organize our thoughts using what we call models.
The word “model” sounds more scientific than “fable” or “fairy tale” although I do not see much difference between them. The author of a fable draws a parallel to a situation in real life. He has some moral he wishes to impart to the reader … Being something between fantasy and reality, a fable is free of extraneous details and annoying diversions …

We do exactly the same thing in economic theory … We perform thought exercises that are only loosely connected to reality and that have been stripped of most of their real-life characteristics.

Ariel Rubinstein

Growth and Growth

September 4, 2019 3 comments

Gross World Product

Graph of gross world product (GWP) historic, for the past two thousand years

Read more…

Why monetary policies are impotent

September 4, 2019 3 comments

from Lars Syll

Even if interest-rate cuts at all points proximately increase demand, there are substantial grounds for concern if this effect is weak. It may be that any short-run demand benefit is offset by the adverse effects of lower rates on subsequent performance …

commercial illustratorFrom a macro perspective, low interest rates promote leverage and asset bubbles by reducing borrowing costs and discount factors, and encouraging investors to reach for yield. Almost every account of the 2008 financial crisis assigns at least some role to the consequences of the very low interest rates that prevailed in the early 2000s. More broadly, students of bubbles, from the economic historian Charles Kindleberger onward, always emphasize the role of easy money and overly ample liquidity.

From a micro perspective, low rates undermine financial intermediaries’ health by reducing their profitability, impede the efficient allocation of capital by enabling even the weakest firms to meet debt-service obligations, and may also inhibit competition by favoring incumbent firms …

In moving toward the secular stagnation view, we have come to agree with the point long stressed by writers in the post-Keynesian (or, perhaps more accurately, original Keynesian) tradition: the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand …

What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

Lawrence Summers & Anna Stansbury

New ‘Keynesians’ — like Paul Krugman and Simon Wren-Lewis — have Read more…

Austerity-obsessed Europe could combat climate change without raising taxes

September 3, 2019 9 comments

from Dean Baker

In the United States, there has been much attention given to the various proposals for a Green New Deal. While there have been legitimate questions about paying for a large push to reduce greenhouse gas emissions, many accept the need for such measures for the survival of the planet.

However, there has been less attention paid to the failure of European countries to act in this area, in spite of the fact that a substantial program would be virtually costless for Europe. There has been far more attention paid to the politics around Brexit in the United Kingdom than to the important question of how Europe will address global warming.

Just to be clear, the European countries have been far better global citizens in this area than the United States. Their per-person emissions are roughly half as much as the United States. Furthermore, many European countries have already taken aggressive measures to promote clean energy and encourage conservation.

But in the battle to slow global warming, simply doing better than the United States is not good enough. The European Union can and must do more to reduce its greenhouse gas emissions. Read more…

The slogan should be, “Save Sapiens.”

September 2, 2019 4 comments

from Ken Zimmerman

First, let’s get the story about climate change right before we look to the Amazon. Climate change will certainly impact the planet in dozens of ways. But it is extremely unlikely it will destroy the planet. So the slogan should be, “Save Sapiens.” Climate change impacts will make human life on the planet more difficult, perhaps even impossible. By fighting climate change, humans are fighting to save themselves.

For us today, it’s sometimes difficult to comprehend just how valueless “undeveloped” resources, including forests, fields, mountains, and valleys were to Americans beginning even before the USA existed. These extreme right-wingers rearing their heads again around the world are throw-backs to that era. If it can’t be monetized, then it worthless. So, before we attempt any other changes to save the Amazon, or Yellowstone, or the great forests, we need to change the culture that takes these as worthless till they “show a profit.” And once you begin to look closely, you’ll be surprised by folks you meet everyday who take this culture as unquestionable. Sometimes human greed and stupidity seem to know no bounds.

Cherry-picking economic models

September 2, 2019 56 comments

from Lars Syll

How would you react if a renowned physicist, say, ​Richard Feynman, was telling you that sometimes force is proportional to acceleration and at other times it is proportional to acceleration squared?

cartoon-hand-picking-cherry-24380737I guess you would be unimpressed. But actually, what most mainstream economists do amounts to the same strange thing when it comes to theory development and model modification.

In mainstream economic theory,​ preferences are standardly expressed in the form of a utility function. But although the expected utility theory has been known for a long time to be both theoretically and descriptively inadequate, mainstream economists all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.

What most mainstream economists try to do in face of the obvious theoretical and behavioural inadequacies of the expected utility theory, is to marginally mend it. But that cannot be the right attitude when facing scientific anomalies. When models are plainly wrong, you’d better replace them! Instead of mending the broken pieces it would be much better to concentrate on developing descriptively accurate models of choice under uncertainty. Read more…