Home > Keynes, The Economics Profession > What has Keynes got to do with New Keynesian Macroeconomics? Nothing!

What has Keynes got to do with New Keynesian Macroeconomics? Nothing!

from Lars Syll

Paul Krugman has a post on his blog discussing “New Keynesian” macroeconomics and the definition of neoclassical economics:

So, what is neoclassical economics? … I think we mean in practice economics based on maximization-with-equilibrium. We imagine an economy consisting of rational, self-interested players, and suppose that economic outcomes reflect a situation in which each player is doing the best he, she, or it can given the actions of all the other players …

Some economists really really believe that life is like this — and they have a significant impact on our discourse. But the rest of us are well aware that this is nothing but a metaphor; nonetheless, most of what I and many others do is sorta-kinda neoclassical because it takes the maximization-and-equilibrium world as a starting point or baseline, which is then modified — but not too much — in the direction of realism.

This is, not to put too fine a point on it, very much true of Keynesian economics as practiced … New Keynesian models are intertemporal maximization modified with sticky prices and a few other deviations …

Why do things this way? Simplicity and clarity. In the real world, people are fairly rational and more or less self-interested; the qualifiers are complicated to model, so it makes sense to see what you can learn by dropping them. And dynamics are hard, whereas looking at the presumed end state of a dynamic process — an equilibrium — may tell you much of what you want to know.

Being myself sorta-kinda Keynesian I  find this analysis utterly unconvincing. Why? Let me try to explain.

Macroeconomic models may be an informative tool for research. But if practitioners of “New Keynesian” macroeconomics do not investigate and make an effort of providing a justification for the credibility of the assumptions on which they erect their building, it will not fulfill its tasks. There is a gap between its aspirations and its accomplishments, and without more supportive evidence to substantiate its claims, critics will continue to consider its ultimate argument as a mixture of rather unhelpful metaphors and metaphysics. Maintaining that economics is a science in the “true knowledge” business, I remain a skeptic of the pretences and aspirations of “New Keynesian” macroeconomics. So far, I cannot really see that it has yielded very much in terms of realistic and relevant economic knowledge.

The marginal return on its ever higher technical sophistication in no way makes up for the lack of serious under-labouring of its deeper philosophical and methodological foundations. The rather one-sided emphasis of usefulness and its concomitant instrumentalist justification cannot hide that “New Keynesians” cannot give supportive evidence for their considering it fruitful to analyze macroeconomic structures and events as the aggregated result of optimizing representative actors. After having analyzed some of its ontological and epistemological foundations, I cannot but conclude that “New Keynesian” macroeconomics on the whole has not delivered anything else than “as if” unreal and irrelevant models.

If we are going to be able to show that the mechanisms or causes that we isolate and handle in our microfunded macromodels are stable in the sense that they do not change when we “export” them to our “target systems”, they do only hold under ceteris paribus conditions and are a fortiori of limited value to our understanding, explanations or predictions of real economic systems. Or as the always eminently quotable Keynes wrote in Treatise on Probability(1921):

The kind of fundamental assumption about the character of material laws, on which scientists appear commonly to act, seems to me to be [that] the system of the material universe must consist of bodies … such that each of them exercises its own separate, independent, and invariable effect, a change of the total state being compounded of a number of separate changes each of which is solely due to a separate portion of the preceding state … Yet there might well be quite different laws for wholes of different degrees of complexity, and laws of connection between complexes which could not be stated in terms of laws connecting individual parts … If different wholes were subject to different laws qua wholes and not simply on account of and in proportion to the differences of their parts, knowledge of a part could not lead, it would seem, even to presumptive or probable knowledge as to its association with other parts … These considerations do not show us a way by which we can justify induction … /427 No one supposes that a good induction can be arrived at merely by counting cases. The business of strengthening the argument chiefly consists in determining whether the alleged association is stable, when accompanying conditions are varied … /468 In my judgment, the practical usefulness of those modes of inference … on which the boasted knowledge of modern science depends, can only exist … if the universe of phenomena does in fact present those peculiar characteristics of atomism and limited variety which appears more and more clearly as the ultimate result to which material science is tending.

Science should help us penetrate to “the true process of causation lying behind current events” and disclose “the causal forces behind the apparent facts” [Keynes 1971-89 vol XVII:427]. We should look out for causal relations. But models can never be more than a starting point in that endeavour. There is always the possibility that there are other variables – of vital importance and although perhaps unobservable and non-additive not necessarily epistemologically inaccessible – that were not considered for the model.

This is a more fundamental and radical problem than the celebrated “Lucas critique” have suggested. This is not the question if deep parameters, absent on the macro-level, exist in “tastes” and “technology” on the micro-level. It goes deeper. Real world social systems are not governed by stable causal mechanisms or capacities. It is the criticism that Keynes first launched against the “atomistic fallacy” already in the 1920s:

The atomic hypothesis which has worked so splendidly in Physics breaks down in Psychics. We are faced at every turn with the problems of Organic Unity, of Discreteness, of Discontinuity – the whole is not equal to the sum of the parts, comparisons of quantity fails us, small changes produce large effects, the assumptions of a uniform and homogeneous continuum are not satisfied. Thus the results of Mathematical Psychics turn out to be derivative, not fundamental, indexes, not measurements, first approximations at the best; and fallible indexes, dubious approximations at that, with much doubt added as to what, if anything, they are indexes or approximations of.

The kinds of laws and relations that economics has established, are laws and relations about entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made “nomological machines” they are rare, or even non-existant. Unfortunately that also makes most of the achievements of econometrics – as most of contemporary endeavours of economic theoretical modeling – rather useless.

Keynes basically argued that it was inadmissible to project history on the future. Consequently an economic policy cannot presuppose that what has worked before, will continue to do so in the future. That macroeconomic models could get hold of correlations between different “variables” was not enough. If they could not get at the causal structure that generated the data, they were not really “identified”. Dynamic stochastic general euilibrium (DSGE) macroeconomists – including “New Keynesians” – has drawn the conclusion that the problem with unstable relations is to construct models with clear microfoundations where forward-looking optimizing individuals and robust, deep, behavioural parameters are seen to be stable even to changes in economic policies. As yours truly has argued in a couple of post (e. g. here and here), this, however, is a dead end.

So here we are getting close to the heart of darkness in “New Keynesian” macroeconomics. Where “New Keynesian” economists think that they can rigorously deduce the aggregate effects of (representative) actors with their reductionist microfoundational methodology, they have to put a blind eye on the emergent properties that characterize all open social systems – including the economic system. The interaction between animal spirits, trust, confidence, institutions etc., cannot be deduced or reduced to a question answerable on the idividual level. Macroeconomic structures and phenomena have to be analyzed also on their own terms. And although one may easily agree with Krugman’s emphasis on simple models, the simplifications used may have to be simplifications adequate for macroeconomics and not those adequate for microeconomics.

“New Keynesian” macromodels describe imaginary worlds using a combination of formal sign systems such as mathematics and ordinary language. The descriptions made are extremely thin and to a large degree disconnected to the specific contexts of the targeted system than one (usually) wants to (partially) represent. This is not by chance. These closed formalistic-mathematical theories and models are constructed for the purpose of being able to deliver purportedly rigorous deductions that may somehow by be exportable to the target system. By analyzing a few causal factors in their “macroeconomic laboratories” they hope they can perform “thought experiments” and observe how these factors operate on their own and without impediments or confounders.

Unfortunately, this is not so. The reason for this is that economic causes never act in a socio-economic vacuum. Causes have to be set in a contextual structure to be able to operate. This structure has to take some form or other, but instead of incorporating structures that are true to the target system, the settings made in these macroeconomic models are rather based on formalistic mathematical tractability. In the models they appear as unrealistic assumptions, usually playing a decisive role in getting the deductive machinery deliver “precise” and “rigorous” results. This, of course, makes exporting to real world target systems problematic, since these models – as part of a deductivist covering-law tradition in economics – are thought to deliver general and far-reaching conclusions that are externally valid. But how can we be sure the lessons learned in these theories and models have external validity, when based on highly specific unrealistic assumptions? As a rule, the more specific and concrete the structures, the less generalizable the results. Admitting that we in principle can move from (partial) falsehoods in theories and models to truth in real world target systems does not take us very far, unless a thorough explication of the relation between theory, model and the real world target system is made. If models assume representative actors, rational expectations, market clearing and equilibrium, and we know that real people and markets cannot be expected to obey these assumptions, the warrants for supposing that conclusions or hypothesis of causally relevant mechanisms or regularities can be bridged, are obviously non-justifiable. To have a deductive warrant for things happening in a closed model is no guarantee for them being preserved when applied to an open real world target system.

In microeconomics we know that aggregation really presupposes homothetic an identical preferences, something that almost never exist in real economies. The results given by these assumptions are therefore not robust and do not capture the underlying mechanisms at work in any real economy. And models that are critically based on particular and odd assumptions – and are neither robust nor congruent to real world economies – are of questionable value.

Even if economies naturally presuppose individuals, it does not follow that we can infer or explain macroeconomic phenomena solely from knowledge of these individuals. Macroeconomics is to a large extent emergent and cannot be reduced to a simple summation of micro-phenomena. Moreover, as we have already argued, even these microfoundations aren’t immutable. The “deep parameters” of  ”New Keynesian” DSGE models– “tastes” and “technology” – are not really the bedrock of constancy that they believe (pretend) them to be.

So I cannot concur with Krugman – and other sorta-kinda “New Keynesians” – when they try to reduce Keynesian economics to “intertemporal maximization modified with sticky prices and a few other deviations”. ”New Keynesian” macroeconomics is a gross misnomer, since it has nothing to do with the fundamentals of Keynes’s economic thoughts. As John Quiggin so aptly writes:

If there is one thing that distinguished Keynes’ economic analysis from that of his predecessors, it was his rejection of the idea of a unique full employment equilibrium to which a market economy will automatically return when it experiences a shock. Keynes argued that an economy could shift from a full-employment equilibrium to a persistent slump as the result of the interaction between objective macroeconomic variables and the subjective ‘animal spirits’ of investors and other decision-makers. It  is this perspective that has been lost in the

  1. July 25, 2013 at 6:24 pm

    Much of what I read here appeals to me but I was wondering…given statements such as:

    “If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose.”

    and

    “The reason for this is that economic causes never act in a socio-economic vacuum. Causes have to be set in a contextual structure to be able to operate. This structure has to take some form or other, but instead of incorporating structures that are true to the target system, the settings made in these macroeconomic models are rather based on formalistic mathematical tractability.”

    what do I have to make of work like Keen’s such as described in

    http://www.businessspectator.com.au/article/2013/6/24/economy/gasping-krugman’s-ocean-theory

    where he obviously describes a simulation framework divorced from certain social aspects (although some others are explicitly encoded) and based on certain general regularities. Being of a natural science/engineering mindset myself, I find this very attractive (and plan to play around with Keen’s software) but reading your post it seems you argue that it is pointless.

  2. July 26, 2013 at 1:56 am

    I confess to not reading all of Lars’ long post. That’s because I think there’s a much more straightforward response.

    There is ample evidence in modern economies for exponential growth instabilities, herd behaviours, booms and crashes, unstable income distributions, and so on, that are clear signatures of disequilibrium. The invisible foot operates at least as much as the invisible hand. Modern economies are far-from-equilibrium systems.

    This means equilibrium models are not a useful first approximation. Equilibrium models are totally inadequate approximations, and quite misleading.

    See my ebook The Nature of the Beast http://betternature.wordpress.com/my-books/nature-of-the-beast/.

    Or, if you have a strong constitution, ask me for my newer, shorter MS Sack the Economists (mainstream, that is). http://betternature.wordpress.com/?cat=40044571

    • davetaylor1
      July 26, 2013 at 6:38 am

      Perhaps your should at least read Lars’ quotation from Keynes, Geoff.

      “The kind of fundamental assumption about the character of material laws, on which scientists appear commonly to act, seems to me to be [that] the system of the material universe must consist of bodies … such that each of them exercises its own separate, independent, and invariable effect, a change of the total state being compounded of a number of separate changes each of which is solely due to a separate portion of the preceding state … Yet there might well be quite different laws for wholes of different degrees of complexity, and laws of connection between complexes which could not be stated in terms of laws connecting individual parts”.

      You say: “This means equilibrium models are not a useful first approximation. Equilibrium models are totally inadequate approximations, and quite misleading”.

      That may be true of the equilibrium models neo-classical economists have been using, but what about the type Keynes envisaged for “wholes”? What we are talking about here are two versions of cybernetics: one Ross Ashby’s one of a multitude of “bodies” mutually adapting to fit the ecological space available, and the other of human steering, using “information” of different types to enable them to correct deviations from equilibrium.

      The latter, I have long argued, is what Keynes envisaged in his “macro” theory of economics as a “whole”, and what has gone wrong by economists continuing to take “self-interest” rather than the “common good” as the pole to steer by. Krugman, with the Ashby concept in mind, thinks “dynamics are hard”, yet telephone engineer Heaviside simplified the physical Maxwellian theories to the temporal equivalent of “the four winds” almost as long ago as Jevons got carried away by Maxwellian mathematics, while engineers have reduced the information-processing part of such equilibrium-maintaining systems to an integrated circuit component: a universal “PID servo”.

      I am very grateful to Lars for highlighting the Keynes quote from the “Treatise on Probability”, a book which, like the General Theory, my local library sold off c.1980. While heterodox economists fail to get their heads round the functioning of PID servos it will remain the case that they don’t have a replacement for the neo-Classical paradigm.

  3. Robert Locke
    July 26, 2013 at 6:42 am

    Reason or reason of state

    Some 30 years ago I attended a series of group discussions organized in the University of Hawaii Philosophy Department by Larry Laudan, department head, and a well-known authority on the epistemology of science. We noted at our first meeting that there were no natural scientists there; when one came the next meeting, we asked him why so few did. His answer “scientists are not interest in scientific epistemology; they just do science.” They follow the rigorous methodology of course but do not abandon the scientific paradigm in which they work if an experiment challenges its assumptions.
    I believe that neoclassical economists, when they refuse to abandon neoclassical principles and econometrics when they are found to be wrong, are just trying to follow the normal behavior of people in natural science.
    But I also think that this justification of their behavior might not be justified. To be justifiable neoclassical economics had to have become orthodox legitimately, that it, through the triumph of their paradigm through rational debate within the economics profession. But this historical evidence shows might not be what happened. J-C Spender points out in a comment to my post, “Getting Business School Reform Wrong,” that the triumph of neoclassical economics as a prescriptive science in academia occurred through government, DOD, even CIA policies. Informed people know that economists (e.g., Kenneth Arrow) imbibed the new methods (e.g. Simplex Linear Programing) while working for the Rand Corporation on Department of Defense contracts, and transferred these ideas into neoclassical economics (Dorfman, Samuelson, & Solow), that Consultancy firms like Booz, Allen, & Hamilton, working for DOD, propagated the methods in academia as well as in praxis, that the methods of operation research were discussed in NATO meetings and symposia in the 1950s and 1960s, attended by military officers and academics, and that the “Rand Corporation funded a generous fellowship program for graduate students in economics [to learn the new methodological and mathematical skills] at the Universities of California, Harvard, Stanford, Yale, Chicago, Columbia, and Princeton, and provided postdoctoral grants to young faculty anxious to use the new methodology in their work.” (Locke & Spender, p. 15).
    It is one thing to argue that neoclassical economics and its new prescriptions triumphed in the discipline through reasoned debate, another to say that the triumph resulted from reason of state. Lars might wish for economics to be a science in the “pure knowledge business,” but it appears that it has not been and that its claim to orthodoxy should be considered bogus.

    Dorfman, J., Samuelson, P., Solow, R. (1958). Linear Programming and Economic Analysis. New York: McGraw Hill..

    Locke, R R, & Spender, J-C. (2011). Confronting Managerialism. Zedbooks.

  4. July 26, 2013 at 1:55 pm

    I guess I really question the purpose of this post (apart from helping us remember some of keynes words—-0like how its nice going to see the MLK or Jefferson memorial and seeing some of those fasmous quotes again).

    Keynes says the atomistic idea so useful in physics from lucretius and boltzmann and on and on is not useful in economics because of discontinuity, emergence, interactions between macro and micro, nonadditivity, noncontinuity, etc.

    Well, PW anderson wrote a short paper in Science around 1972 called ‘more is different’; the theme appears many places also from trainor, laughlin (noble in physics), vigier, and on and on. (some of these people have some views considered loony).

    chaos theory shows the existence of abrupt shifts or bifurcations in dynamical systems, from a micro view. So does the theory of phase transitions.

    Quantum theory has many discrete aspects (especially for ‘bound states’ which is what are generally observed; it has non-seperability (bell, EPR). Newtonian mechanics has equally complex issues (instability, just like general equilibrium (SMD)).

    I could go on and on, as you or Krugman or anyone likely can. I dont see the point. Its like debating a christian fundamnentalist who shows that the theory of evolution has flaws, so it is not worth improving or elucidating (as Krugman argues for neo/classical econ and as physicists did after using the 1st approximation of the ideal gas of Lucrretius). Fundamentaslists say we should just read the bible because its more satisfying and correct than updating the Hardy-Weinberg law or Fisher/Wright bean bag genetics so it can explain speciation. Or you argue we should do ‘methodology’ and ‘philosophy’, rather than study math—be a Popper or Hayek or Keynes or shumpeter rather than follow in the path of samuelson or krugman. Wave our hands, pontificate. Of course both samuelson in newsweek and now krugman did that —write little ditties and poems. (Inequality is terrible, and thats why i have to work 2 jobs—one at NYT and one in the IVY league (since perhaps he blew his noble money (though J B Rosser and others would dispute how noble it is) at casinos or perhaps travel ).

    I do think standard economics is fairly corrupt and dogmatic — most people don’t really do what krugman proposes, but rather construct huge CVs repeating what others have written before, either with some slight new twist, or by simply changing all the terms and symbols in a paper into their own preferred alphabet and vocabulary (eg Krugman on economic geography). So guess TINA.

  5. July 26, 2013 at 3:56 pm

    As I see it the point of this thread is to clarify how the notion of ‘real world’ or ‘context’ should affect/shape the academic discourse around ‘economics’. So I find Lars’s post very interesting; struggling with issues of methodology, epistemology, and philosophy that I find germane but that some, such as Ishi (I suspect) would rather separate from real world economics. But perhaps probing how we humans think is a highly appropriate way of addressing and identifying the ‘real world context’ of our discourse, so providing an alternative to the ‘physics’ assumptions that everything can be reduced to logically/mathematically rigorous cause and effect and so on. (The fact that real physics isn’t anything like this is beside the point – we are merely deploying a rhetorical metaphor/trope/ideology.)

    Dave notes a different search for an alternative non-perfect notion of ‘real world context’ with his suggestion that Keynes’s intuited theoretically defensible analyses might be found at some macro-holistic level rather than at the atomistic level – which intuition leads on to the excitement of those who turn to chaos theory, self-organization, and so on. Perhaps this ‘system level’ approach offers a more tenable notion of our real world context and indicates some of the methods needed to explore it in an intellectually honest manner.

    As a historian through and through, Bob surfaces an entirely different real world context, political rather than epistemologically non-rational or incompletely rational. So he reinforces Lars’s use of Quiggin’s suggestion that whatever our discourse is or isn’t we academics should realize real world economics has little to do with mathematics per se (what some call ‘methodolatory’ or ‘method worship’) and that it is simply one mode of engagement with the rhetorical practices of ‘real world politics’.

    The sub-text of our little Confronting Managerialism book was that until our discipline/s accept/s and come to terms with how the Cold War and neoliberal politics of 1925 – 1975 affected/shaped our discourse we are likely to remain trapped in the kind of pointless around and around that Ishi protests. Put another way, Bob and I feel that the kind of methodological disputes that Lars notes and most readers of RWER have heard before actually mask the fundamentally political nature of our discussion. Were we able to come to grips with this political impact we might find some new and more profitable discourses.

    • davetaylor1
      July 26, 2013 at 6:12 pm

      “Dave notes a different search for an alternative non-perfect notion of ‘real world context’ with his suggestion that Keynes’s intuited theoretically defensible analyses might be found at some macro-holistic level rather than at the atomistic level – which intuition leads on to the excitement of those who turn to chaos theory, self-organization, and so on”.

      No. Exactly not. Dave lives in a real world where perfection is relative to the achievement of an aim and the side-effects of “noise” are not yet imperfections but errors. The looking for a “macro-holistic” solution was Keynes, not me. I’ve found it in control engineering’s PID, information-based, error-correcting servo. Again, those excited by chaos theory and self-organisation are still hooked on the mathematics of chaos. I’ve found the basis of these AND the “macro-holistic” solution already present in the pre-atomic physics and information content of directed energy at the Big Bang.

      Sure that’s interesting, but what ought to be exciting is the simplicity of the PID information circuit structure and its consequent educational value in coming to understand personality clashes, specialisation, necessary distinctions of function in economic theory and the need in multi-user facilities for time-sharing and harmonisation of activities. It’s terribly hard to REMAIN excited about what one’s friends seemingly struggle so to understand.

      • July 26, 2013 at 7:13 pm

        Oh dear, Dave, I am sorry I got it so wrong. But as an ex-mathematician, systems, nuclear, and IT engineer I believe I know what you are suggesting.

        I was long sorely tempted by systems level solutions, just like my friend Max Boisot. Indeed I came into academic life to research System Dynamics with Stafford Beer. It took me a while to overcome this temptation.

        For me these days the bottom line is always about human agency, and I can only find this property in human beings – not in self-regulating systems. Vico’s thinking is especially influential here.

      • davetaylor1
        July 26, 2013 at 9:04 pm

        Thanks for the apology, JC. Agreed on human agency – it takes imagination to envisage a course before we set out on it – but that surely makes us potentially more rather than less of a self-regulating system? And surely humans can supply PID servos with aims in relation to which they are self-regulating? We can train guide dogs not to bark and we can legislatively decide the ethos as against the mores and practices of institutions and individuals in a political economy, enabling self-control in both the setting and following of procedural courses. The ethos is our moral compass, but as I wrote earlier it is all too easy to legislators to mistake self-interest for the common good.

  6. davetaylor1
    July 26, 2013 at 4:05 pm

    ” ‘Scientists are not interest in scientific epistemology; they just do science’. They follow the rigorous methodology of course but do not abandon the scientific paradigm in which they work if an experiment challenges its assumptions.”

    The first statement is generally but not always true. (In a class of 14 apprentice scientists obliged to study British empiricism, I was one of only two with an exam result better than 24, the two Catholics scoring 47 and 84). The second statement mistakes empirical (epistemological) methodology for a scientific paradigm. The paradigm of economics was ethical Estate management, then successful Mercantile practice, but since the success of Newtonian mechanics it has been, successively, Newtonian (balancing forces), Maxwellian (broadcast forces), Keynesian (forces controlled by timely information) and von Neumann’s (Monroe Doctrine war gaming: containing militant opposition by playing Maxwellians and Keynesians against each other. Having subverted Maxwellians with political hacks, financiers are now misrepresenting Maxwellians as New Keynesians). Which was the point of Lars’ article.

    Keynes in the initial quote was having a go at your “rigorous methodology”: Hume’s non-scientific misinterpretation of Newton’s method and achievement. As your Larry Laudan said, most “normal” scientists wouldn’t. With a Keynesian type of mind I’ve been having a go at Hume myself, and eventually found the scientific methodology I’ve experienced articulated by Lakatos and Bhaskar. The one (in answer to Kuhn and Popper) asked why paradigms change, the answer being “when we cease to learn from having to qualify challenged assumptions drawn from them”. The other saw that the practice of science – both normal and revolutionary – has different phases suited to different types of scientist. “By their fruits you shall know them”.

    Says Robert: “To be justifiable, neoclassical economics had to have become orthodox legitimately, that it, through the triumph of their paradigm through rational debate within the economics profession”.

    Agreed on becoming orthodox legitimately, and of course the historical detail on the illegitimate sponsorship of neo-Classical orthodoxy is most interesting and welcome. I would argue it is mathematical rather than scientific method which has changed recently, i.e. from analytical to computational; sciences like chemistry and genetics have simply moved on to later phases. I don’t, though, think a paradigm is justified by “rational debate”. It is justified by giving scientists a “handle” on issues they had not previously known how to address – and then, by continued “eureka” experiences. The proof of the pudding is in the eating.

    Lakatos, I & Musgrave, A, eds. (1969). Criticism and the Growth of Knowledge. Cambridge University Press. [A debate involving Kuhn, Popper, Lakatos et al].

    Bhaskar, R (1993). Dialectic: The Pulse of Freedom. Verso. [Difficult. The dynamic sequel to A Realist Theory of Science (1975). Verso, 1997.

  7. July 27, 2013 at 3:47 am

    Perhaps I can clarify my rather terse comment earlier, and also respond to one or two points more directly.

    I think several comments have picked up on the critical importance of emergence in a self-organising system. The whole is greater than the sum of the parts. The properties of the whole do not follow from a representative agent, they follow from the myriad interactions among agents. (Keynes was saying this in his own way it seems.)

    This implies you have to study the whole, as well as the parts. In other words, you have to study macro even if you think you understand micro.

    My critique really has two parts. One is that an equilibrium theory of micro is never going to be a useful place to start to understand a system that is always far from equilibrium. The behaviour of the latter is *radically* different from the gentle near-equlibrium of neoclassical, even or especially at the micro level. For example, increasing returns to scale (which pervade our economies) generate runaway exponential instabilities that result in global oligopolies, completely contrary to the neoclassical contrivance.

    The second part is that trying to extract macro behaviour from a micro model that is fundamentally irrelevant (as I gather New Keynesians try to do) is also quite misguided. Keynes (I gather from recently reading Minsky’s account of Keynes) was onto this, and was trying to construct macro models that might be intrinsically unsteady, and might have more than one meta-stable state. So it seems real Keynes (not the bastardised neoclassical Keynes) and Minsky were pursuing sensible macro theories, as Steve Keen is demonstrating, without direct reference to a micro theory.

    There is a useful distinction to make between “steady” and “equilibrium”. A macro model may have (relatively) steady states, even though at a micro level the economy is full of smaller-scale instabilities. This reflects the ability of a complex system to orbit a stationary state for a time, though it may suddenly shift into a different state – the kind of thing Keynes was pursuing, according to Minsky. It may be possible to design self-correcting mechanisms at the macro level that keep the economy in a fairly steady state. I presume this is what Dave Taylor was getting at.

    Several comments refer loosely to “chaos”. A self-organising system may have behaviour that is simple, not-so-simple, complex, or chaotic. There are major distinctions among these, that it would pay to become familiar with. A pendulum, a rocking chair and a neoclassical system are all self-organising, but their behaviour is relatively simple, not at all like that of a “complex” system. A complex system is not chaotic, though it may be erratic some of the time.

    Robert Locke, I think you have good things to contribute, but I do wish you would move beyond simplistic caricatures of science. Yes, most of the time scientists can get on with science without worrying about the philosophy or the “paradigm”. However if observations conflict with theory then at some stage someone has to look deeper, and that may lead them to throw out the prevailing overview (paradigm, whatever) of that topic.

    Also, modern science has thrown up ideas that go far beyond Descartes’ clockwork universe. Reductionism was brilliant for understanding (many) physical systems, but hopeless for living systems. The profoundly important thing about the new understanding of self-organising systems is that they show behaviours that are more like living systems, and it seems living systems are of this kind. So simultaneously we find out why the old simple mechanistic approaches did not work for living systems, and we learn new ways to gain a better understanding of living systems. One clear lesson (from system science, we already knew it from daily life) is that it is essential to approach living systems with humility – not commonly associated with scientists, I know. Unfortunately many medical scientists (among others) do not seem yet to have cottoned on to this lesson.

    Finally, I agree with the comment (not sure who) that it would be good to move on from philosophising and “get on” with some investigations. And also to consign the neoclassical to the “not worth agonising about” basket. Its assumptions are absurd, its predictions are nothing like real modern economies, it is not a useful first approximation. Yes, keep pointing this out to the profession that’s addicted to it, but I think that can be done concisely, and also to the non-specialist audience that is more receptive to the message. That’s what I’m trying to do in my several manuscripts, and for example in my Eight Elementary Errors post (https://rwer.wordpress.com/2012/06/07/eight-elementary-errors-of-economics/).

    • Robert Locke
      July 27, 2013 at 6:13 am

      Geoff, if you don’t think I know much about how scientists work, I can make the same comment about your view of historians. In the blog my colleague, J-C Spender said that I am a “through and through” historian. By that is meant that historians do not pretend to discuss the substance of subjects like mathematical economics, scientific epistemology, or as you say of me present “simple caricatures of science.” I never discuss the substance of science. But I do discuss scientists and what they say about it. It is the people and the historical contexts they operate in which interest me, and from which I think you could learn something. In the specific instance to which you refer, I said that a scientist said “scientists are not interested in scientific epistemology..” That was not my judgment, it was his. In your comment you said that we have to understand more about “living systems.” If you knew more about my work you would know that I, quoting the work Of H..Thomas Johnson and Fritjof Capra, have been saying that for a quarter of a century. (Johnson, H. T. 1992, Locke, 1996, 179-81) Sorry to be so prickly. I cite your comment frequently because I generally find it important that economists benefit from your, an outsider’s, critique.

      Capra, F. (1982). The Turning Point, Science, Society, and the Rising Culture (NY: Randon House.
      Johnson, H. T. (1992) Relevance Regained (New York: Free Press
      Locke, R. R. (1996) The Collapse of the American Management Mystique (Oxford UP).

    • July 27, 2013 at 7:28 am

      Robert,
      Sorry it if it was not very clear. Only the paragraph referring to you was meant as a comment on your comment. The following paragraphs were more general or responses to other comments. If we agree we need to understand more about living systems, then good. I’m also a fan of Capra.

      As to my comment addressed to you, I don’t think I’ve said anything about “historians” in general. I just picked up on your anecdote about what *one* scientist said at one time. I think it was a superficial comment by the scientist. I wasn’t criticising your history, but I’m afraid citing one anecdote is not very good history.

      It’s true I don’t know much of your work (there’s so much to try to keep up with). I do see value in many of your comments, and I value the historical perspective, so neglected by mainstream economists. But it’s not the first time I’ve seen you criticise science in what I think is not a well-informed way. But Robert I’d rather focus on what we can learn from each other than get into a slanging match.
      Regards,
      Geoff

      • Robert Locke
        July 27, 2013 at 7:55 am

        Right Geoff, and no self-respecting historian would generalize from what one scientist said, including me, but sometimes we throw out a comment not as proof but as a conversation opener and that is what I was doing. There is a lot of big game out there that we are both hunting, in order to understand better why economics is in the state it is. So let’s get on with it.

  8. davetaylor1
    July 27, 2013 at 11:53 am

    Geoff @ #11.
    “It may be possible to design self-correcting mechanisms at the macro level that keep the economy in a fairly steady state. I presume this is what Dave Taylor was getting at”.

    Geoff, when I have so much to say after seventy years’ curious observation and thus critical reflection, anything I do say following other people’s leads in a blog is so inevitably abstract and out of context that it is not surprising that people – even mainstream scientists like yourself – have difficulty interpreting it.

    Let me remind you that I am an information scientist. Thus where you seem to be thinking physically of “self-correcting mechanisms”, I see humans as information processors rather than cogs in a machine, and their ability to correct themselves being dependent, not on the existence of a mechanism, but on the existence of appropriate channels of information, and on their being programming to understand (or better, to be able to see) their meaning and significance.

    People are able to control their own fertility if they understand how their bodies work. However, they can only space their reproduction so as to fit in with communal aims if they both understand the communal intention and know in advance what “vacancies” remain for babies in the current period – which requires recording of pregnancies (future) as well as births (now) and deaths (past). With governments still understanding control as the wielding of big sticks, the Chinese are unique in even having a population target, but forcibly aborting mistakes instead of enabling others to allow for them.

    Despite the dire consequences of ignoring the Limits to Growth governments are still proposing the target of economic [monetary?] growth rather than maintenance or (where possible) replacement of the goods we already have. We are back with the naive elitist politics of Plato’s Republic, so how are we to escape militarism without the Christian practice of teaching and enabling people (not least the elites) to understand their dangers, recognise their friends and count their blessings?

  9. July 27, 2013 at 1:22 pm

    Practically no economist understands science, otherwise economics would be a science by now. For example, Paul Davidson has pointed many times here: Samuelson mistakenly identified the ergodic axiom as a necessary condition of science. This same error is repeated over and over to this day by nearly everyone, particularly by modellers and theorists. This is part of a much greater fallacy I will write about in future. Bur for now, to put simply, economics is not physics and ideas such as “econophysics” are mistakes, cul-de-sacs.

    Paradoxically, most scientists, and particularly physicists, do not understand science either, because of specialisation and career (and urgent need of publication) force them to focus on only one or two aspects of the scientific process. For example, few theorists do experiments and few experimenters contribute usefully to theory, in order maintain a publication rate. (As always, there are exceptions.) Much of science has gone off the rails due to “managerialism” of output, as a result.

    Similarly, economists are either armchair theorists or econometricians, who are “discovering objective economic laws”, assuming the ergodic axiom. The separation leads to theories never really get verified or decisively falsified by econometrics, which itself is never informed by theoretical hypothesis of economic processes. Nothing scientific can possibly be discovered by a methodology, which appears like that of modern physics, but is actually unscientific.

    I do not see much to be gained from debating about name-tags for theoretical Keynesian ideas which have proven to be false or flawed, not because they have been proven flawed by econometrics, but because they are sufficiently vague and imprecise to generate so much arguments about they actually mean. Defining terms clearly and unambiguously is the first requirement of a science. For Keynesians, what is government? The government to Keynesian economics is the invisible hand to neoclassical economics; an avoidance tactic to answer real questions.

    • davetaylor1
      July 27, 2013 at 3:55 pm

      The fact that a jar is poorly labelled doesn’t mean that one should throw it out without trying the contents. In the last sentence here, is it the name-tags or the concepts Keynes (judging by the factual and verbal contexts) is trying to refer to, which have proven to be “false or flawed?” Judging by results, it has not been Keynes’s concepts. As it happens, this particular blog is about Keynes’s goodies having been relabelled by the spoiled children of the rich, who saw him as a rival rather than a benefactor.

      Having just labelled myself as an information scientist, let me add that my work as such was with a language designed (so I was told when I was introduced to it by its developers) to overcome the problem of so-called scientists being able to use poetic or dishonest language. This was not because of the vocabulary of their language but because of lack of distinctions in their grammar, resulting in problems like economists denying categorical distinctions in the economy because (as Lars pointed out) this would require them to qualify the either/or categorisations assumed in primitive logic and thus complicate derivations. The programming language Algol60 would have had to change its vocabulary to cater for new types of data. Its successor Algol68 made unambiguous definition of types, and unambiguous interpretation of the types of data and processes, a requirement of the grammar, so that users cannot but define their terminology unambiguously.

      At Lars’ third quotation, Keynes says, “The atomic hypothesis which has worked so splendidly in Physics breaks down in Psychics”. Hence the alternative hypothesis of humans and economics being information systems (which works so intelligibly and well in AI and IT), and the significance of its having needed a scientific language.

      • July 28, 2013 at 2:14 am

        Precisely, one has tried its contents, concluded they should be discarded and therefore should not be bothered with the labelling. Trying to create new content would be more fruitful.

      • davetaylor1
        July 28, 2013 at 6:10 am

        Are you old enough to have actually tried the Keynesian contents, Lyonwiss, and have you lived in a district where history stares you in the face in the form of lovely pre-Reformation ruins and disgusting pre-Keynesian dereliction?

        No, when television was invented it didn’t work that well and its construction was, like that of economics, a birds-nest of wiring connecting simple components of not very obvious purpose. It was nevertheless a vast improvement on steam radio similarly constructed, and the logical course was not to throw it out but to improve it: practically by way of printed circuit boards to integrated circuits, and functionally via colour-point rather than linear displays to digital rather than analog signal encoding.

        Too many people armchair critics here don’t have enough understanding of the limitations of Aristotelian logic to recognise themselves throwing the baby out with the bathwater.

      • July 28, 2013 at 7:35 am

        Exactly what is the “baby” in the bath water? What must we keep that is in Keynes? Market failures? Uncertainty?
        Speculative markets? Fickle investors? Government running the economy? Governments ARE running major economies now, but on what Keynesian insights? What is your logic? Be specific, no waffle.

      • July 28, 2013 at 7:45 am

        By the way, you may not know, the neoclassical revival was due to the failure of Keynesian economics in 1970s. There have been many thorough critiques of Keynesian economics, particularly by Austrians, which have not be rebutted, but ignored. Clearly, markets fail, but so do governments, but even more so, because the ultimate blame must rest on governments, which can control markets if they choose to.

  10. davetaylor1
    July 28, 2013 at 5:25 pm

    Like Robert at #12, I’m “sorry to be so prickly”.

    Let me generalise Robert’s explanation of why he finds it important to cite Geoff’s comment. On the whole and in this thread particularly (reading it through yet again), contrasting other’s views with one’s own is a huge help in deciding what still needs saying. For example, Tokugawa at #1 was from my point of view spot on with his quotations from Lars, but “If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose”, is it the economy or its data (or both, in the form of a self-reinforcing prophecy) that have been engineered – for [who’s?] purpose? Geoff at #2 delightfully sees disequilibrium in “the invisible foot operating as much as the invisible hand”, but isn’t human “control” precisely about “engineering” equilibrium?

    Ishi at #5 contributes the beginnings of something quite profound when he says “chaos theory shows the existence of abrupt shifts or bifurcations in dynamical systems, from a micro view. So does the theory of phase transitions”. I would say maths shows the POSSIBILITY rather than the EXISTENCE of abrupt shifts, but so does a clock counting the minutes and having to start again with a new hour, or a ship going round in circles from N via N-E to E, S and W. Also I would say, study philosophy, methodology AND maths through their history rather than their presumed relevance to economics, so one has some idea of what the options are (and what one doesn’t yet know) when getting down to practicalities.

    I was entirely with Geoff at #11 on “runaway exponential instabilities” – that was the point of my reference at #15 to “The Limits to Growth” – but this doesn’t mean there may not be stability in relation to another aim, e.g. the rich growing richer rather than the poor finding employment. Says Geoff: “One clear lesson (from system science, we already knew it from daily life) is that it is essential to approach living systems with humility – not commonly associated with scientists, I know”.

    So at #19, was it frustration or arrogance on my part that provoked Lyonwiss’s outbursts at #18, #20 and #21? After I’d just explained that what needed to be kept from Keynes was the PID servo concept he’d been “seeing through a glass, darkly”, Lyonwiss wants to know what it was in Keynes I want to keep! He then regurgitates Austrian criticism that has been dishonest (in completely misrepresenting the original thesis of Belloc’s The Servile State”) at least since the pro-Capitalist, anti-Communist propaganda of Hayek’s war-time “The Road to Serfdom”; along with lies like “Governments ARE running major economies now” (when in fact Governments are being run by foreign bankers), and “the neo-classical revival was due to the failure of Keynesian economics” (when the whole point of the thread is that it wasn’t Keynesian economics that failed; in fact it was changes his enemies built into the Bretton Woods agreement and attributed to him after his death). When I’ve been told I “presented by far the best material in by far the worst manner”, I find it hard to be arrogant. I am, though, hard enough myself to be willing “to call a spade a spade”, and sensitive enough to become “prickly”.

    As I’ve endorsed most of what Robert has been saying about history, let me end these reflections on what hasn’t already been said with a brief look behind Keynes to theorising of political economy being started by Aristotle. His thought was developed by Aquinas in a medieval Christendom grateful for Creation and our Recreation, whereby, as Christ’s body (1 Cor 12: 27), we are urged to follow the example of Christ who, “has wiped out the record of our legal debt …; he has destroyed it by nailing it to the cross” (Col 2: 14-15). [Elsewhere: “redeemed” our mortgage; taken it on himself]. That’s policy, Robert, not economising.

    On a less prickly note, a later Christian economist and polymath, G K Chesterton, says of Aquinas: “There is an image of his, that is true poetry as well as true philosophy; about the tree of life bowing down with a huge humility, because of the very load of its living fruitfulness”.

    As for my own humility, years before finding the above, I was asked to name a song which was “me” during a reflection on personality types. I came up with this, the last verse of a song collected by Vaughn Williams.

    “Let other folk make money faster
    In the air of dark roomed towns.
    I do not fear a peevish master
    Though no man may heed my frowns
    For I be free to go abroad
    Or take again my homeward road
    To where, for me, the apple tree
    Do lean down low, in Linden Lea”.

    May I wish such good fortune on you all.

    • July 28, 2013 at 11:43 pm

      All the waffle does not cover the fact that in economics, when there is recognized failure of the economy, it is not any economic theory or economic policy or government which has failed. It is not Marxism which fails under communism. It is not Keynesian economics which fails under government management of the economy. It is not neoclassical economics which fails under deregulated, free-market capitalism. It is always something else. Nothing will ever change, including the useless waffle.

      • July 29, 2013 at 12:53 am

        lyonwiss,
        Economics is an edifice that importantly serves to obscure the omission of inflation-adjustment of asset price histories — because they look like this
        http://www.showrealhist.com/RHandRD.html
        which is bad for business!

      • July 29, 2013 at 3:32 am

        Agree Ed, most people don’ even go as far as looking at your charts. Inflation is not only an unlawful tax, it is also a money-illusion trick to make everyone think that they are wealthier than than they really are. There will be a rude awakening coming soon enough, particularly for the retiring baby boomers.

        By the way, economists are so lazy that they don’t even question inflation data (distorted and manipulated), they treat inflation data from different countries in the same way, they make cross-country comparisons without hesitation etc. Most econometric studies are just rubbish, with Reinhart and Rogoff study (recently discussed on this blog) and Bernanke’s Great Depression studies (I mentioned earlier) being just some examples.

  11. davetaylor1
    July 29, 2013 at 10:25 am

    Lyonwiss @ #23, waffling! “It is not Keynesian economics which fails under government management of the economy”? Hadn’t I just explained that what has failed was not Keynesianism but Bretton Woods with its [made out of thin air] oil dollars [funding the “throw-away” engineering of a consumer market] and the Government policy of New Keynesians masquerading in Keynesian clothing?

    But yes, you are right, Lyonwiss. Labels are not the issue but something deeper even than what they refer to; and some things won’t change: the inability of sensory thinkers to see in profoundly intuitive writing anything better than a failed cook-book, and the inability of intuitives to see today what whey may be able to see tomorrow, when their brain has had time to see through its fog of detail.

    This morning I woke up seeing the possibility of a clear-cut resolution of the issue in the contrast between Belloc and Hayek.

    Historian Belloc saw that, irrespective of labels, “he who pays the piper calls the tune”. King Charles lost his head in England over his [divine] right to charge taxes, his problem by then (following Henry VIII’s misfortunes) having become rivalry with barons able to charge interest. Belloc realised that covert, privatised taxation by Capitalists in the form of interest, rent and monopoly profits is just as bad if not worse than government taxation by Socialists, hence his conclusion: “a plague on both their houses”.

    Hayek, by contrast, was an Austrian school economist who went to America as researcher at the (private) Federal Reserve Bank, then to the UK as a director of the Austrian Institute for business. His “Road to Serfdom” acknowledges its debt to Belloc in the tiny print of a footnote, but not the post-Belloc paper-money development of profit-seeking corporations larger than many governments. Unsurprisingly, it praises capitalism in order to damn Socialism.

    The 1926 Chesterton-Belloc “Distributist” solution was a lifestyle still evident in rural France today (local government, small businesses, widespread property ownership enabling small communities to live more or less independently off Nature). After the Great Slump of 1929, bank seizures of land and mass migration into huge cities were making that impractical, leaving citizens dependent on employment which wasn’t there.

    Keynes opted for a practical solution to the root problem here: allowing both private and public taxation, but controlling unemployment by increasing government taxation to fund investment in infrastructure where private investment in profitable production was failing to. However, doubtless understanding Reserve Banking where Belloc did not, he also directed attention to Gesell’s free money proposals, which in principle resolved the issue of privatised taxation of debtors.

    Subsequent history reveals Hayek and New Keynesians diverting attention from fiscal control of unemployment back to the old financial control of the economy, i.e. via the (surreptitiously private) Bank Rate rather than by (very public) Taxation of private interests. Even with almost zero Bank Rate that is working only for the bankers.

  12. July 29, 2013 at 11:02 am

    a few notes—

    regarding ed hamilton’s graphs, i personally have seen versions of those many times—they are all over, though it is also true that sometimes there are many versions (some likely incorrect or improperly labeled) so its hard to know what you are seeing. (I think the situation is even worse for income statistics, or other versions of GDP measures).
    that stuff on the ‘macro’ level is alot of what econ is about, but personally despite the prevalance (size) of FIRE (finance, etc.) in the economy the ‘stock market’ doesn’t really interest me (except as a useful set of data if you are interested in time series analyses, along with sunspot data, temperature data, baseball data, or any other sort—just something to test your algorithm or theory on). I’m with Hermann Daly—-the gross domestic product is pretty gross, and the stock market is its worst manifestation, though unfortunately (like the Military Industrial Prison Complex ) many people depend on it to pay the bills.

    to me the basic issues of economics is who does what, and who gets what. all the theorizing and modeling and econometrics really are just tools to predict what will happen under varying rules or algorithms for deciding who does what and who gets what. in physics, you can start with simple rules or laws describing how an arrow will fly; then you improve the model and you can predict the fate of the entire universe, though the model may be wrong or imperfect.

    lyonweiss says physicsts, etc don’t understand science. well, feynman (a physicist) pointed out no layman (or women for the pc) can understand quantum mechanics, but neither do physicists. but it works. everyone here is using a computer. that is based on a whole lot of physics and math (and labor). so people do understand something. its not all ‘waffle’. one can always blame yourself.

    one other note—i gave cryptic references to why keynes’ atomisim was a caricature of modern physics. people use this to say ‘econophysics’ for example is bs. (and i”d say about 50% of econophysics i have read is almost bs—its really often just publish/perish fodder by people with physics degrees who were looking for jobs on wall street).

    however since the physics described by keynes is a caricature, it can be equally noted that physics has changed, and so can mathematical econ—-not that it will lead to a better world (i mean, what did physics give us? global warming? nuclear weapons? peace on earth and in syria somalia and egypt or chicago?) but the santa fe institute had a book series on the ‘self organizing economy’ or something edited by Arrow in the 90’s with contributions by Kirman among others, looking at game theory, stastistical mechanics, etc. Since then, a few more approaches have been developed (including Reimann geometry a la Einstein—tho this goes back to Sato—-and nonstandard logics). Alot of this stuff is very formalistic and a mixed bag. However, saying this is all bs to me is like some adult telling a teenager that ‘social media’ is bs so stick with church (philosophy or methodology or real world econ), or get a real job (econometrics).

    Most of this stuff to me is really like art since it has no applicability which is obvious, just like theoretical science. But there is a feedback between the micro and the macro—eventually some of those equations will turn into reality. (usually in terms of the ‘who does what and who gets what’ paradigm the math models determine who gets tenure or a grant. (as davetaylor notes, math describes possibility not existence; the way i look at it, if you have a math model it will have possibly many solutions, and maybe only one will exist (eg sometimes if the solutions involve imaginary (complex) numbers—you throw out those and take the real ones) or maybe many—multiple equilibria, all of which may occur as metastable states (this takes you into stochastic porcesses and chaotic attractors).

    anyway.

    • July 29, 2013 at 5:47 pm

      Ishiguro
      I just wrote this at the thread “What’s the use of economics?”.

      Economics is an edifice that importantly serves to obscure the omission of inflation-adjustment of asset price histories — because they look like this
      http://www.showrealhist.com/RHandRD.html
      which is bad for business!
      I’m convinced that keeping the real price histories NOT ongoingly apparent is central to suckering the people. For my charts’ credibility, see WSJ and NYT here.
      http://www.showrealhist.com/yTRIAL.html

      I trust it addresses your credibility issue. AND very many people in USA hear stock price reports everyday, and home price reports frequently — so, I see relevance of doing them ‘real’. AND have you seen this. http://patrick.net/forum/?p=1223928

  13. Robert Locke
    July 29, 2013 at 11:44 am

    So you go to school, learn mathematics, then enter a firm and work hard, then you marry the boss’ daughter, and become head of he firm. So which are the determinants in career success, your mathematical skills, your managerial skills on the job, or you ability to ski and play polo which landed you in the boss’ daughter’s set in graduate school.

  14. July 30, 2013 at 5:34 pm

    lyonwiss :
    Agree Ed, most people don’ even go as far as looking at your charts. Inflation is not only an unlawful tax, it is also a money-illusion trick to make everyone think that they are wealthier than than they really are. There will be a rude awakening coming soon enough, particularly for the retiring baby boomers.
    By the way, economists are so lazy that they don’t even question inflation data (distorted and manipulated), they treat inflation data from different countries in the same way, they make cross-country comparisons without hesitation etc. Most econometric studies are just rubbish, with Reinhart and Rogoff study (recently discussed on this blog) and Bernanke’s Great Depression studies (I mentioned earlier) being just some examples.

    lyonwiss, Thanks …
    I’ve reckoned about using CPI-U, which I do. Please see the followings.

    From the last answer here:
    http://www.edwardtufte.com/bboard/q-and-a-fetch-msg?msg_id=00003k
    please see the following.
    I use CPI-U with substantial confidence. Robert Shiller uses it. The WSJ used it here (3/30/1999): http://showrealhist.com/begun.gif The NYT used it here (8/27/2006): http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html
    NOTE WELL! The NYT wrote: “Two gains in recent decades were followed by returns to levels consistent since the late 1950’s.”
    Robert Shiller has repeatedly argued that nationally ‘we are NOT running out of land’. So, the foregoing ‘flat baseline’ since the late 1950’s (NYT) is substantial “Occam’s razor” support for CPI-U soundly measuring consumer price inflation — I figure. (Note the same rises in both nominal home prices and CPI-U over a LARGE SCALE: each rose by a factor 5.6 over 1958-1998.)

    Re. some criticisms of CPI-U, I found this recent BLS paper persuasive: “Addressing misconceptions about the Consumer Price Index” download it from the bottom of this page: http://www.bls.gov/cpi/cpiqa.htm#Question_6 In this paper, the writers write at length on pp. 14-16 in the section Does the CPI understate inflation?

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