“I never learned maths, so I had to think”

August 17, 2018 9 comments

from Lars Syll

Professors may find themselves ill-prepared for the macro classroom. To become academics they had to answer erudite questions posed by more senior members of the discipline. To become good teachers of introductory macro, they have to give clear answers to muddled students. That requires an intuitive feel for the subject. It is not enough to crank through the equations.

roweIndeed, Mr Rowe attributes part of his success as a teacher to his shortcomings as a mathematician. He quotes Joan Robinson, another clear expositor of macroeconomics: “I never learned maths, so I had to think.” Because the answers did not leap out at him from the equations, he had to dwell on the economic behaviour underneath the algebra.

Macroeconomics is difficult to teach partly because its theorists (classical, Keynesian, monetarist, New Classical and New Keynesian, among others) disagree about so much. It is difficult also because the textbooks disagree about so little.

The Economist

Income redistribution in the United States

August 16, 2018 3 comments

Share of wealth in the United States

August 16, 2018 2 comments

Image result for share of wealth distribution

Source: http://politicsthatwork.com/graphs/share-of-wealth   Read more…

Easterlin’s paradox or why economic growth does not make us happier

August 15, 2018 13 comments

from Lars Syll

In Easterlin’s (1974) seminal paper, he finds that within any one country, in cross sectional studies, there was a strong correlation between income and happiness. One would easily conclude that money can buy happiness. However, looking at a cross section of countries, one comes to a different conclusion …

For 10 of the 14 countries surveyed, the happiness ranking is about the same, even though the income per capita changes by a factor of 30 from $140 to $2,000 …

easterlinThe finding of strong correlation between income and happiness disappears when comparisons are made across countries. Similarly, there is no correlation between happiness and income in the long run within a single country … Easterlin (2001) cites several studies which show that, despite tremendous increases in GNP per capita, the level of happiness in European and Latin American has remained virtually constant over decades.

The startling implication of these empirical findings is that the stress being placed on economic growth is entirely misplaced. Growth has no clear relation to happiness. The profession of economics, as well as policy makers all over the world are directly threatened by these findings, which suggest radical changes in how to organise economic affairs …

The implicit proposition of utility theory that the sole route to happiness is maximisation of consumption contradicts with the empirical evidence: this proposition is true only in the short run. This short run validity creates a dangerous illusion of long run validity; understanding this has dramatic policy implications. If happiness is determined by relative comparisons, then one can achieve greater happiness by reducing inequalities, and also by reducing the standards of living for everyone. This will lower the benchmark and make it easier for everyone on the planet to be happy in comparison with this benchmark.

Asad Zaman & Mehmet Karacuka

Factory workers in India

August 15, 2018 1 comment

from C. P. Chandrasekhar and Jayati Ghosh

Recent data from the Annual Survey of Industries, covering up to 2015-16, provide some interesting insights into the changing nature of industrial employment in India. In the decade up to 2015-16, there was a significant increase in the number of factory workers, by around 40 per cent. This expansion can be dated from around 2005-06 onwards and especially up to 2011-12. This is to be expected, given that that was the period of India’s economic boom, in which both construction and manufacturing industry showed higher rates of investment and output growth.

While the aggregate numbers still remain low for an economy of India’s size and ambitions, such an increase in doubtless to be welcomed. Figure 1 indicates the annual pattern of aggregate employment of workers and other salaried employees in the factory sector. There is no doubt that there is a trend change in the number of workers after 2005-06, while the increase in the number of salaried employees has been more muted.

Figure 1

Read more…

So much for value-free economics

August 15, 2018 3 comments

from Lars Syll

Back in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economics textbooks — have increased relative to Pennsylvania. However, when economists David Card and Alan Krueger gathered information on fast food restaurants in the two states, it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream demand theory we had an anomalous case of a backward-sloping supply curve.

And, of course, all those non-ideological and value-free scientific economists out there were überjoyed and prepared to revise their theories …

jp-imgresI’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.

David Card

“Don’t class warfare me”

August 14, 2018 2 comments

from David Ruccio

trump slump

Marketplace’s Kai Ryssdal is no class warrior. Far from it. But after Donald Trump’s chief economic adviser Larry Kudlow spent considerable time during a recent interview celebrating the latest statistics about economic growth, jobs, and wages and minimizing the effects of the trade tariffs, Ryssdal was encouraged to challenge him:  Read more…

Money in perspective

August 13, 2018 12 comments

from Lars Syll

keWhen the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession — as distinguished from the love of money as a means to the enjoyments and realities of life — will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.

Scientist qua scientist, scientist qua citizen Part II: The double-edge approach to science

August 13, 2018 4 comments

from Małgorzata Dereniowska

Scientific epistemology is a serious business in economics—as it is in any science. Not surprisingly, therefore, discussions about value-ladeness tend to focus on theoretical and methodological issues within the discipline, while the question of the social consequences of science is approached with more reservation. And for many good reasons, one may say, because it is not entirely up to scientists how will the scientific product be disseminated and interpreted in society, or how will it be used by policy makers. Or, that’s not the job of the scientist, one could reason, to determine and be ready for all possible applicative scenarios.

Since the last few decades, research practices have undergone a far-reaching transformation at the interface between science, policy and society. It involves an increased engagement of science in problem solving and policy advice, and the enhancing role of participatory research methods in problem-based approaches. The social consequences of science become therefore more readily visible, opening up new perspectives on debates about facts and values dichotomy, or the relationship between knowledge, truth, and values (cf. Kitcher, 2001). One way of looking at the transformation of scientific practices focuses on the criteria of scientific rationality with regard to scientific knowledge and the very process of knowledge production, echoing a Weberian contrast between instrumental and axiological rationality of social action (Weber 1968). Specifically, the scientific rationality criteria have been extended in the process from purely (i) internal rationality,that can be defined as a conventional scientific rationality approach focused on disciplinary epistemology and methodology, to (ii) external rationality that pertains to axiological, ethical, and societal elements of knowledge and its production (Kiepas, 2006).   read more

Modern macro — a total waste​ of time

August 13, 2018 3 comments

from Lars Syll

While one can understand that some of the elements in DSGE models seem to appeal to Keynesians at first sight, after closer examination, these models are in fundamental contradiction to Post-Keynesian and even traditional Keynesian thinking. The DSGE model is a model in which output is determined in the labour market as in New Classical models and in which aggregate demand plays only a very secondary role, even in the short run.

In addition, given the fundamental philosophical problems presented for the use of DSGE models for policy simulation, namely the fact that a number of parameters used have completely implausible magnitudes and that the degree of freedom for different parameters is so large that DSGE models with fundamentally different parametrization (and therefore different policy conclusions) equally well produce time series which fit the real-world data, it is also very hard to understand why DSGE models have reached such a prominence in economic science in general.

Sebastian Dullien

Read more…

Share of wealth held by the bottom 90%

August 12, 2018 Leave a comment

Graph depicting Share of Wealth Held by the Bottom 90%

Source: http://politicsthatwork.com/graphs/share-wealth-by-country

Median individual level of wealth by country

August 11, 2018 7 comments

Image result for median wealth by country

Sources: Credit Suisse    Last updated: May 12, 2016

Why data is not enough to answer scientific questions

August 10, 2018 5 comments

from Lars Syll

The Book of Why_coverIronically, the need for a theory of causation began to surface at the same time that statistics came into being. In fact modern statistics hatched out of the causal questions that Galton and Pearson asked about heredity and out of their ingenious attempts to answer them from cross-generation data. Unfortunately, they failed in this endeavor and, rather than pause to ask “Why?”, they declared those questions off limits, and turned to develop a thriving, causality- free enterprise called statistics.

This was a critical moment in the history of science. The opportunity to equip causal questions with a language of their own came very close to being realized, but was squandered. In the following years, these questions were declared unscientific and went underground. Despite heroic efforts by the geneticist Sewall Wright (1889-1988), causal vocabulary was virtually prohibited for more than half a century. And when you prohibit speech, you prohibit thought, and you stifle principles, methods, and tools.

Readers do not have to be scientists to witness this prohibition. In Statistics 101, every student learns to chant: “Correlation is not causation.” With good reason! The rooster crow is highly correlated with the sunrise, yet it does not cause the sunrise.

Unfortunately, statistics took this common-sense observation and turned it into a fetish. It tells us that correlation is not causation, but it does not tell us what causation is. In vain will you search the index of a statistics textbook for an entry on “cause.” Students are never allowed to say that X is the cause of Y — only that X and Y are related or associated.

A popular idea in quantitative social sciences is to think of a cause (C) as something that increases the probability of its effect or outcome (O). That is:   Read more…

The most unequal regions in the world

August 10, 2018 1 comment

Minimum wages around the world

August 9, 2018 4 comments

Related image

Source: https://gshindi.com/category/national-issues/minimum-wage-proposal-big-risk

Rethinking public budget

August 8, 2018 5 comments

from Lars Syll

The balanced budget paradox is probably one of the most devastating phenomena haunting our economies. The harder politicians — usually on the advice of establishment economists — try to achieve balanced budgets for the public sector, the less likely they are to succeed in their endeavour. And the more the citizens have to pay for the concomitant austerity policies these wrong-headed politicians and economists recommend as “the sole solution.”

One of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external … A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.

Abba Lerner The Burden of the National Debt (1948)

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Read more…

Socialism or truth

August 7, 2018 30 comments

from David Ruccio

The liberal establishment continues to mourn the death of truth. Everyone else is moving on.

Every day, it seems, one or another liberal—pundit, columnist, or scholar—issues a warning that, in the age of Donald Trump, we now live in a post-truth world. In their view, we face a fundamental choice: either return to a singular, capital-t truth or suffer the consequences of multiple sets of beliefs, facts, and truths.

For example, just the other day, Keith Kahn-Harris [ht: ja] (in the Guardian) noted the “sheer profusion of voices, the plurality of opinions, the cacophony of the controversy,” which in his view “are enough to make anyone doubt what they should believe.” It’s what he calls “denialism”: the transformation of the “private sickness” of self-deception into the “public dogma” of seeing the world in a whole new way.

There are multiple kinds of denialists: from those who are sceptical of all established knowledge, to those who challenge one type of knowledge; from those who actively contribute to the creation of denialist scholarship, to those who quietly consume it; from those who burn with certainty, to those who are privately sceptical about their scepticism. What they all have in common, I would argue, is a particular type of desire. This desire – for something not to be true – is the driver of denialism.

Read more…

Methodology of Modern Economics

August 6, 2018 12 comments

from Asad Zaman

My paper is a survey of the huge amount of solid empirical evidence against the utility maximization hypothesis that is at the core of all microeconomics currently being taught today in Economics textbooks at universities all over the world. It is obviously important, because if what it says is true, the entire field of microeconomics needs to be re-constructed from scratch. Nonetheless, it was summarily rejected by a large number of top journals, before being eventually published by Jack Reardon as: ” The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,”  in International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414.   Speaking metaphorically, my paper documents the solid evidence that the earth is a round sphere in world where educational institutions teach the widely held belief that the earth is flat. Readers of RWER blog will recall that when challenged on the failure of macroeconomics after the Global Financial Crisis, economists retreated to the position that while macro theory may be in a bad shape, at least Microeconomics is solidly grounded. My paper blows this claim out of the water. As a result, nothing is left of Micro and Micro, and of economics as whole. This supports my earlier claim that a Radical Paradigm Shift is required to make progress — patching up existing theories cannot work.

None of the several leading journals that I sent the paper to made any comments about any mistakes in my arguments. There were two main reasons which were stated for rejections.  read more

The essence​ of scientific reasoning​

August 6, 2018 18 comments

from Lars Syll

In science we standardly use a logically non-valid inference — the fallacy of affirming the consequent — of the following form:

(1) p => q
(2) q

or, in instantiated form

(1) ∀x (Gx => Px)

(2) Pa

Although logically invalid, it is nonetheless a kind of inference — abduction — that may be factually strongly warranted and truth-producing.

holmes-quotes-about-holmesFollowing the general pattern ‘Evidence  =>  Explanation  =>  Inference’ we infer something based on what would be the best explanation given the law-like rule (premise 1) and an observation (premise 2). The truth of the conclusion (explanation) is nothing that is logicallygiven, but something we have to justify, argue for, and test in different ways to possibly establish with any certainty or degree. And as always when we deal with explanations, what is considered best is relative to what we know of the world. In the real world, all evidence is relational (evidence only counts as evidence in relation to a specific hypothesis) and has an irreducible holistic aspect. We never conclude that evidence follows from a hypothesis simpliciter, but always given some more or less explicitly stated contextual background assumptions. All non-deductive inferences and explanations are necessarily context-dependent.  Read more…

Utopia and mathematics

August 4, 2018 9 comments

from David Ruccio

In a recent article, Dan Falk [ht: ja] identifies a fundamental problem in contemporary physics:

many physicists working today have been led astray by mathematics — seduced by equations that might be “beautiful” or “elegant” but which lack obvious connection to the real world.

What struck me is that, if you changed physics and physicists to economics and economists, you’d get the exact same article. And the same set of problems. giphy2.gif

Economists—especially mainstream economists but, truth be told, not a few heterodox economists—are obsessed with mathematics and formal modeling as the only correct methods for achieving capital-t truth. Mathematical modeling for them represents the best, most scientific way of producing, disseminating, and determining the veracity of economic knowledge—because it is logical, concise, precise, and elegant.* In that sense, mathematics represents what can only described as a utopia for the practice of modern economics.**

Mathematical utopianism in economics is based on elevating mathematics to the status of a special code or language. It is considered both a neutral language and, at the same time, a language uniquely capable of capturing the essence of reality. Thus, economists see mathematics as having both an underprivileged and overprivileged status vis-à-vis other languages.

Let me explain.  Read more…