Truth and probability

November 15, 2018 2 comments

from Lars Syll

uncertainty-7Truth exists, and so does uncertainty. Uncertainty acknowledges the existence of an underlying truth: you cannot be uncertain of nothing: nothing is the complete absence of anything. You are uncertain of something, and if there is some thing, there must be truth. At the very least, it is that this thing exists. Probability, which is the science of uncertainty, therefore aims at truth. Probability presupposes truth; it is a measure or characterization of truth. Probability is not necessarily the quantification of the uncertainty of truth, because not all uncertainty is quantifiable. Probability explains the limitations of our knowledge of truth, it never denies it. Probability is purely epistemological, a matter solely of individual understanding. Probability does not exist in things; it is not a substance. Without truth, there could be no probability.

William Briggs’ approach is — as he acknowledges in the preface of his interesting and thought-provoking book — “closely aligned to Keynes’s.”

Almost a hundred years after John Maynard Keynes wrote his seminal A Treatise on Probability (1921), it is still very difficult to find statistics textbooks that seriously try to incorporate his far-reaching and incisive analysis of induction and evidential weight.  Read more…

A leading economist who took Uber’s money and delivered favorable results sees his reputation tarnished

November 15, 2018 1 comment

from Norbert Häring

A year ago, I described how the controversial and well-financed ride-hauling platform Uber pays economists with data and money to do Uber-related research. This research invariably leads to favourable results, which can be used to fend off criticism and regulation. One such study has now been ripped apart in the Industrial & Labor Relations Review (ILR), a top journal in labor-economics.

Two fearless economists, Janine Berg, senior-economist at the International Labor Organisation (ILO), and doctoral candidate Hannah Johnston submitted an extremely critical comment on a paper by Uber’s chief economist Jonathan Hall and Princeton economist Alan Krueger, which portrayed Uber as a good company to work for and its “driver-partners” as very satisfied and earning good money. The comment recently appeared in ILR, the same journal in which the Hall-Krueger paper had appeared. Notably, there is no reply by Krueger.

While I cannot be specific about the history of this comment, for fear of legal complications, I judge it as almost a miracle that it made it into the journal, despite strong adverse winds. The elephant in the room could not be mentioned in that article, though: the strong conflict of interest that arises if an Uber-employee and a prominent economist on an Uber consultancy-contract use confidential Uber-data to research an issue in which Uber has an elementary business interest. This omission is not surprising: at the time of my critical report, the editor in chief of ILR had also declined to talk about this issue, insisting on keeping the discussion to the substantive arguments.  Read more…

US drug prices started to explode in the 1980s, contrary to what the NYT tells you

November 14, 2018 1 comment

from Dean Baker

Book4 22160 image002

Austin Frakt had an interesting Upshot piece in the NYT saying that drug spending in the US began to sharply diverge from other countries in the 1990s. This actually is not very clear, since the comparison group dating back to the 1980s is small. I am actually more struck by the explosion in spending in the 1980s, with it nearly doubling as a share of GDP over the course of the decade. Note that drug spending had not been increasing at all as a share of GDP over the prior two decades.  Read more…

Take a hard look at the skeletons in the mainstream closet!

November 14, 2018 10 comments

from Lars Syll

lieberAlthough prepared to admit that our empirical research procedures may be based on some very shaky assumptions, [some thoughtful scholars see] no point in saying much about this unless superior alternatives are presented. I understand this concern … Nevertheless, a hard look at the skeletons in the closet is beneficial, especially when there is a propensity to keep the door locked. Nothing is gained by avoiding that which the discipline must face up to sooner or later. If a current procedure appears to be patently wrong, I have not hesitated to indicate this, even if the alternatives remain to develop.

Like Stanley Lieberson, those of us in the economics community who are impolite enough to dare to question the preferred methods and models applied in mainstream economics and econometrics are as a rule met with disapproval. But although people seem to get very agitated and upset by the critique, defenders of “received theory” always say that the critique is “nothing new”, that they have always been “well aware” of the problem, “what Syll points out, we all know; there is nothing new in it; the real issue is to find out the alternative,” and so on, and so on.  Read more…

Markets, policy, and institutions

November 13, 2018 11 comments

from David Ruccio

Teaching critical literacy.

That’s what professors do in the classroom. We teach students languages in order to make some sense of the world around them. How to view a film or read a novel. How to think about economics, politics, and culture. How to understand cell biology or the evolution of the universe.

And, of course, how to think critically about those languages—both their conditions and their consequences.

I’ve been thinking about the task of teaching critical literacy as I prepare the syllabi and lectures for my final semester at the University of Notre Dame.

Lately, I’ve been struck by the way mainstream economics is usually taught as a choice between markets and policy. Whenever a problem comes up—say, inequality or climate change—one group of mainstream economists offers the market as a solution, while the other group suggests that markets aren’t enough and need to be supplemented by government policies. Thus, for example, conservative, market-oriented economists teach students that, with free markets, everybody gets what they deserve (so inequality isn’t really a problem) and greenhouse gas emissions will decline over time (by imposing a tax on the burning of carbon-based fuels). Liberal economists generally argue that market outcomes are inadequate and require additional policies—for example, minimum-wage laws (to lower inequality) and stringent regulations on carbon emissions (because allowing the market to work through carbon taxes, or even cap-and-trade schemes, won’t achieve the necessary reductions to avoid global warming).*

That’s the way mainstream economists frame the issues for students—and, for that matter, for the general public.  Read more…

Thomas Sargent discovered his inner Marxist. Really. Two graphs.

November 12, 2018 8 comments

Unemploymentlonger

Graph 1. Unemployment in the USA, % of the labor force, monthly data.

One of the central and most pressing questions of macro-economics is how to estimate and explain unemployment. Thomas Sargent, card-carrying member of the neoclassical cabal and winner of the ‘Sveriges Riksbank Prize In Economic Sciences In Memory Of Alfred Nobel’ (SRPIESIMOAN)  just made a shot at it. A somewhat Marxist shot, as far as I’m concerned. Which, considering the hard core neoclassical nature of the rest of the work of Sargent, is quite surprising. What’s the case? Read more…

Hype and facts on free trade

November 12, 2018 3 comments

from C. P. Chandrasekhar

Voices questioning the claim that nations and the majority of their people stand to gain from global trade are growing louder. The one difference now is that the leading protagonist of protectionism is not a developing country, but global hegemon United States under Donald Trump. Free trade benefits big corporations with production facilities abroad, Trump argues, while harming those looking for a decent livelihood working in America. With time Trump has made clear that his words are not mere rhetoric, matching them with tariffs that have frightened European and North American allies and US corporations, besides troubling the likes of China and Japan. A nation that pushed for freer trade is now building economic walls along its borders. This turn in policy at the metropolitan core not only undermines the case for free trade among other nations, but revives arguments usually advanced by developing countries. The benefits of trade under capitalism, they hold, tend to be distributed unequally among nations. They sometimes fail to mention that at the national level as well the gains are asymmetrically distributed, favouring the more powerful.  Read more…

Econometrics: The Keynes-Tinbergen controversy

November 11, 2018 6 comments

from Lars Syll

Mainstream economists often hold the view that Keynes’ criticism of econometrics was the result of a sadly misinformed and misguided person who disliked and did not understand much of it.

This is, however, nothing but a gross misapprehension.

To be careful and cautious is not the same as to dislike. Keynes did not misunderstand the crucial issues at stake in the development of econometrics. Quite the contrary. He knew them all too well — and was not satisfied with the validity and philosophical underpinning of the assumptions made for applying its methods.

poofKeynes’ critique is still valid and unanswered in the sense that the problems he pointed at are still with us today and ‘unsolved.’ Ignoring them — the most common practice among applied econometricians — is not to solve them.

To apply statistical and mathematical methods to the real-world economy, the econometrician has to make some quite strong assumptions. In a review of Tinbergen’s econometric work — published in The Economic Journal in 1939 — Keynes gave a comprehensive critique of Tinbergen’s work, focusing on the limiting and unreal character of the assumptions that econometric analyses build on:  Read more…

Demonetisation in India was a great success – for the Better Than Cash Alliance

November 10, 2018 3 comments

from Norbert Häring

Two years ago, on 8 November 2016 at 8 pm, prime minister Narendra Modi declared most cash in India demonetised, starting a period of several months of severe cash shortage, which imposed a lot of hardship and suffering on the people. The National Herald India invited me to write a guest-comment on the occasion.

I have been invited to write a comment on the ‘failure’ of the Demonetisation exercise of Prime Minister Modi. True, it was an obvious failure if you judge it by its declared objective of fighting corruption, terrorism funding and tax dodging. Almost all the demonetised banknotes were deposited in banks and thus re-inserted into the legal economy. It was a failure also if judged by the secondary goal of promoting financial inclusion. Rather than helping the poor by giving them access to modern means of savings and payment options, demonetisation disproportionately hurt the poor, as they were robbed of the free means of payment that they used to have at their disposal: cash and which was working well for them. Those well integrated into a social web of support found ways to cope. Those at the margin of society, like migrant workers, suffered tremendously from being temporarily excluded from participation in the monetary economy.

It would be unthinkable for a US-government to take most of the cash out of circulation at four hours’ notice. If it is done in India to Indian people, however, it is alright!  Read more…

Good news, the stock market is plunging: thoughts on wealth

November 9, 2018 2 comments

from Dean Baker

Several people on my Twitter feed touted the drop in the stock market last month as evidence of the failure of Donald Trump’s economic policy. I responded by pointing out that he was reducing wealth inequality. I was being only half facetious.

I have always been less concerned about wealth than income both because I think wealth is less well-defined and because income is the more important determinant of living standards. In the case of the stock market plunge, the vast majority of the losses go to the richest 10 percent of the population and close to half go to the richest 1 percent, for the simple reason that this is distribution of stock ownership.

When people decry the rise in inequality in wealth over the last decade, they are basically complaining about the run-up in the stock market. The real value of the stock market has roughly tripled from its recession lows. With the richest one percent holding close to 40 percent of stock wealth and the richest 10 percent holding more than 80 percent, a tripling in the value of the stock market pretty much guarantees a big increase in wealth inequality. If we think this increase is bad, then why would we not think a drop in the stock market is good?

There is a correlation between the stock market and economic growth. The market generally rises when the economy is strong and falls in recessions, but this link is weak. Remember the recession of 1988?

I hope not, because the economy continued to grow at a healthy pace until the summer of 1990. This is in spite of stock market’s largest one-day drop ever in October of 1987. (It did recovery half of its value by the end of the year.)

In short, the recent plunge in the market tells us little about the future direction of the economy. If we are troubled by wealth inequality then we should be happy, rich people now have substantially less wealth.

Richard Feynman om mathematics

November 9, 2018 21 comments

from Lars Syll

In a comment on one of yours truly’s posts last week, Jorge Buzaglo wrote this truly interesting comment:

Nobel prize winner Richard Feynman on the use of mathematics:

Mathematicians, or people who have very mathematical minds, are often led astray when “studying” economics because they lose sight of the economics. They say: ‘Look, these equations … are all there is to economics; it is admitted by the economists that there is nothing which is not contained in the equations.

510935-Richard-P-Feynman-Quote-If-all-of-mathematics-disappeared-physics

The equations are complicated, but after all they are only mathematical equations and if I understand them mathematically inside out, I will understand the economics inside out.’ Only it doesn’t work that way. Mathematicians who study economics with that point of view — and there have been many of them — usually make little contribution to economics and, in fact, little to mathematics. They fail because the actual economic situations in the real world are so complicated that it is necessary to have a much broader understanding of the equations.

I have replaced the word “physics” (and similar) by the word “economics” (and similar) in this quote from Page 2-1 in: R. Feynman, R. Leighton and M. Sands, The Feynman Lectures on Physics, Volume II, Addison-Wesley Publishing, Reading, 1964,

 

Calibration — an economics fraud kit

November 8, 2018 7 comments

from Lars Syll

In his well-written and interesting article The Trouble with Macroeconomics, Paul Romer goes to a ​frontal attack on the theories that have put macroeconomics on a path of ‘intellectual regress’ for three decades now:

Macroeconomists got comfortable with the idea that fluctuations in macroeconomic aggregates are caused by imaginary shocks, instead of actions that people take, after Kydland and Prescott (1982) launched the real business cycle (RBC) model …

fraud-kitIn response to the observation that the shocks are imaginary, a standard defence invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that “the more significant the theory, the more unrealistic the assumptions.” More recently, “all models are false” seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favourite.

The noncommittal relationship with the truth revealed by these methodological evasions and the “less than totally convinced …” dismissal of fact goes so far beyond post-modern irony that it deserves its own label. I suggest “post-real.”

Paul Romer

There are many kinds of useless ‘post-real’ economics held in high regard within mainstream economics establishment today. Few — if any — are less deserved than the macroeconomic theory/method — mostly connected with Nobel laureates Finn Kydland, Robert Lucas, Edward Prescott and Thomas Sargent — called calibration.

Read more…

India’s wealthy barely pay taxes

November 7, 2018 1 comment

from C. P. Chandrasekhar and Jayati Ghosh

Figure 1: India has very unequal wealth distribution

Source: Credit Suisse Global Wealth Report, 2018.

India is often mistakenly seen as a country with relatively low economic inequality. In fact, there were always very significant economic inequalities in India, which intersected with social and locational inequalities in complex ways. More significantly, the country’s inequalities widened after the internal and external economic liberalization measures from the early 1990s, which attracted global financial investors and boosted economic growth considerably.   Read more…

“Never have corporate profits outgrown employee compensation so clearly and for so long”

November 7, 2018 1 comment

from David Ruccio

fredgraph (3)

Those aren’t my words. The quotation that forms the title of this post is from a recent Federal Reserve Bank of St. Louisblog post.

And they’re important to keep in mind in light of the news coverage (e.g., by the New York Times) of last week’s Labor Department report on hiring and unemployment. Yes, 250 thousand jobs were added in the U.S. economy last month and average earnings did rise by 0.2 percent and are up 3.1 percent over the past year.  Read more…

Debunking mathematical​ economics

November 6, 2018 14 comments

from Lars Syll

The belief in the power and necessity of formalizing economic theory mathematically has thus obliterated the distinction between cognitively perceiving and understanding concepts from different domains and mapping them into each other.quote-too-large-a-proportion-of-recent-mathematical-economics-are-mere-concoctions-as-imprecise-as-the-john-maynard-keynes-243582 Whether the age-old problem of the equality between supply and demand should be mathematically formalized as a system of inequalities or equalities is not something that should be decided by mathematical knowledge or convenience. Surely it would be considered absurd, bordering on the insane, if a surgical procedure was implemented because a tool for its implementation was devised by a medical doctor who knew and believed in topological fixed-point theorems? Yet, weighty propositions about policy are decided on the basis of formalizations based on ignorance and belief in the veracity of one kind of one-dimensional mathematics.

K. Vela Velupillai

Indeed. As social researchers, we should never equate science with mathematics. All science entail human judgement, and using mathematical models do not relieve us of that necessity. They are no substitutes for doing real science.   Read more…

The Nordhaus Racket: How to use capitalization to minimize the cost of climate change and win a ‘Nobel’ for ‘sustainable growth’

November 5, 2018 7 comments

from Shimshon Bichler and Jonathan Nitzan

The LA Times called the bluff: William D. Nordhaus won the Nobel prize in economics for a climate model that minimized the cost of rising global temperatures and undermined the need for urgent action.

‘The economics Nobel went to a guy who enabled climate change denial and delay’:

It has been a scary month in climate science. Hurricane Michael and a frightening report from the U.N. Intergovernmental Panel on Climate Change underlined the potential costs of human-caused global warming. Then to add insult to injury, William Nordhaus won the economics Nobel Prize.

Nordhaus was recognized for his work developing a model to guide policymakers on how best to address the costs and benefits of limiting greenhouse gases. That’s a noble goal, but Nordhaus’ work has no more helped to defuse the threat of global warming than Neville Chamberlain’s appeasement of Germany prevented World War II. Rather, Nordhaus’ low-ball estimates of the costs of future climate change and high-ball estimates of the costs of containing the threat contributed to a lost decade in the fight against climate change, lending intellectual legitimacy to denial and delay.

Unfortunately, the LA Times missed the nugget in the racket   Read more…

Uploaded: ‘The role of money in economic theory’ by Wesley Claire Mitchell (1916)

November 4, 2018 1 comment

Is economics basically about measured monetary variables like GDP or wages (recount that ‘total wage income’ is part of GDP)? Or is it, as neoclassical economists assume, mainly about what Thorstein Veblen called ‘hedonistic’ variables like ‘utility’? This discussion is still waging. Look here. It’s an old discussion. According to a man who decisively contributed to the way we measure the ‘money economy’, Wesley ClaireMitchell, economics is about measuring the ‘money economy’ (Mitchell (1916))‘ – even when we want to know about the psychological variables. Not because money is all that matters. But as (on the practical side) monetary relations and transactions are inherently measurable. While (on the theoretical side) the development of monetary variables like wages, loans or profits, show but also shape our behavior. We don’t have to assume ‘wages’. We can measure them. We don’t have to assume ‘wage labor’. We can measure it. Mitchell chided the tendency of economists to focus on crude a- empirical ‘pain and pleasure’ psychology:

  Economic life may be regarded also as a process of making efforts and gaining satisfactions; or better, the activities of getting and using goods, of making and spending money, have a subjective aspect upon which attention may be focused. In this dim inner realm of consciousness it is difficult to make out the technique; there are no technical experts, no labor forces, no material appliances, and no capital in any sense, except by virtue of fanciful analogies.

Read more…

Modern Monetary Theory

November 4, 2018 5 comments

from Asad Zaman

In a rapidly changing world, ways of thinking which served us well in other eras, become obstacles to understanding, and reacting appropriately to change. Traditional economic theories, currently being taught all around the world,blinded economists to the possibility of the global financial crisis.The Queen of England went to London School of Economics to ask why “no one saw it coming?”.The US Congress appointed a committee to study why economic theories “dismissed the notion that a financial crisis was possible”. At the heart of this failure arewrong ideas about the role of money in the economy. All major schools of macroeconomics currently being taught around the globe teach that the quantity of money only affects the prices, and does not have any other effects on the real economy. Economists write that “money is a veil” – it hides the workings of the real economy, but does not play any role in it. Economists were blindsided by the crisis because models currently in use for policy making do not have a role for money, credit, banking, and debt, even though these were the factors responsible for the Global financial crisis.

The crisis made clear to all and sundry the vital role of money in the economy. Surprisingly, the mainstream economics profession has been extremely resistant to change. The same textbooks, theories and models which failed so drastically, continue to be used in teaching and policy making throughout the world. However, the space for unorthodoxy has expanded substantially, and a lot of new theories of money have emerged to challenge mainstream views.  read more

Economics is an extremely powerful source of ideational content

November 3, 2018 6 comments

from Jamie Morgan and the current issue of RWER

What mainstream economics has become creates limits on what society can be because mainstream economics is an extremely powerful source of ideational content. This is not just a matter of what cannot be explored without models or datasets, since many things that can be explored in this way are not actually explored and some that are, are deformed. One well-known current example is inequality. This problematic was conceptually invisible within the mainstream prior to the popularity of Piketty’s Capital in the Twenty First Century (2014) despite more than two decades of growing (if variable) wealth and income inequality (within states rather than necessarily between them), and despite longstanding work by James Galbraith and others. As Piketty notes, this was not accidental, it was a consequence of the dominant conceptual constructs, mindsets and lack of empirical curiosity amongst economists.

The idea that marginal productivity in competitive markets equals to its price means, from a normative point of view, that labour is paid what it is worth (naturalising social division). Trickle down assumptions lead economists to anticipate incomes are all growing and wealth diffuses (rather than power allows wealth to be captured, concentrated and protected). Given the prevalence of these kinds of ideas and assumptions, little attempt was actually made to establish or critique the relations that were assumed, and this in turn, was reinforced by a reluctance to go beyond standardised tests of readily available datasets. This highlights how the economist’s skillset can be an impediment to empirical work, since testing data is not the same as seeking out all available evidence, some of which only comes into view if one is prepared to think in terms of a range of methods and sources – for Piketty that was many different types of tax record (see Pressman, 2015). Mainstream economics has subsequently been required by circumstance to address inequality. However, its prior invisibility – and focus on incentives to individuals and firms – meant in effect that the most powerful social science discourse acted to reinforce growing inequality, since it was to economics one would look for argument and evidence regarding it as a possible problem.  Read more…

Modern economics is sick

November 2, 2018 7 comments

from Lars Syll

mark-blaug-900pxModern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigour is everything and practical relevance is nothing …

If there is such a thing as “original sin” in economic methodology, it is the worship of the idol of the mathematical rigour invented by Arrow and Debreu in 1954 and then canonized by Debreu in his Theory of Value five years later, probably the most arid and pointless book in the entire literature of economics.

The result of all this is that we now understand almost less of how actual markets work than did Adam Smith or even Léon Walras …

Indeed, much of modern microeconomics might be fairly described as a kind of geography that consists entirely of images of cities but providing no maps of how to reach a city either from any other city or from the countryside.

Mark Blaug

Mark Blaug (1927-2011) did more than any other single person to establish the philosophy and methodology of economics a respected subfield within economics. His path-breaking The methodology of economics (1980) is still a landmark (and the first textbook on economic methodology yours truly ever read).  Read more…