Consistency and validity is not enough!

May 23, 2015 2 comments

from Lars Syll

Neoclassical economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality. As Julian Reiss writes:  Read more…

Categories: methodology

The Draghi speech on structural reforms: mistakes, misunderstandings and defunct models

May 23, 2015 1 comment

“As of 2005 Spain had the second highest immigration rates within the EU, just after Cyprus, and the second highest absolute net migration in the World (after the USA). …  In fact, booming Spain was Europe’s largest absorber of migrants from 2002 to 2007, with its immigrant population more than doubling as 2.5 million people arrived.”

Contrary to what Mario Draghi tells us in his recent speech ‘structural reforms, inflation and monetary policy’, more ‘flexibility’ is not the answer to the Eurozone woes. Maybe even to the contrary. Flexible labour markets and deregulated financial markets did not just enable the buildup of housing bubbles and an oversized financial sector and unsustainable private debt levels in countries like Spain, Ireland and the Netherlands but also caused them. Fast ‘reallocation of resources between sectors’, lauded by Draghi, like mass immigration of construction workers in Spain and Ireland, mitigated wage increases. Which led to an even larger bubbles Read more…

Categories: Uncategorized

Paul Romer is ‘busy’ …

May 21, 2015 8 comments

from Lars Syll

About math: I have an undergraduate degree in physics. I’ve seen clear evidence that math can facilitate scientific progress toward the truth.

If you think that math is worthless or dangerous, I’m sure that there are people who will be happy to discuss this with you. I’m not interested. I’m busy.  too-busy-people-workplace-ecard-someecards

About truth and science: My fundamental premise is that there is an objective notion of truth and that science can help us make progress toward truth.

If you do not accept this premise, I’m sure that there are people who would be happy to debate it with you. I’m not interested. I’m busy.

Paul Romer

Hmm …  Read more…

“The Scientist and the Church “

May 21, 2015 1 comment

 

Cover of The Scientist and the ChurchThe Scientist and the Church
Shimshon Bichler and Jonathan Nitzan

Published 21 June 2015 by WEA Books $10
337 pages

The Scientist and the Church is a wide-ranging biography of research, showcasing Bichler and Nitzan’s attempts to break through the stifling dogmas of the academic church and chart a new scientific cosmology of capitalism. Central to the authors’ work is the notion that capital is not a productive economic category but capitalized power, and that capitalism should be conceived and researched not as a mode of production and consumption but as a mode of power.

The articles collected in this volume outline the general contours of their approach, flesh out some of their recent research and offer personal insights into the broader politics of their journey. The first chapters reexamine the common foundations of the neoclassical and Marxist doctrines, sketch the contours of the authors’ alternative cosmology of capitalized power, identify the asymptotes – or limits – of this power and explore the all-encompassing logic of modern finance. Subsequent chapters research the connection between redistribution and cyclical crises, reassess the Marxist nexus between imperialism and financialism, rethink the oft-misunderstood role of crime and punishment in the capitalist mode of power and articulate a new theory and history of Middle-East energy conflicts. The closing chapters include two big-picture interviews, as well as riveting reflections on the authors’ own scientific clashes with the church.

Categories: WEA Books

Links. The standard of living and how to measure it.

May 21, 2015 3 comments

How to measure the standard of living? Is it about market production? Or about happiness? Or about market production plus home production (the washing machine!) plus government production? Or about utility? Or even about ‘the biological standard of living’? Or where we live? Or all of these? Below, three excerpts from recent articles about this, from John Komlos, Diane Coyle and Eurostat.

My take:(1) we should be wary of national averages while (2) national accounts are highly useful and even indispensable to calculate (using input-output models) the change in CO2 production caused by a change in final demand, technology or gasoline taxes. These accounts are not just about GDP, though GDP is, in an accounting sense, the emergent statistical keystone of a national money based economy. And (3), as Komlos shows social differences permeate our entire life. Read more…

Categories: Uncategorized

DSGE macro models criticism, a round up. Part 5, the intertemporal government budget constraint

May 20, 2015 9 comments

Guest post by Brian Romanchuk (see also his blog Bond Economics)

Earlier posts in this series, which consists of concise posts looking at DSGE models using the lens of statistical concepts, were about money, market fundamentalism, unemployment and capital.

Problems With Fiscal Policy In DSGE Models

Dynamic Stochastic General Equilibrium (DSGE) models suffer from a great many defects, but the specification of fiscal policy in standard models stands out. Given the ongoing wave of publications of these models, it is hard to generalise about them. My statements here are based on how fiscal policy is represented within the models presented in the Chapter 12 of the text Advanced Macroeconomics by Paul Romer (fourth edition). The models in Romer are fairly indicative of much of the literature, but my criticisms here will not apply to all of them.

Behavioural Assumptions

One of the key results used within DSGE models is that the timing of taxes has no effect on household behaviour.  This assumption is known as “Ricardian Equivalence”. There is an academic literature which questions this behavioural assumption. Although this is an interesting debate, my view is that the specification of fiscal policy within DSGE is internally inconsistent, and so the quality of the behavioural assumptions around Ricardian Equivalence appears to be a secondary issue. Read more…

Categories: Uncategorized

Modelling consistency and real world non-coherence in mainstream economics

May 20, 2015 2 comments

from Lars Syll

9781138851023

In those cases where economists do focus on questions of market or competitive equilibrium etc., the formulators of the models in question are often careful to stress that their theorising has little connection with the real world anyway and should not be used to draw conclusions about the latter, whether in terms of efficiency or for policy or whatever.

In truth in those cases where mainstream assumptions and categories are couched in terms of economic systems as a whole they are mainly designed to achieve consistency at the level of modelling rather than coherence with the world in which we live.

This concern for a notion of consistency in modelling practice is true for example of the recently fashionable rational expectations hypothesis, originally formulated by John Muth (1961), and widely employed by those that do focus on system level outcomes. The hypothesis proposes that predictions attributed to agents (being theorised about) are treated as being essentially the same as (consistent with)  those generated by the economic model within which the same agents are theorised. As such the proposal is clearly no more than a technique for (consistency in) modelling, albeit a bizarre one. Significantly any assertion that the expectations held (and so model in which they are imposed) are essentially correct, is a step that is additional to assuming rational expectations.

Read more…

The fetishism of mathematics

from David Ruccio

I am tempted, in response to Paul Romer, to paraphrase the Old Moor: “The use of mathematics in economics appears, at first sight, a very trivial thing, and easily understood. Its analysis shows that it is, in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties.”

The last time I had the occasion to comment on Romer’s work was in reaction to the neoclassical colonialism of his proposal for “charter cities” in poor countries. Now, in a desperate bid to save the last vestiges of so-called endogenous growth theory, Romer has gone on the attack against what he calls “mathiness” in contemporary growth theory.

What is mathiness? Read more…

Paul Romer on math masquerading as science

May 19, 2015 3 comments

from Lars Syll

I have a new paper in the Papers and Proceedings Volume of the AER that is out in print and on the AER website …

Paul_RomerThe point of the paper is that if we want economics to be a science, we have to recognize that it is not ok for macroeconomists to hole up in separate camps, one that supports its version of the geocentric model of the solar system and another that supports the heliocentric model …

The usual way to protect a scientific discussion from the factionalism of academic politics is to exclude people who opt out of the norms of science. The challenge lies in knowing how to identify them.

From my paper:

“The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.”

Read more…

Changing our development paradigms

May 19, 2015 2 comments

from Asad Zaman  (reposted from the WEA Pedagogical Blog)

Growing up in British India, my father learnt that Great Powers had certain special characteristics. For global influence, they had to have sea power which required indented coastlines and natural harbours, coal mines for energy, extensive telegraph cables for communications. Furthermore, they had to have a cold climate to make them hardy, and be isolated from the mainland so as to have natural defences against potential rivals and enemies. In light of these criteria, it would be obvious even to a child, that the UK was the sole and unrivalled leader of the world. Read more…

Greece, cognitive dissonance edition

Did I ever tell you that the extremely hostile reaction of the Troika towards the Syriza government made it miss a unique chance? Well, it did. As I see it, the window of opportunity has closed. For the first time in decades Greece had (and still has) a responsible government. But all available Troika-energy was directed at derailing the Greek economy, corrupting information, saving the Troika ego’s and toppling Syriza. I’m afraid the derailment program succeeded, despite the green shoots mentioned below.

From Bruegel.org:

The State budget balance records a deficit of EUR 508 mn over January- April 2015, against the target of deficit of EUR 2.9 bn set in the 2015 budget, and significantly lower than for the same period of 2014 (when the deficit was EUR 1.15 bn). The State budget primary balance records instead a surplus of EUR 2.16 bn over the first four months of the year, against the target primary deficit of EUR 287 mn. This implies that in cumulative terms the State primary balance has over-performed the target by as much as EUR 2.45 bn

Read more…

Categories: Uncategorized

Deflation in Greece: a hideous loose-loose situation

May 18, 2015 1 comment

Deflation in Greece is serious. In the fourth quarter of 2014 the price level was 8% lower than in the third quarter of 2009 (seasonally adjusted data) – which means that total income (wages, profits, mixed income of the self-employed) is 8% lower than it would have been if the price level had not changed. As this, predictably, leads to a decline of tax income of the government of about the same size this makes it quite difficult for the government to balance the budget. One of the goals of austerity is a decline of the relative price level of countries. Greece did accomplish this. Compared with the Eurozone average the price level of Greece has deteriorated with about 12% (2010-I – 2014-IV). The decline of the Greek price level is, in the medium run, much larger than the decline of the Spanish and Portuguese price level, which makes one wonder why other, less ‘succesful’ austerity countries like Spain and Portugal are so critical of Greece. As austerity was imposed upon Greece by the creditors it seems less than fair that these same creditors do not take responsibility for their actions and write down the debts. It was not Greece which shot the creditors in the foot. Source: Eurostat.

Greek deflation

Read more…

Categories: Uncategorized

Liberty to do what?

May 18, 2015 1 comment

from Peter Radford

Continuing my peon to Judt: he reminds us of Condorcet’s fear:

“Liberty will be no more, in the eyes of an avid nation, than the necessary condition for the security of financial operations.”

No kidding.

How many times do we come across, in this avid nation of ours, some foolish comment that our social policies must not restrict commerce? How many times do we hear some politician arguing that we must become more business friendly? We scarcely can move an inch without tripping over someone cajoling us with fears that limitations on liberty are actually limitations on prosperity. As if prosperous was purely an arithmetic reference and had no qualitative content.

This is Condorcet’s fear alive and well. We seem to have reduced liberty to some small prop for the making of profit. Liberty is simply, in this ghostly shadow of what it once was, a veil behind which profits can be amassed without reference to the fabric of society as whole. And certainly without reference to any larger interest than that of the individual, or individuals, engaged in making that profit. Read more…

Fact checking Jens Wedmann – deflation and ELA edition

May 17, 2015 2 comments

Update: the GDP price level of Greece deteriorated, according to the most recent estimates, with 8% (quarterly data), not 10%. Post adapted.

As the head of the Bundesbank Jens Weidmann has a large responsibility. His acts and remarks influence the lifes of millioins. But he’s not up to this task. He at least does not seem to know what he is talking about. In a recent interview in the German Handelsblatt he makes, as far as I’m concerned, two major mistakes.

1) He states that the weekly increases in ECB ‘ELA-money’ (Emergency Liquidity Assitance’), which keep the Greek banks afloat, are not to be accepted as the freshly printed money is used to ramp up lending to the Greek government, which means that these increases violate the ban on monetary financing of the government by the ECB. Probably, somebody told Weidmann that the net position of the Greek government vis-a-vis the Greek banks is deteriorating. Which is right. But balance sheets have two sides. And looking at both of these shows that this deterioration is not caused by an increase of bank lending to the government (to the contrary – bank loans to the government have diminished a little between December 2014 and March 2015). Read more…

Categories: Uncategorized

Piketty and the non-applicability of neoclassical economics

May 17, 2015 5 comments

from Lars Syll

economic-mythIn yours truly’s On the use and misuse of theories and models in economics the author of Capital in the Twenty-First Century is criticized for not being prepared to fully take the consequences of marginal productivity theory — and the alleged close connection between productivity and remuneration postulated in mainstream income distribution theory — over and over again being disconfirmed both by history and, as shown already by Sraffa in the 1920s and in the Cambridge capital controversy in the 1960s, also from a theoretical point of view: Read more…

Economics and the value of art

from David Ruccio

Les-femmes-dAlger-daprès-Delacroix-XV-Paris-14-Fevrier-1955-huile-sur-toile114-x-146-cm-collection-privée-Europe

Neoclassical economists don’t have a lot to say about the value of art. Read more…

“This may all sound far-fetched, but the idea has been developed in some detail by a Norwegian academic, Trond Andresen”

May 15, 2015 4 comments

The conservative UK newspaper The Telegraph has featured an article “How to end boom and bust: make cash illegal” about Trond Andresen’s RWER paper “Improved macroeconomic control with electronic money and modern monetary theory”.  It has already attracted over 3,000 comments.

We rely on economics too much

May 14, 2015 7 comments

from Peter Radford

I think I am with Tony Judt on this one. I am reading the new collection of his essays written between 1995 and his death in 2010, and have had my memory jolted: he gave us many very considered critiques of modern economics, although they were usually dressed within the context of a book review. The point I am agreeing with is this statement he gives us in his 2009 speech called “What Is Living and What Is Dead in Social Democracy?”:

“But how did we, in our own time, come to think in exclusively economic terms? The fascination with an etiolated economic vocabulary did not come out of nowhere.”

Etiolated? Lovely, but I disagree. Our economic vocabulary is both robust and way too vigorous to be etiolated. On the contrary, economics has become a weed infesting society in every corner, and our use of it is far too frequent to consider it etiolated at all. Indeed our reliance on economic vocabulary belies the gaping holes in the theories that those words depend upon for their relevance.

But the larger point: that we overuse economics, that we see our world in economic terms rather than in other, perhaps more relevant, terms, and that we have come to depend too much on economic analysis to justify our actions is one I wholeheartedly endorse.  Read more…

Categories: Uncategorized

“Fear the Economics Textbook (Story of the Next Crook)”

May 13, 2015 6 comments

from Steve Ziliak

I believe that you and readers of Real World Economics Blog would like to know about an “economics rap battle” that is challenging more than orthodox economics.

Here is some discussion at Inside Higher Ed, together with the opposing videos:
https://www.insidehighered.com/news/2015/05/06/roosevelt-u-classs-rap-video-challenges-george-masons-hayek-fan-videos

Lyrics for my and my students at Roosevelt University in Chicago’ “Fear the Economics Textbook (Story of the Next Crook)” video are here:
http://blogs.roosevelt.edu/sziliak/fear-the-economics-textbook-a-rap-video/

The reply from the National Review is amusing but predictable:
http://www.nationalreview.com/phi-beta-cons/418134/professor-who-misunderstands-what-economics-about-george-leef

In solidarity,  Steve

Categories: students, teaching

In search of causality

May 13, 2015 Leave a comment

from Lars Syll

dilbert

One of the few statisticians that I have on my blogroll is Andrew Gelman.  Although not sharing his Bayesian leanings, yours truly finds  his open-minded, thought-provoking and non-dogmatic statistical thinking highly recommendable. The plaidoyer here below for “reverse causal questioning” is typical Gelmanian:

When statistical and econometrc methodologists write about causal inference, they generally focus on forward causal questions. We are taught to answer questions of the type “What if?”, rather than “Why?” Following the work by Rubin (1977) causal questions are typically framed in terms of manipulations: if x were changed by one unit, how much would y be expected to change? But reverse causal questions are important too … In many ways, it is the reverse causal questions that motivate the research, including experiments and observational studies, that we use to answer the forward questions …  Read more…

Categories: econometrics, methodology
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