Economists have no ears

October 24, 2016 1 comment

Thomas Kuhn once famously described textbooks as the vehicle by which students learn how to do “normal science” in an academic discipline. Economic textbooks clearly fulfil this function, but the pity is that what passes for “normal” in economics barely deserves the appellation “science”.

Most introductory economics textbooks present a sanitised, uncritical rendition of conventional economic theory, and the courses in which these textbooks are used do little to counter this mendacious presentation. Students might learn, for example, that “externalities” reduce the efficiency of the market mechanism. However, they will not learn that the “proof” that markets are efficient is itself flawed.

Since this textbook rendition of economics is also profoundly boring, the majority of those exposed to introductory course in economics do no more than this, and instead go on to careers in accountancy, finance or management – in which, nonetheless, many continue to harbour the simplistic notions they were taught many years earlier.  Read more…

Econometrics and the axiom of correct specification

October 23, 2016 1 comment

from Lars Syll

Most work in econometrics and regression analysis is — still — made on the assumption that the researcher has a theoretical model that is ‘true.’ Based on this belief of having a correct specification for an econometric model or running a regression, one proceeds as if the only problem remaining to solve have to do with measurement and observation.

aWhen things sound to good to be true, they usually aren’t. And that goes for econometric wet dreams too. The snag is, of course, that there is pretty little to support the perfect specification assumption. Looking around in social science and economics we don’t find a single regression or econometric model that lives up to the standards set by the ‘true’ theoretical model — and there is pretty little that gives us reason to believe things will be different in the future.

To think that we are being able to construct a model where all relevant variables are included and correctly specify the functional relationships that exist between them, is  not only a belief without support, but a belief impossible to support.

The theories we work with when building our econometric regression models are insufficient. No matter what we study, there are always some variables missing, and we don’t know the correct way to functionally specify the relationships between the variables.

Every regression model constructed is misspecified. There are always an endless list of possible variables to include, and endless possible ways to specify the relationships between them. So every applied econometrician comes up with his own specification and ‘parameter’ estimates. The econometric Holy Grail of consistent and stable parameter-values is nothing but a dream. Read more…

The old debt and entitlement charade

October 22, 2016 8 comments

from Dean Baker

The establishment is trying to pull a big one over on the public yet again. One of the designated topics for the last presidential debate goes under the heading, “debt and entitlements.” This should have people upset for several reasons.

The first is simply the use of the term “entitlements.” While this has a clear meaning to policy wonks, it is likely that most viewers won’t immediately know that “entitlements” means the Social Security and Medicare their parents receive. It’s a lot easier for politicians to talk about cutting wasteful “entitlements” than taking away seniors’ Social Security and Medicare.

The ostensible purpose of the debate is to allow voters to be better informed about the candidates’ views. So if the purpose is conveying information, why not use terms that most voters will understand?

But the semantics are the less important part of the problem. Why is it that Social Security and Medicare are linked to debt?  These are not the only programs that entail future commitments of resources.

For example, our military budget involves large commitments of future resources. New weapon systems can require decades to develop and produce. We commit ourselves not only to the annual salaries of current soldiers, but also many decades of veterans’ benefits. And, when we make military commitments through policies like the expansion of the North American Free Trade Agreement, we are potentially obligating ourselves to vast expenditures in future conflicts.

Many of the government’s largest commitments of future resources do not even appear in the budget. When the government grants a patent or copyright monopoly, it is allowing the holder to effectively tax the public for decades into the future.    Read more…

DSGE modeling – a statistical critique

October 21, 2016 1 comment

from Lars Syll

As Paul Romer’s recent assault on ‘post-real’ macroeconomics showed, yours truly is not the only one that questions the validity and relevance of DSGE modeling. After having read one of my posts on the issue, eminent statistician Aris Spanos kindly sent me a working paper where he discusses the validity of DSGE models and shows that the calibrated structural models are often at odds with observed data, and that many of the ‘deep parameters’ used are not even identifiable.

Interesting reading. And confirming, once again, that DSGE models do not marry particularly well with real world data. This should come as no surprise — microfounded general equilibrium modeling with inter-temporally optimizing representative agents seldom do.

reality-check-1024x682This paper brings out several weaknesses of the traditional DSGE modeling, including statistical misspecification, non-identification of deep parameters, substantive inadequacy, weak forecasting performance and potentially misleading policy analysis. It is argued that most of these weaknesses stem from failing to distinguish between statistical and substantive adequacy and secure the former before assessing the latter. The paper untangles the statistical from the substantive premises of inference with a view to delineate the above mentioned problems and suggest solutions. The critical appraisal is based on the Smets and Wouters (2007) DSGE model using US quarterly data. It is shown that this model is statistically misspecified …

Read more…

Economic growth is not “natural”: re-thinking current economic challenges

October 21, 2016 3 comments

from Maria Alejandra Madi

Since the late 1980s,  the World Bank has been defending a policy agenda that reinforces the free market model of endogenous economic growth where human capital plays an outstanding role since the acquisition of abilities would increase the productivity levels, and as a result, the income levels. In the model of endogenous growth, the evolution of the level of product per worker depends on the increase of productivity. Regarding the human capital model, the long run growth in each country is analysed considering the particular features of infrastructure and human capital. The divergences verified in the levels of product per worker among different countries can be attributed to the abilities accumulated by labour and to the infrastructure of the economies.  The emergence and diffusion of the  model of endogenous growth reflected the intellectual victory of  the  ideas about the supremacy of the competitive economic order and the rejection of interventionism to promote economic growth and social justice. Considering the relevant economic outcomes of this intellectual victory, the main question that arises in the context of economics education is: What is at stake in  the economic discourse that privileges the economic competitive order as the pillar of economic growth?

The competitive order, as a necessary one, is the pillar of Hayek’s theoretical construction.  Hayek’s economic discourse turns out to “naturalize” the competitive market as a superior arrangement. However,  the “naturalization” of the competitive market – by considering it a “natural” arrangement – is overwhelmed by political interests that play a crucial role in the economic and political decision procedures, and in the institutional management of such issues.

Taking into account a real-world approach  to economic growth, it is relevant to highlight  the ideas of  Keynes, Minsky, Kalecki, Rifkin in order to re-think  current economic growth challenges

1. Uncertainty         read more

Links. EU (not?).

October 20, 2016 Leave a comment


The latest UK (un)employment data (August) show at worst some stalling of the relatively high pace of the growth of employment. But there is no sign of any kind of Brexit cliff.

The latest UK retail sales data show a 4,1% increase in volume (September). Obviously, people care more about earnings growth (2% higher wages and 1,6% more employment compared with one year ago) than about Brexit. This surprised me: average store prices were 1,1% lower than one year before.

The latest UK data on the government deficit and debt show that the UK does not comply with the Maastricht criteria. Between 2009 and 2015, the government deficit however declined from 10% of GDP (or about 25% of government expenditure) to about 4% of GDP.

This is not EU (yet). Yes, Trumps effort to mobilize poll watchers reminds me of Mussolini’s ‘Blackshirts’. Read more…

Denying globalization’s downside won’t stop right-wing populism

October 20, 2016 9 comments

from Jim Stanford

I was somewhat surprised to see Stephen Poloz recently urging economists to do more work identifying and disseminating research on the supposed benefits of free trade.  That’s slightly beyond his job description (perhaps more fitting with his last position as head of Export Development Canada).  But like economic leaders elsewhere in the world, Mr. Poloz is obviously concerned with the disintegration of popular support for neoliberal free trade deals.  That disintegration will have tectonic economic and political consequences.

True believers may think that merely educating citizens about how trade deals reallyare good for everyone (á la David Ricardo’s textiles and port parable) will save the day for globalization.  But I think there’s a much deeper problem.  The reality is that trade liberalization, as currently practiced (with an emphasis on corporate power and capital mobility, and absent effective demand-management and imbalance-correcting tools), has harmed many millions of people — in both developed and developing countries — and is now repressing growth, not stimulating it.  All the comparative advantage pontificating and CGE modeling in the world won’t magically convince people to deny their own lived reality: namely, that globalization is one reason (among others) why their economic prospects have visibly diminished over the last generation.  Read more…

Rational choice theory …

October 19, 2016 10 comments

from Lars Syll

In economics it is assumed that people make rational choices

Sharing in the booty

October 18, 2016 8 comments

from David Ruccio


We’ve just learned that the corporate payouts—dividends and stock buybacks—of large U.S. firms are expected to hit another record this year. At the same time, John Fernald writes for the Federal Reserve Bank of San Francisco that the “new normal” for U.S. GDP growth has dropped to between 1½ and 1¾ percent, noticeably slower than the typical postwar pace.

What’s the connection?

Read more…

Can we move on?

October 18, 2016 6 comments

from Peter Radford


I am hardly alone in ranting on about economics, but it never changes. How can it? The intellectual honesty required to make the sort of shift needed to recapture the discipline’s honor simply doesn’t exist. Its practitioners are too deeply embedded and ingrained. Its students are too intimidated by the burden of its closed social pressures.

Nowhere is there a leader willing to take on the mantle of righting the ship. So it continues to wallow low in the water, not sinking but adrift. It has become an aimless enterprise being more and more revealed as nothing but a combination of artless technique and ideological objective.

When we think of economics nowadays we think of applied mathematics. Applied to certain problems, in certain ways, within certain boundaries, and only against certain data.

Economics has become a small minded sub-discipline designed to produce analysis of small issues or problems that can be contained within the massive restrictions of the subject’s edifice.  Read more…

Probability and rationality — trickier than you may think

October 17, 2016 14 comments

from Lars Syll

The Coin-tossing Problem

My friend Ben says that on the first day he got the following sequence of Heads and Tails when tossing a coin:

And on the second day he says that he got the following sequence:

184bic9u2w483jpgWhich day-report makes you suspicious?
Most people I ask this question says the first day-report looks suspicious.

But actually both days are equally probable! Every time you toss a (fair) coin there is the same probability (50 %) of getting H or T. Both days Ben makes equally many tosses and every sequnece are equally probable!

The Linda Problem  

Linda is 40 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.   Read more…

In the EU, house prices are increasing too fast.

October 16, 2016 Leave a comment

In the EU, house prices are Increasing too fast (graph 1). Yes, I do know that the general price level is rising, too. And I do know that wages are increasing even somewhat faster than the general price level – which mitigates problems. While, a problem in its own right, in Italy and Greece house prices have been declining for years and are still declining. And almost nowhere the record levels of 2007 have been reached (graph 2). But that does not matter. House prices are increasing too fast.

Graph 1. Annual deflated House Price Index by Member State, % increase, 2015 (Eurostat).


Read more…

Market myths and realities

October 15, 2016 7 comments

from Asad Zaman

One of the core and central properties of markets is that they lead to increasing concentration of wealth at the top. This is because market allocations of goods and services respond to money, automatically conferring great power to those with wealth. For instance, market incentives lead to the production of luxury handbags anmythrealityd briefcases for plutocrats priced at $40,000+. According to the World Health Organisation (WHO), the price of one such bag can save more than 300 lives.

The extremely ugly realities of market societies are hidden from view because markets generate myths to glorify achievements, project illusions and conceal defects. Indeed, the creation of market myths is a second core and central property of markets, which is not mentioned in any current economics textbook. Market myths are crucial to the survival of market societies since knowledge of realities would lead to a revolution of the bottom 99% who are exploited by the super-rich. In this essay, we analyse a few of the central myths of market societies, and contrast them with the realities.  read more

Blind leading the blind

October 14, 2016 3 comments

from Peter Radford

A few days ago David Ruccio posted an article titled “Crash and Learn” on the state of economics education. I want to elaborate a little further, although my usual skepticism on this subject does bridle a tad at the concept of economics education. Is that the same as “military intelligence”?

Anyway, in that article is this quote:

In Manchester, Diane Coyle also defends the basic methodology of economics. She says there is confusion among critics between microeconomics, the study of the behaviour of individuals and firms, and macroeconomics, the study of whole economies. Macroeconomics, she admits, “is broken”. But microeconomics is both robust and often verifiable with real-world data. What, she asks, can heterodox economists contribute to typical concerns of microeconomics, such as discovering the right mix of policy incentives to discourage obesity?

Therein, as someone once said, lies the tale.

Macroeconomics is “broken”. I quite agree. It’s nice to see an august member of the trade admitting that snake oil is snake oil no matter how clever the mathematics looks. Not that I blame the math. You can’t make something silly into something smart simply by expressing it in the formal language of math. If the root is rotten so is the formal outcome.

But that part I like more is that she goes on to laud the robust nature of microeconomics.


Micro, if anything, is worse than macro. It is so utterly disconnected from reality that it is incapable of anything other than talking about itself. Which it does loudly and proudly.   Read more…

Growth: weighing the evidence (with changing weights)

October 13, 2016 1 comment

In growth accounting, 1+1 might sometimes add up to 1,5 instead of 2. With good reasons. Or at least: with reasons. Let me explain.


Economists – and others – tend to look at production when they define  ‘growth’. But we might as well look at consumption. But: what is consumption? It’s the use of stuff. And of services. But economists define it as the purchase of stuff. And services. Which leads to some problems. The value of purchases is, by definition, measured using prices. And prices change – not just in an absolute way but also in a relative way. Stuff that was expensive in 1955, like televisions, might be relatively cheap by now, in 2016. Which means that the purchase of two televisions might add relatively less to total expenditure, measured in fixed prices, than it did in 1955. At least – when these prices are not entirely fixed. Economic statisticians sometimes use 2013 prices to estimate the value of purchases in 2013 and 2014 and to use 2014 prices to estimate consumption in 2014 and 2015 and to link the growth of the ‘volume’ of consumption between 2013 and 2014 tot the growth of the volume between 2014 and 2015. Neat! But this does mean that, over time, goods which have prices which are getting lower in a relative sense are getting lower and lower weights in our estimates of the growth of consumption. This influences our picture of what happened to long-term consumption growth.   Read more…

Sherlock Holmes of the year — ‘Nobel prize’ winner Bengt Holmström

October 13, 2016 9 comments

from Lars Syll

Oliver Hart and Bengt Holmström won this year’s ‘Nobel Prize’ in economics for work on applying contract theory to questions ranging from how best to reward executives to whether we should have privately owned schools and prisons or not.

Their work has according to the prize committee been “incredibly important, not just for economics, but also for other social sciences.”

Asked at a news conference about the high levels of executive pay, Holmstrom said,

It is somehow demand and supply working its magic.

Wooh! Who would have thought anything like that.

What we see happen in the US, the UK, Sweden, and elsewhere, is deeply disturbing. The rising inequality is outrageous – not the least since it has to a large extent to do with income and wealth increasingly being concentrated in the hands of a very small and privileged elite.

Societies where we allow the inequality of incomes and wealth to increase without bounds, sooner or later implode. The cement that keeps us together erodes and in the end we are only left with people dipped in the ice cold water of egoism and greed.

And all this ‘Nobel prize’ laureate manages to come up with is demand and supply ‘magic.’

Impressive indeed …

Taking on global poverty and inequality

October 13, 2016 3 comments

from David Ruccio

To read National Public Radio’s [ht: ja] article on the latest World Bank report on Poverty and Shared Prosperity: Taking on Inequality, you’d think the problem of global poverty was well on the way to being solved.

Is that just wishful thinking?

In terms of the headline numbers, the author of the article is correct:

In 2013, fewer than 800 million people lived on less than $1.90 a day. That’s less than 11 percent of the global population. As recently as 1990, about 35 percent of all people lived in such extreme poverty.

That means about 1.1 billion people rose out of extreme poverty.

But, before we get too excited, there are 3 key issues to keep in mind.

First, the World Bank itself follows the presentation of the numbers with a note of caution:

Although this represented a noticeable decline, the poverty rate remains unacceptably high given the low standard of living implied by the $1.90-a-day threshold.

That’s right. The threshold is a miserly $1.90 a day, an update taking into account inflation of the previous limit of $1 a day. If they used anything more reasonable—say, an absolute level of $5 a day or, even better, a relative level of 50 percent of mean income—the level of global poverty would be much higher.*


Read more…

The Market and Nobels

October 12, 2016 5 comments

from Peter Radford

As I awake from my self-imposed slumber and re-survey the state of economics:

Nothing has changed.

This is predictable, and, I submit, is the most predictable phenomenon within the ambit of the discipline. Economics is in disrepute, and its current elite are determined to keep it there.

The latest ersatz Nobel prize went to a couple of guys who theorize a lot about contracts. This is the kind of work that now dominates much of economics. Tinkering with mathematics, incentives, and other aspects of minutiae whilst steadfastly turning away from the rapidly approaching storms that threaten the lives of real people outside the tenured redoubts professors hide within.

I have come to think that economics itself is one of the greatest impediments to returning us all to a prosperous and sustainable path. It is one of those moribund institutions that festers away living in a long-ago past, secure in what little it knows, and terrified of what it might not know.

I don’t think people realize just how historical contingent economic is. It was invented in the aftermath of the onset of industrialization, it was an afterthought as a growing chorus of politically motivated observers sought to identify a body of thought to be deployed to defend modernization and to attack the old order.

That old order was the entire system of life built around the stability of an agricultural economy in which land was paramount, aristocrats carved out precious freedoms from the older-still order of monarchs and autocrats, and, by and large, regular people lived as many generations of their ancestors had. The entire social and political structure can be encapsulated in the word: tradition.    Read more…

The main problem with mainstream economics

October 11, 2016 17 comments

from Lars Syll

Many economists have over time tried to diagnose what’s the problem behind the ‘intellectual poverty’ that characterizes modern mainstream economics. Rationality postulates, rational expectations, market fundamentalism, general equilibrium, atomism, over-mathematisation are some of the things one have been pointing at. But although these assumptions/axioms/practices are deeply problematic, they are mainly reflections of a deeper and more fundamental problem.

c9dd533b1cb4e7a2e1d6569481907beeThe main problem with mainstream economics is its methodology.

The fixation on constructing models showing the certainty of logical entailment has been detrimental to the development of a relevant and realist economics. Insisting on formalistic (mathematical) modeling forces the economist to give upon on realism and substitute axiomatics for real world relevance. The price for rigour and precision is far too high for anyone who is ultimately interested in using economics to pose and (hopefully) answer real world questions and problems.

This deductivist orientation is the main reason behind the difficulty that mainstream economics has in terms of understanding, explaining and predicting what takes place in our societies. But it has also given mainstream economics much of its discursive power – at least as long as no one starts asking tough questions on the veracity of – and justification for – the assumptions on which the deductivist foundation is erected. Asking these questions is an important ingredient in a sustained critical effort at showing how nonsensical is the embellishing of a smorgasbord of models founded on wanting (often hidden) methodological foundations.   Read more…

Hunger as the primary economic problem

October 11, 2016 1 comment

You have until 30 October to submit to
a paper for the WEA online conference Food and Justice.

from Asad Zaman

Ifaohungermapf any group of concerned citizens would gather to discuss economic problems, it would seem natural to begin with the problem of feeding the hungry. Strangely enough, one would not encounter this problem within a standard course of study of economic theory at any of the leading universities throughout the world. This is due to two major mistakes made in the formulation of conventional economic theories currently being taught and practised throughout the globe. The first mistake is the idea that the goal of an economic system is the production of wealth, broadly defined. For example, Adam Smith takes the fundamental economic problem to be the production of wealth. The maximisation of GNP per capita currently forms the core of economic growth theory. The value of human life can be evaluated in terms of how much wealth the human can produce. This also accounts for the use of the degrading term ‘human resource’, which basically puts humans on a par with other resources, like factories and machines, as inputs to the production process.

A revolution in economic theory would result if we replace this completely mistaken idea with its opposite: the goal of an economic system is to increase human welfare. Wealth is important only to the extent that it can bring about increases in human welfare. In conjunction with wealth, many other types of invisible inputs, such as social capital, cultural norms and institutional structures also play an important role in determining human welfare, broadly understood in terms of all dimensions of life which contribute to our collective well-being. Wealth, industry and production of goods and services are resources to be used to help improve human lives. A central goal of economics should be the relation between resources, and their relative efficiency at contributing to human welfare. In particular, providing food to the hungry is clearly the single most important and universal invariant in production of human welfare. The fundamental economic problem is to study how to use a given amount of wealth to produce the maximum amount of welfare.  read more