Economics — a science with wacky views of human behaviour​

February 25, 2018 1 comment

from Lars Syll

There is something about the way economists construct their models nowadays that obviously doesn’t sit right.

The one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics still has not given way to methodological pluralism based on ontological considerations (rather than formalistic tractability). In their search for model-based rigour and certainty, ‘modern’ economics has turned out to be a totally hopeless project in terms of real-world relevance.

grumpy-economics-catIf macroeconomic models — no matter of what ilk — build on microfoundational assumptions of representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that model-based conclusions or hypotheses of causally relevant mechanisms or regularities can be bridged to real-world target systems, are obviously non-justifiable. Incompatibility between actual behaviour and the behaviour in macroeconomic models building on representative actors and rational expectations microfoundations shows the futility of trying to represent real-world target systems with models flagrantly at odds with reality. As Robert Gordon once had it:

 

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.

Regraphing USA unemployment history. An addendum to the USA data

February 25, 2018 Leave a comment

Oops2

Source: Bureau of Labor Statistics

Broad unemployment today is, compared with the period before 1994, worse than you think. A new way of estimating ‘part time workers for economic reasons’ shifted this series downward with almost 1% of the labor force. To gain a proper understanding of historical developments present day data have to be increased or historical data have to be decreased a little.  Read more…

Oil, gas and coal 2040 (4 graphs)

February 24, 2018 5 comments

Utopia and inequality

February 24, 2018 5 comments

from David Ruccio

graph_dl (1)

Economic inequality is arguably the crucial issue facing contemporary capitalism—especially in the United States but also across the entire world economy.   Read more…

Bribe offers for academics

February 23, 2018 5 comments

from Edward Fullbrook

Norbert Häring’s story about misleading academic research reminds me of another story.

Big-money offering bribes to academics is, I suspect, more common than people, including academics, realize.  I first encountered the practice when I was an undergraduate.  My university’s most popular course, “Insurance”, was taught by an economics professor whose students affectionately called Doc Elliot.  He taught not only how the insurance industry purported to work, but also how it really worked, and he frequently accepted off-campus speaking engagements.

Doc Elliot may be the only person who has ever lived who could talk insurance and make people laugh.  Certainly, he was the funniest person I’d ever known; and, despite our 35-year age gap, we became friends of a sort.  One day I was sitting with him in his office when, handing me a business letter, he said, “Here, this is what a bribe offer looks like.”

The letter was from a national association of insurance companies.  It praised his eminence as a world authority on insurance and said they would like to be able to occasionally call on him for advice.  For this they would pay him $80,000 a year.  At the time the university’s highest professor’s salary was $10,000, and so far as I know there was no money in this professor’s family.

“In the world we live in,” explained Doc Elliot, “refraining from telling the truth is often worth lots more than telling it.  I get between-the-lines offers like this all the time.  But I think this one deserves to go up on my bulletin board.”

CEPR vs. NBER: Two approaches for dealing with false research in favor of tuition fees

February 23, 2018 5 comments

from Norbert Häring

For international readers, I would like to summarize a piece on false economic research supporting tuition fees, which appeared in German in Handelsblatt on 19 February. As interesting as the fake research itself is the differing reactions of the two main channels, which had been used to publicize it: One was the prestigious Working Paper series of the National Bureau of Economic Research in the US The other was the well-read platform Vox (voxeu.org) of the London-based Centre for Economic Policy Research.

Britain started to impose tuition fees starting in 1998. From 1000 GBP, at first just for the wealthier students, the fees went up steeply to 9250 GBP for all students today. On average, graduates leave university with about 50.000 GBP in debt. With Jeremy Corbyn rather successfully campaigning against tuition fees and one of the architects of the current system, former Blair advisor Andrew Adonis demanding its abolition, the system has come under fire in Britain. The same is true for the US. Critics assume that there is a deterring effect of high tuition fees on young people from disadvantaged households.

A surprising finding   Read more…

Science and the quest for truth

February 23, 2018 25 comments

from Lars Syll

28mptoothfairy_jpg_1771152eIn my view, scientific theories are not to be considered ‘true’ or ‘false.’ In constructing such a theory, we are not trying to get at the truth, or even to approximate to it: rather, we are trying to organize our thoughts and observations in a useful manner.

Robert Aumann

 

What a handy view of science.

How reassuring for all of you who have always thought that believing in the tooth fairy make you understand what happens to kids’ teeth. Now a ‘Nobel prize’ winning economist tells you that if there are such things as tooth fairies or not doesn’t really matter. Scientific theories are not about what is true or false, but whether ‘they enable us to organize and understand our observations’ …   Read more…

Where does inflation hide?

February 22, 2018 18 comments

from Herman Daly

The talking heads on the media explain the recent fall in the stock market as follows:

A fall in unemployment leads to a tight labor market and the prospect of wage increases; wage increase leads to threat of inflation; which leads the Fed to likely raise interest rates; which would lead to less borrowing, and to less investment in stocks, and consequently to an expected fall in stock prices. Therefore investors (speculators) rush to sell before the expected fall in stock prices happens, bringing about the very fall expected. So the implicit conclusion is that rising wages of the bottom 90% are bad for “the economy”, while an increase in the unearned incomes (lightly taxed capital gains) of the top 10% is good for “the economy”. The financial news readers of the corporate media avoid making that grotesque conclusion explicit, but it is implicit in their explanation.

A wage increase, in addition to cutting into profits, is considered inflationary, and that leads the Fed to raise interest rates and choke off the new money feeding the stock market boom and related growth euphoria. But higher interest rates serve other functions, most notably to keep capital from being wasted on uneconomic projects that are financially lucrative only at zero or negative interest rates. Furthermore, positive interest rates reward savers, provide for retirement and emergencies, and even reduce the inflationary effect of consumer spending.  Read more…

What, us worry?

February 21, 2018 8 comments

David Ruccio

stocks

Ed Wolff is right:

For the vast majority of Americans, fluctuations in the stock market have relatively little effect on their wealth, or well-being, for that matter.

Read more…

The debate continues in the same absurd, polarized and simplified form.  

February 20, 2018 5 comments

from Neva Goodwin 

One of the outstanding features of the time in which we live is the terrifying prospect of global climate change, regarding which it has been said that contemporary humankind is suffering from “Pre-Traumatic Stress Disorder”. Whether we squarely face what this will likely mean for the coming years, or whether we simply can’t bear to look at the facts, it is getting ever harder to avoid the gut-knowledge that the world is rapidly becoming markedly less beautiful, rich and generous to its human inhabitants. Tens of thousands of species disappear forever every year. Large coastal land areas will be submerged; diseases will multiply and spread; food from the oceans and the climate-stressed fields will be scarce; fresh water will be expensive or unobtainable for ever more millions of people; environmental refugees will swell the ranks of unwelcome migrants; and armed conflicts will reach many people who had assumed they were safe.

Armed fortress living will be increasingly common among the rich, and will doubtless create some areas of relative security, but the people inside will be their own prisoners. They will find it difficult to visit the beautiful natural areas in the United States, or the cultural jewels of other continents. Many of these cultural jewels are already being sacked in the raging conflicts of the Middle East and elsewhere; many of the world’s natural beauties are already eroding under pressure from climate change – as well as from actors in the market economy. The rich are not immune to pre-traumatic stress, as this century heads for various forms of catastrophe; their awareness and response will be important for any hope we may have for a constructive response to the threats we face. An indicator of awareness is a comment by the investor, Seth Klarman, warning that the Trump administration could lead to a major stock market correction and “global angst” among the investor class. But some of that angst is already translating into escapist survivalism among those who can afford to buy land in New Zealand, or build bunkers out of former missile sites in the U.S.. The work of Dr Richard Rockefeller, to whom this piece is dedicated, is an example of a more responsible kind of reaction among the one percent.  Read more…

The future — something we know very little about

February 20, 2018 18 comments

from Lars Syll

All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface.

check-your-assumptionsPerhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the marketplace, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.

I dare say that a classical economist would readily admit this. But, even so, I think he has overlooked the precise nature of the difference which his abstraction makes between theory and practice, and the character of the fallacies into which he is likely to be led.

John Maynard Keynes

Who’s Afraid of John Maynard Keynes?

February 19, 2018 7 comments

from James Galbraith and the Journal of Behavioral and Experimental Economics

Paul Davidson, Who’s Afraid of John Maynard Keynes? Challenging Economic Governance in an Age of Growing Inequality, 2017, Palgrave-MacMillan

Paul Davidson, in his ninth decade, has produced a crisp and clear exegesis of essential Keynesian ideas and the critical failures of so-called mainstream economic thought. The most critical flaw lies in the treatment of time. Rooted in ancient ideas of equilibrium, harmony and social balance, mainstream economics treats the future as an extrapolation of the past, predictable except for random errors, which are called “risk.” This as Davidson insists is incurably incorrect; there is uncertainty and at any time financial markets are prone to collapse in a failed flight to safety, which drains liquidity and deprives both financial and physical assets of their market value.

From this it follows that in the social sphere any model that projects the future from the past will fail from time to time. The models work so long as things do not change! As for change, for turning points, they nevertheless occur. And that those who believe most in the model will prepare the least and be hurt the worst. And yet, for the economy to function, “belief” in the model – at the least, conditional belief sufficient to motivate consumption and investment – appears essential. Without it, the private economy cannot prosper. Living in a house of cards is better than having no house at all.  Read more…

Economics education — teaching cohorts after cohorts of students useless theories

February 18, 2018 6 comments

from Lars Syll

Nowadays there is almost no place whatsoever in economics education for courses in the history of economic thought and economic methodology.

This is deeply worrying.

A science that doesn’t self-reflect and asks important methodological and science-theoretical questions about the own activity, is a science in dire straits.

How did we end up in this sad state?

Philip Mirowski gives the following answer:

philAfter a brief flirtation in the 1960s and 1970s, the grandees of the economics profession took it upon themselves to express openly their disdain and revulsion for the types of self-reflection practiced by ‘methodologists’ and historians of economics, and to go out of their way to prevent those so inclined from occupying any tenured foothold in reputable economics departments. It was perhaps no coincidence that history and philosophy were the areas where one found the greatest concentrations of skeptics concerning the shape and substance of the post-war American economic orthodoxy. High-ranking economics journals, such as the American Economic Review, the Quarterly Journal of Economics and the Journal of Political Economy, declared that they would cease publication of any articles whatsoever in the area, after a prior history of acceptance.

Once this policy was put in place, and then algorithmic journal rankings were used to deny hiring and promotion at the commanding heights of economics to those with methodological leanings. Consequently, the grey-beards summarily expelled both philosophy and history from the graduate economics curriculum; and then, they chased it out of the undergraduate curriculum as well. This latter exile was the bitterest, if only because many undergraduates often want to ask why the profession believes what it does, and hear others debate the answers, since their own allegiances are still in the process of being formed. The rationale tendered to repress this demand was that the students needed still more mathematics preparation, more statistics and more tutelage in ‘theory’, which meant in practice a boot camp regimen consisting of endless working of problem sets, problem sets and more problem sets, until the poor tyros were so dizzy they did not have the spunk left to interrogate the masses of journal articles they had struggled to absorb.

Read more…

The third axiom of neoclassical economics: methodological equilibration

February 18, 2018 4 comments

from Christian Arnsperger and Yanis Varoufakis

The third feature of neoclassical economics is, on our account, the axiomatic imposition of equilibrium. The point here is that, even after methodological individualism turned into methodological instrumentalism, prediction at the macro (or social) level was seldom forthcoming. Determinacy required something more: it required that agents’ instrumental behaviour is coordinated in a manner that aggregate behaviour becomes sufficiently regular to give rise to solid predictions. Thus, neoclassical theoretical exercises begin by postulating the agents’ utility functions, specifying their constraints, and stating their ‘information’ or ‘belief’. Then, and here is the crux, they pose the standard question: “What behaviour should we expect in equilibrium?” The question of whether an equilibrium is likely, let alone probable, or how it might materialise, is treated as an optional extra; one that is never central to the neoclassical project.

The reason for the axiomatic imposition of equilibrium is simple: it could not be otherwise! By this we mean that neoclassicism cannot demonstrate that equilibrium would emerge as a natural consequence of agents’ instrumentally rational choices. Thus, the second best methodological alternative for the neoclassical theorist is to presume that behaviour hovers around some analytically-discovered equilibrium and then ask questions on the likelihood that, once at that equilibrium, the ‘system’ has a propensity to stick around or drift away (what is known as ‘stability analysis’).  Read more…

The problem of extrapolation

February 17, 2018 43 comments

from Lars Syll

steelThere are two basic challenges that confront any account of extrapolation that seeks to resolve the shortcomings of simple induction. One challenge, which I call extrapolator’s circle, arises from the fact that extrapolation is worthwhile only when there are important limitations on what one can learn about the target by studying it directly. The challenge, then, is to explain how the suitability of the model as a basis for extrapolation can be established given only limited, partial information about the target … The second challenge is a direct consequence of the heterogeneity of populations studied in biology and social sciences. Because of this heterogeneity, it is inevitable there will be causally relevant differences between the model and the target population.

In economics — as a rule — we can’t experiment on the real-world target directly.  To experiment, economists therefore standardly construct ‘surrogate’ models and perform ‘experiments’ on them. To be of interest to us, these surrogate models have to be shown to be relevantly ‘similar’ to the real-world target, so that knowledge from the model can be exported to the real-world target. The fundamental problem highlighted by Steel is that this ‘bridging’ is deeply problematic​ — to show that what is true of the model is also true of the real-world target, we have to know what is true of the target, but to know what is true of the target we have to know that we have a good model  …   Read more…

Polanyi’s six points

February 17, 2018 3 comments

from Asad Zaman

The analysis of Polanyi’s Great Transformation can be summarized in the six points listed below.

1: All societies face the economic task of producing and providing for all members of society. Modern market societies are unique in assigning this responsibility to the marketplace, thereby creating entitlements to production for those with wealth, and depriving the poor of entitlement to food. All traditional societies have used non-market mechanisms based on cooperation and social responsibility to provide for members who cannot take care of their own needs. It is only in a market society that education, health, housing, and social welfare services are only available to those who can pay for it.

2: Market mechanisms for providing goods to members conflict with other social mechanisms and are harmful to society. They emerged to central prominence in Europe after a protracted battle, which was won by markets over society due to certain historical circumstances peculiar to Europe. The rise of markets caused tremendous damage to society, which continues to this day. The replacement of key mechanisms which govern social relations, with those compatible with market mechanisms, was traumatic to human values. Land, labour and money are crucial to the efficient functioning of a market economy. Market societies convert these into commodities causing tremendous damage. This involves (A) changing a nurturing and symbiotic relationship with Mother Earth into a commercial one of exploiting nature, (B) Changing relationships based on trust, intimacy and lifetime commitments into short term impersonal commercial transactions, and (C) Turning human lives into saleable commodities in order to create a labor market.  Read more…

The second axiom of neoclassical economics: methodological instrumentalism

February 17, 2018 2 comments

from Christian Arnsperger and Yanis Varoufakis

We label the second feature of neoclassical economics methodological instrumentalism: all behaviour is preference-driven or, more precisely, it is to be understood as a means for maximising preference-satisfaction.[1] Preference is given, current, fully determining, and strictly separate from both belief (which simply helps the agent predict uncertain future outcomes) and from the means employed. Everything we do and say is instrumental to preference-satisfaction so much so that there is no longer any philosophical room for questioning whether the agent will act on her preferences. In effect, neoclassical theory is a narrow version of consequentialism in which the only consequence that matters is the extent to which an homogeneous index of preference-satisfaction is maximised.[2]

Methodological instrumentalism’s roots are traceable in David Hume’s Treatise of Human Nature (1739/40) in which the Scottish philosopher famously divided the human decision making process in three distinct modules: Passions, Belief and Reason. Passions provide the destination, Reason slavishly steers a course that attempts to get us there, drawing upon a given set of Beliefs regarding the external constraints and the likely consequences of alternative actions. It is not difficult to see the lineage with standard microeconomics: the person is defined as a bundle of preferences, her beliefs reduce to a set of subjective probability density functions, which help convert her preferences into expected utilities, and, lastly, her Reason is the cold-hearted optimiser whose authority does not extend beyond maximising these uilities. However, it is a mistake to think that Hume would have approved. For his Passions are too unruly to fit neatly in some ordinal or expected utility function. It took the combined efforts of Jeremy Bentham and the late 19th Century neoclassicists to tame the Passions sufficiently before they could initially be reduced to a unidimensional index of pleasure before turning into smooth, double differentiable utility functions.  Read more…

Modern macro-economists: money is not ‘neutral’. Bordo, Meissner, Sufi and Mian do a good job.

February 16, 2018 1 comment

Hardcore neoclassical economist John Taylor has edited a new handbook of macro-economics. The good news: the sands are shifting. After 2008, more attention has been paid to the obvious fact that we’re living in a monetary world. Guess what: it  turns out that money is non-neutral after all. Two examples (summaries below):

(A) Bordo and Meissner claim that whenever a country has a large banking sector it has a choice, during a financial crisis. It can bail out the banks or it can try to mitigate the crisis and prevent unemployment to increase to extreme levels.

And (B): Mian and Sufi’s work implicates that the ‘representative consumer’ is bogus: differences between renters and house owners in combination with data on indebtedness and house price booms and busts explain a lot of the severity of the 2008 crisis.

Bordo and Meissner:

(A) Interconnections between banking crises and fiscal crises have a long history. We document the long-run evolution from classic banking panics toward modern banking crises where financial guarantees are associated with crisis resolution. Recent crises feature a feedback loop between bank guarantees and bank holdings of local sovereign debt thereby linking financial to fiscal crises. Earlier examples include the crises in Chile (early 1980s), Japan (1990), Sweden and Finland (1991), and the Asian crisis (1997). Read more…

The first axiom of neoclassical economics: methodological individualism

February 16, 2018 1 comment

from Christian Arnsperger and Yanis Varoufakis

Unsophisticated critics often identify economic neoclassicism with models in which all agents are perfectly informed. Or fully instrumentally rational. Or excruciatingly selfish. Defining neoclassicism in this manner would perhaps be apt in the 1950s but, nowadays, it leaves almost all of modern neoclassical theory out of the definition, therefore strengthening the mainstream’s rejoinders. Indeed, the last thirty years of neoclassical economics have been marked by an explosion of models in which economic actors are imperfectly informed, some times other-regarding, frequently irrational (or boundedly rational, as the current jargon would have it) etc. In short, Homo Economicus has evolved to resemble us more.

None of these brilliant theoretical advances have, however, dislodged the neoclassical vessel from its methodological anchorage. Neoclassical theory retains its roots firmly within liberal individualist social science. The method is still unbendingly of the analytic-synthetic type: the socio-economic phenomenon under scrutiny is to be analysed by focusing on the individuals whose actions brought it about; understanding fully their ‘workings’ at the individual level; and, finally, synthesising the knowledge derived at the individual level in order to understand the complex social phenomenon at hand. In short, neoclassical theory follows the watchmaker’s method who, faced with a strange watch, studies its function by focusing on understanding, initially, the function of each of its cogs and wheels. To the neoclassical economist, the latter are the individual agents who are to be studied, like the watchmaker’ cogs and  wheels, independently of the social whole their actions help bring about.  Read more…

Bitcoin, efficient markets, and efficient financial sectors

February 16, 2018 5 comments

from Dean Baker

John Quiggin had a good piece in the NYT, pointing out how the sky-high valuations of Bitcoin undermine the efficient market hypothesis that plays a central role in much economic theory. In the strong form, we can count on markets to direct capital to its best possible uses. This means that government interventions of various types will lead to a less efficient allocation of capital and therefore slower economic growth.

Quiggin points out that this view is hard to reconcile with the dot-com bubble of the late 1990s and the housing bubble of the last decade. Massive amounts of capital were clearly directed towards poor uses in the form of companies that would never make a profit in the 1990s and houses that never should have been built in the last decade.

But Bitcoin takes this a step further. Bitcoin has no use. It makes no sense as currency and it is almost impossible to envision a scenario in which it would in the future. It has no aesthetic value, like a great painting or even a colorful stock certificate. It is literally nothing and worth nothing. Nonetheless, at its peak, the capitalization of Bitcoin was more than $300 billion. This suggests some heavy-duty inefficiency in the market.  Read more…