Chicago economics — the triumph of empty formalism

February 28, 2021 Leave a comment

from Lars Syll

Is macroeconomics for real? | LARS P. SYLLVielleicht ist diese Grundperspektive der radikalen Trennung von Form und Gehalt hilfreich, einige zunächst überaus paradoxe Äußerungen von Lucas etwas zu erhellen. Erinnert man sich der Forderungen von Lucas, die Makroökonomik zwingend auf Basis der klassischen Postulate, die Lucas und Sargent (1978) als (a) „Markträumung“ und (b) „Eigennutz“ umrissen hatten, zu errichten, so erstaunt man doch angesichts Passagen wie der folgenden:

“In recent years, the meaning of the term “equilibrium” has undergone such dramatic development that a theorist of the 1930s would not recognize it. It is now routine to describe an economy following a multivariate stochastic process as being “in equilibrium,” by which is meant nothing more than that at each point in time, postulates (a) and (b) above are satisfied. This development, which stemmed mainly from work by K. J. Arrow […] and G. Debreu […], implies that simply to look at any economic time series and conclude that it is a “disequilibrium phenomenon” is a meaningless observation. Indeed, a more likely conjecture […] is that the general hypothesis that a collection of time series describes an economy in competitive equilibrium is without con tent.” (Lucas und Sargent 1978: 58-9)” Read more…

To prevent the resurgence of the pandemic, can we talk about open-source research?

February 26, 2021 Leave a comment

from Dean Baker

As the vaccination campaign picks up steam, we have many public health experts warning us about a possible resurgence of the pandemic due to the spread of new vaccine-resistant strains. The logic is that, as more people are protected against the predominant strain for which the vaccines were designed, it will allow room for mutations to spread, for which the current vaccines may not be effective. This can leave us in a whack-a-mole situation, where we have to constantly alter our vaccines and do new rounds of inoculations to limit the death and suffering from the pandemic.

This situation would seem to make the urgency for open-sourcing our research on vaccines even greater than in the past. The point is that we would want evidence on new strains to be shared as quickly as possible. We also would want the evidence on the effectiveness of the current batch of vaccines against each new strain to be quickly shared.

The Problem of Patent Monopolies

That is not likely to happen as long as drug companies are trying to maximize the profits from their government-granted patent monopolies. They have little incentive to share evidence that their vaccines may not be effective against particular strains. Regulatory agencies may make this determination and publicly disclose their findings, but it is not in the interest of, for example, Pfizer, to make this determination and widely disseminate its findings.

Read more…

Sameness is just wrong

February 26, 2021 3 comments

from Peter Radford

There is something truly odd about any economist who lives wholly in the world of equilibrium.  Truly odd.  Just think of what they have to assume to get there:

The first step is to make sure the problem they are tackling is well defined.  Really well defined.  Without ambiguous objects lurking in dark corners.  The problem must be well lit and sanitized of any potential taint.  And it mustn’t be connected to anything that might, under some circumstance or another, become entangled with it.  Good luck with that in the real world.

Then, this being economics, all the actors within the problem have to be identical.  They have to behave rationally — where rationality is something defined by the economist to make sure the math works out nicely — and they have to “know” everything, including what all the other actors know and will do.  Nirvana: we all know what we all know.

Next, the economist ensures that the actors behave in such a way that their aggregate behavior is both assembled from and validates their individual behavior.  Micro to macro is the watchword.  No emergence is allowed.  No nasty intermediate layers to get in the way of reductionist perfection.

With all this in place the preferred mathematics can then be applied.

And, hey presto, out can pop an equilibrium.

This is my version of the process that Brian Arthur described in a talk in 2019.  When followed rigorously and applied to the kinds of problems amenable to such a process, it can produce useful results.  Or at least that’s what Arthur said.  I am a little more skeptical.

The blandness, the sameness, the lack of difference, and the striking lack of reality make the process almost a caricature of itself.  I can comprehend why economics went down this road back in the 1800s, but why it became entrenched there is more confusing.  And more annoying.  Yes, there’s a great deal of work going on to lift it out of the hole it fell into, but, as yet, the public face of economics is still dominated by those who kneel before the altar of equilibrium. Read more…

The leap of generalization

February 25, 2021 1 comment

from Lars Syll

Statistician Andrew Gelman has an interesting blogpost up on what inference in science really means:

gelmanI like Don Rubin’s take on this, which is that if you want to go from association to causation, state very clearly what the assumptions are for this step to work. The clear statement of these assumptions can be helpful in moving forward …

Another way to say this is that all inference is about generalizing from sample to population, to predicting the outcomes of hypothetical interventions on new cases. You can’t escape the leap of generalization. Even a perfectly clean randomized experiment is typically of interest only to the extent that it generalizes to new people not included in the original study.

I agree — but that’s also why we so often fail (even when having the best intentions) when it comes to making generalizations in social sciences.

What strikes me again and again when taking part of the results of randomized experiments is that they really are very similar to theoretical models. They all have the same basic problem — they are built on rather artificial conditions and have difficulties with the ‘trade-off’ between internal and external validity. The more artificial conditions, the more internal validity, but also less external validity. Read more…

The Great Lockdown: A WEA online conference – 15th April to 15th May

February 24, 2021 Leave a comment

This conference is open for submissions SUBMIT YOUR PAPER

Aims of the conference

The advent of the global Covid-19 crisis created new challenges for businesses, workers, and policymakers. Their outcomes have transforming implications for all countries, industries, businesses of all sizes, and societies. The Covid-19 twin economic and health crises call for a deep reflection on the forces that will shape the future of the global economy.

In fact the outbreak of Covid-19 and the lockdown policies imposed worldwide generated a global economic crisis which challenges the traditional explanations of economic downturns and the way we are used to understanding and handling business cycles.

This WEA Conference, organized in cooperation with the Center for Market Education (CME, and led by Dr Carmelo Ferlito and Prof Dr Maria Alejandra Madi, aims to discuss recent contributions to the understanding of the Covid-19 economic crisis and its “lockdown” governance in terms of its consequences for policy making, business trends and social challenges. The conference also focuses on bridging the gap between different economic theoretical approaches and the practical applications of economic theories in a pluralist approach.

Topics include (but are not limited to):  Read more…

The war against scientific economics continues

February 24, 2021 1 comment

From the AFEE (Association for Evolutionary Economics):

February 24, 2021

Subject: An Open Letter Regarding a Proposal to Dismiss 145 Faculty Members at the University of Leicester

We are shocked to hear that 145 staff members have been placed at risk of compulsory redundancy at the University of Leicester. 

In particular, 16 people within the School of Business have been targeted because their work is deemed to fall within “Critical Management Studies” or “Political Economy”. Specifically, “class based” and “institutionalist” forms of political economy are deemed redundant. However, the “rational choice orthodoxy” has been excluded from this definition.

The proposed action threatens academic freedom. It betrays a lack of appreciation of pluralism in academia, contradicting pedagogical research concluding that students learn best when presented with differing points of view, allowing students to consider the evidence, and come to their own conclusions.

We support our colleagues in Leicester University. We hope that the administration will reconsider this action as contrary to academic freedom, contrary to student learning, and contrary to the advancement of economics.


John Watkins, President
Mary Wrenn, President-Elect
Association for Evolutionary Economics

To learn more about this issue:


To sign a petition in support of academic freedom and the advancement of economics,

Hunger, again

February 23, 2021 Leave a comment

from C. P Chandrasekhar & Jayati Ghosh

The world has been preoccupied with the Covid-19 pandemic, and this has also affected policymakers everywhere. There is much more recognition today of the terrible effects of underfunding public health over decades and how this affects the resilience of economies and societies. Yet this official preoccupation with addressing the spread of infectious disease appears to have had an unanticipated negative effect: less policy attention to concerns of food security and hunger.  Poor nutrition is a major underlying factor affecting overall health conditions as well as resistance to disease, yet politicians and global leaders seem to have taken their eyes off that particular ball.

This is bad news, because globally, hunger is rising once again. (This is especially true in India, already the country with the largest number of hungry people in the world, but more on that later.) Even before the pandemic, in 2019, FAO estimates that there were 690 million people (9 per cent of the world’s population) who were chronically undernourished. This number is lower than previous estimates, but only because of data revisions for China and 12 other countries, which brought down the total numbers. The trend of hunger was still upwards: according to the FAO, the number of hungry people increased by 60 million between 2014 and 2019.

Figure 1: Sub Saharan Africa had the highest prevalence of undernourishment in 2019 

Read more…

AI and democracy

February 22, 2021 4 comments

from Peter Radford

Just a quick thought prompted by my reading of a talk given by Allison Stanger during the Santa Fe Institute’s 2019 Fall symposium.  First she gives us a nice quote from Hannah Arendt’s “The Human Condition” who says the question is not …

whether we are the masters or slaves of our machines, but whether machines still serve the world and its things or if, on the contrary, they and the automatic motion of their processes have begun to rule and even destroy the world and its things.”

This quote obviously resonates with fundamental interest to those of us struggling to understand the economy as we hurtle into the digital age.

The central issue as Stanger describes it is that all the algorithms based on big data, those that increasingly drive chunks of how we deal with each other, are based on a sort of collectivism.  They rely on groups.  They rely on large-scale analysis and the identification of structures detected in seas of data.  They abstract away the individual. Read more…

Keynes on the methodology of econometrics

February 22, 2021 2 comments

from Lars Syll

Machine Learning or Econometrics? | by Dr. Dataman | Analytics Vidhya |  MediumThere is first of all the central question of methodology — the logic of applying the method of multiple correlation to unanalysed economic material, which we know to be non-homogeneous through time. If we are dealing with the action of numerically measurable, independent forces, adequately analysed so that we were dealing with independent atomic factors and between them completely comprehensive, acting with fluctuating relative strength on material constant and homogeneous through time, we might be able to use the method of multiple correlation with some confidence for disentangling the laws of their action … In fact we know that every one of these conditions is far from being satisfied by the economic material under investigation.

Letter from John Maynard Keynes to Royall Tyler (1938)

Bitcoin and baseball cards

February 22, 2021 1 comment

from Dean Baker

I saw this piece last week on the soaring price of baseball cards, and naturally started thinking about Bitcoin. The article begins with a story about how a rare LeBron James trading card (it’s all sports cards, not just baseball cards) would now sell for over $3 million, more than ten times its price in 2016. It then reports on how the prices for rare cards of other famous players have also gone through the roof, with even cards of less great players selling for several million dollars.

The reason this got me thinking about Bitcoin is that the price of Bitcoin has also been soaring. In fact, it has risen considerably faster than the price of baseball cards, increasing more than a hundredfold over the last five years.

Bitcoin as a Currency

Bitcoin proponents see this soaring price as vindication. After all, if the price of a Bitcoin has risen more than a hundred times in just five years, then this digital currency must be extremely valuable.

There is no doubt that Bitcoin investors could have become rich through their investment. A $10,000 Bitcoin investment in 2016 would be worth more than $1.4 million today. If they had made their Bitcoin investment earlier, they would be even richer today. In that sense, at least for now, we can say that someone would have been right to buy Bitcoin as an investment.

But does this mean Bitcoin is establishing itself as a currency? In fact, Bitcoin’s soaring price argues the opposite. Read more…

Complexity, institutions and firms

February 20, 2021 3 comments

from Peter Radford

Are they associated?

We all know that one of the central problems of economics is the existence of uncertainty.  At least since Frank Knight’s work in the 1920s, uncertainty has been something of concern to economists.  Knight’s description of uncertainty as being a condition in which no probability distribution existed, or could exist, has led some of the most eminent theorists of economics to argue that theorizing is simply not possible.  Which is a rather formidable obstacle.  I assume they meant that their particular form of theorizing was not possible.

One person who rose to the challenge represented by uncertainty was Douglass North, who famously built his theory of institutional change to show how humans respond to  the endemic uncertainty they deal with on a day-to-day basis.

I am going to use three separate quotes from North’s book “Understanding the Process of Economic Change” as a starting point for this short discussion.

First: Read more…

Say ‘consistent’ one more time and I …

February 19, 2021 9 comments

from Lars Syll

Image result for say 'consistent' one more time memeBeing able to model a credible world, a world that somehow could be considered ‘similar’ to the real world is not the same as investigating the real world. The minimalist demand on models in terms of ‘credibility’ and ‘consistency’ has to give away to stronger epistemic demands. Claims in a ‘consistent’ model do not per se give a warrant for exporting the claims to real-world target systems.

Questions of external validity are important more specifically also when it comes to microfounded macro models. It can never be enough that these models somehow are regarded as internally consistent. One always also has to pose questions of consistency with the data. Internal consistency without external validity is worth nothing.

Yours truly has for many years been urging economists to pay attention to the ontological foundations of their assumptions and models. Sad to say, economists have not paid much attention — and so modern economics has become increasingly irrelevant to the understanding of the real world.

As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science. Read more…

Information take two

February 18, 2021 19 comments

from Peter Radford

Keeping the conversation going.

Let’s start with Shannon, from his personal papers published in 1993 …

“The word ‘information’ has been given different meanings by various writers in the general field of information theory.  It is likely that at least a number of these will prove sufficiently useful in certain applications to deserve further study and permanent recognition.  It is hardly to be expected that a single concept of information would satisfactorily account for the numerous possible applications of this general field.”

So Shannon is fine with an eclectic vision of information, and expects a variety of definitions to emerge as useful.  This seems extremely wise.  Especially given his own somewhat narrow version.

Weaver, in 1949, expanded on  this ecumenical approach when he proposed a three pronged approach to understanding information.  He broke the analysis of information down into three basic areas of concern: technical issues to do with the quantification of information [which was where Shannon’s greatest insights lie]; semantic issues relating to meaning and truth; and a final category to do with the way in which information affected human behavior.

All the above information is summarized on page 81 of Luciano Floridi’s “The Philosophy of Information”  which is an excellent read.  Floridi has also provided us with “The Blackwell Guide to the Philosophy of Computing and Information”, which gives the topic a broad survey and is well worth the effort.  For those of you who want to get a taste of the way Floridi surveys the topic I suggest chapter four in the Blackwell Guide, which is simply entitled “Information” and begins thus … Read more…

Beyond mathematical modelling

February 17, 2021 22 comments

from Lars Syll

Image result for mathematical modelling realityMathematical modelling has now dominated the economics academy for so long that younger people that emerge from economic studies who are dissatisfied with what they are taught, cannot think beyond the modelling. They have been immersed in it so long that it is a kind of common sense to them. The idea that modelling is bound to be almost always irrelevant just does not compute for many. Yet they recognize that modern academic economics mostly does not provide any insights. So, they assume that the fault lies in the sorts of topics covered, or conclusions drawn etc. with the solution to be found by way of doing the modelling differently. It is all quite dire …

The only diversity the mainstream advocate is that which remains consistent with the mathematical modelling emphasis. Read more…

Steve Keen vs. Nordhaus – regarding humankind’s greatest ever crisis

February 16, 2021 6 comments

from Edward Fullbrook

Steve Keen’s new paper “The appallingly bad neoclassical economics of climate change,” would benefit humankind if it were widely read by economists.¹  There are two ways you can obtain it:

  1. Go here at Taylor & Francis and pay £35
  2. Go here and download it for free.

Here is its conclusion:

Conclusion: drastically underestimating economic damages from global warming

Were climate change an effectively trivial area of public policy, then the appallingly bad work done by Neoclassical economists on climate change would not matter greatly. It could be treated, like the intentional Sokal hoax (Sokal, 2008), as merely a salutary tale about the foibles of the Academy.

But the impact of climate change upon the economy, human society, and the viability of the Earth’s biosphere in general, are matters of the greatest importance. That work this bad has been done, and been taken seriously, is therefore not merely an intellectual travesty like the Sokal hoax. If climate change does lead to the catastrophic outcomes that some scientists now openly contemplate (Kulp & Strauss, 2019; Lenton et al., 2019; Lynas, 2020; Moses, 2020; Raymond et al., 2020; Wang et al., 2019; Xu et al., 2020; Yumashev et al., 2019), then these Neoclassical economists will be complicit in causing the greatest crisis, not merely in the history of capitalism, but potentially in the history of life on Earth.

1. More than once Keen distances his usage of “climate change” from greenwash usage, as when he writes: “these Neoclassical economists are on a par with United States President, Donald Trump, in their appreciation of what climate change entails. . . . . They are equating the climate to the weather.”

The information conundrum

February 16, 2021 5 comments

from Peter Radford

Kolmogorov, I think, hit the nail on the head when he said:

“At each given moment there is only a fine layer between the ‘trivial’ and the impossible.  Mathematical discoveries are made in this layer.”

He might just as well have said that life itself is discovered in this layer.  But let’s not get ahead of ourselves.

A few days ago I tried to point our way towards an acceptance of a certain humility.  I used a couple of quotes, one from Durer and one from Soros, to provide us with insights form well-regarded figures separated by a good long period.  Obviously the need to recognize our inherent fallibility has a long history.  The problem is that we keep forgetting and frequently end up acting as if we had some form of ultimate knowledge.  I used the word ‘utopia’ to stand in as a proxy for this illusion.  I was not talking about Utopia the book.

I have made it a long habit not to engage in public with correspondents who critique what I write because my purpose is simply to begin conversations and allow correspondents to create their own conversation.  Most often, and most interestingly to me, they go in very different directions than the one I had on  mind when I wrote.  Such is the richness of our modern ability to discuss in this remote, electronic, fashion.  We learn, or at least I do.  And that is the envigoration that motivates me to continue.

Once in a while, however, someone will say something that requires my public reaction.  My little Durer and Soros missive is one such occasion.

I have three points of contention to respond to.  I will go in the order with which they appeared.

First, I was accused of never had read “Utopia”.  This is a highly personal attack .  It is offensive.  But par for the course.  Quite how anyone could have this knowledge I don’t know.  In any case, as I indicated above, I was not referring to the book.  I was using the colloquial word ‘utopia’ as a placeholder for any body of knowledge that is based on the illusion of perfect knowledge.  Modern economics falls very closely to being such a vision of utopia. Read more…

MMT basics

February 14, 2021 4 comments

from Lars Syll

We have already shown that deficit spending increases our collective savings. But what happens if Uncle Sam borrows when he runs a deficit? Is that wht eats up savings and forces interest rates higher? The answer is no.

Image result for kelton deficitThe financial crowding-out story asks us to imagine that there’s a fixed supply of savings from which anyone can attempt to borrow …

MMT rejects the loanable funds story, which is rooted in the idea that borrowing is limited by access to scarce financial resources …

Government deficits always lead to a dollar-for-dollar increase in the supply of net financial assets held in the nongovernment bucket. That’s not a theory. That’s not an opinion. It’s just the cold hard reality of stock-flow consistent accounting.

So fiscal deficits — even with government borrowing — can’t leave behind a smaller supply of dollar savings. And if that can’t happen, then a shrinking pool of dollar savings can’t be responsible for driving borrowing costs higher. Clearly, this presents a problem for the conventional crowding-out theory, which claims that government spending and private investment compete for a finite pool of savings.

The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credit, determined by supply and demand in the same way as the price of bread and butter on a village market. In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks — the amount of loans and credit available for financing investment is constrained by how much saving is available. Saving is the supply of loanable funds, investment is the demand for loanable funds and assumed to be negatively related to the interest rate. Read more…

It takes a theory to beat a theory

February 13, 2021 70 comments

from Yoshinori Shiozawa (originally a comment)

At around the same time that Fred Lee and Lars Syll visited the University of California and talked long on Sraffa with Axel Leijonhufvud, a paper by Avi J Cohen appeared in Eastern Economic Journal: “The Laws of Returns under Competitive Conditions”: Progress in Microeconomics since Sraffa (1926)? (Vol. 9, No. 3, 1983, pp. 213-220).

It was a short paper that counts only eight pages, but a decisive criticism of economics of perfect competition that was understandable for new economics students. After two sections of persuasive arguments, Cohen concluded that

Thus, on both short and long run levels, there is no adequate resolution of contradictions between the partial equilibrium theory of perfect competition and the empirical evidence of non-increasing costs. Instead of a constructive resolution, perfect competition continues to be justified by the unsatisfactory verbal and logical contortions, denials of empirical evidence and proofs by assertion that originated more than fifty years ago.

However, this was not a real conclusion, but a premise of his true inquiry:
How are we to account for this extraordinary state of affairs?  Read more…

What do Durer and Soros have in common?

February 13, 2021 8 comments

from Peter Radford

I know, this is one of those more philosophical moments.  In my case prompted by my continued meditation on the deleterious effects of a belief in utopias.  Such beliefs seem always to end up with authoritarian consequences.  People can all too easily get swept up by the illusion of having solved life’s great mysteries.  It’s been going on for ages.  It appears to be a commonly held human attribute.  We need, apparently, to think we understand things that are, beneath the surface, remote, opaque, and inscrutable.  It’s the way we are.

The issue keeps popping up.  In the humdrum world of economics and economic history utopian ideas bedevil analysis.  Whereas we began with the humanistic description of the workings of an economy, for instance as articulated by Adam Smith, we end up with a cramped mechanistic and needlessly formal model of human behavior that is stripped of all humanity in its effort to be all encompassing.  Each step away from the initial description, each small addition of reasonable progress, each brick in the wall, and each hard won insight merely solidify the edifice, making it ever more difficult to challenge, and ever more difficult to improve.

This difficulty is then compounded by the necessary effort to become conversant with its entirety.  In modern economics it isn’t even possible to be truly fluent across the board.  We rely on others.  It has become a community effort, an act of solidarity rather than an act of individual accomplishment.  How does someone on one edge of the discipline know and trust the notions and analysis taking place on a distant edge?  Mutual trust.  Which is ironic in a discipline so committed to models of the individual. Read more…

“Pure Economics”

February 12, 2021 30 comments

from Ikonoclast  (originally a comment)

The whole idea that economics and the economy exist as a self contained discipline and a self-contained system respectively is absurd. First, there is a natural system, the biosphere, which contains economics activity and upon which economic activity is dependent. Second, there is politics and force (power) which condition economic activity.

In relation to the second, Chomsky writes of: “…American Liberalism, reiterated… in the Clinton doctrine, which held that the US has the right to resort to “unilateral use of power” to ensure “uninhibited access to key markets, supplies and strategic resources.” Not a right accorded to others, needless to say.”

Under these conditions, the pretense that there can be “pure economics” and a “science” of economics is absurd. It’s equally important to point out that these conditions (use of force to secure and retain strategic access to markets, supplies and strategic resources) show no sign of abating any time soon in human affairs.

The entire and so far successful attempt of capitalist economics has to been to ideologically and systemically “naturalize” itself, meaning make it seem natural and common sense to all its beneficiaries, and many of its bought-and-suborned wage-slaves and politicians, rather than a system of artifice, imposition, exploitation and appropriation. Read more…