Home > Uncategorized > Your model is internally consistent? So what!

Your model is internally consistent? So what!

from Lars Syll

‘New Keynesian’ macroeconomist Simon Wren-Lewis has a post on his blog discussing how evidence is treated in modern macroeconomics (emphasis added):

quote-Oscar-Wilde-consistency-is-the-last-refuge-of-the-58The unique property that DSGE models have is internal consistency. Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.

Being able to model a credible world, a world that somehow could be considered real or similar to the real world is not the same as investigating the real world. Even though all theories are false, since they simplify, they may still possibly serve our pursuit of truth. But then they cannot be unrealistic or false in any way. The falsehood or unrealisticness has to be qualified (in terms of resemblance, relevance, etc.). At the very least, the minimalist demand on models in terms of credibility has to give away to a stronger epistemic demand of appropriate similarity and plausibility. One could of course also ask for a sensitivity or robustness analysis, but the credible world, even after having tested it for sensitivity and robustness, can still be far away from reality – and unfortunately often in ways we know are important. Robustness of claims in a model does not per se give a warrant for exporting the claims to real world target systems.

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

an-unconvenient-truthWithin mainstream economics, internalvalidity is still everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!

To have valid evidence is not enough. Aiming only for validity is setting the economics aspirations level too low for developing a realist and relevant science.

  1. deshoebox
    December 13, 2018 at 4:53 pm

    It may be worth noting that life itself is not internally consistent. Also, Mr. Wren-Lewis may not be aware of the work of Kurt Godel and its implications for economics. If economics were a formal system (which some people think it ought to be) then it would follow that there are an infinite number of true but unprovable economic propositions. We wouldn’t necessarily have an easy time working out which ones they were, but we would know they existed. Since, as a matter of fact, economists start with false premises (generally hidden) and use shoddy logic to build on them, they can “prove” anything at all, including falsehoods. Pfoooey!!

  2. December 13, 2018 at 5:50 pm

    A foolish consistency is the hobgoblin of little minds.

    Ralph Waldo Emerson
    Original was better I think.

  3. December 13, 2018 at 6:32 pm

    With four parameters I can fit an elephant, and with five I can make him wiggle his trunk.

    By this he meant that one should not be impressed when a complex model fits a data set well. With enough parameters, you can fit any data set.

    It turns out you can literally fit an elephant with four parameters if you allow the parameters to be complex numbers.

    Example here:
    https://www.johndcook.com/blog/2011/06/21/how-to-fit-an-elephant/

  4. James Beckman
    December 13, 2018 at 7:42 pm

    Shouldn’t the main path in economics be to fit real data to a model which allows prediction, that is, allowing for a dependent t-dimension, whatever the independent variables be?

    • December 14, 2018 at 10:19 am

      Nicely put, James. I would perhaps rather say “enables” rather than “allows” prediction. The model should get one looking in the right direction, so able to see the variables and the paths between them along which things are continuously happening. “Prediction” then amounts to interpolation.

  5. Craig
    December 13, 2018 at 9:44 pm

    Models are secondary considerations to paradigms which (mostly unconsciously) rule individuals minds and their systems. Systems were made for Man, not Man for systems. Technology has been trying to lift the so called curse of Adam for 5000 years and elite controlled finance whether private or public has been there to usurp control and the vast majority of profit from the system created by the paradigm of Debt Only for the sole vehicle and form for which money can be created and distributed.

    The new paradigm of Direct and Reciprocal Monetary Gifting would change all of that, help mankind evolve away from homo economicus and toward its true species designation of homo sapiens, i.e. wise and discerning man, and also enable the financing of green research and the world wide projects necessary to enable us to survive the effects of our technology.

    Economists need to “up their game” to paradigm perception, and in addition to abstraction add direct present time contemplation of the day to day operations of the economy so as to perceive the orthodoxy shattering significances within the economic process to be found there.

    • December 14, 2018 at 12:02 pm

      Craig, I can’t tell whether I agree with you when I’m not sure what you are saying: it is as if I am hearing English in which the key terms are (as the joke has it) “all Greek to me”. Let’s try the other way round and see if you agree with my reading of what I think you are saying.

      “Paradigms (mostly unconscious) rule individual minds and their systems”. Yes. Like rose coloured or dark-coloured spectacles one tends to forget one is wearing? Isn’t Kuhn, though, suggesting a concrete example of a way of seeing and doing things that by force of habit has subconsciously become “normal”?

      So you then have proft from “the paradigm of Debt Only” and “the new paradigm of Direct and Reciprocal Monetary Gifting”. From “Debt Only” I can’t tell whether your you are thinking of a bank balance in a communal system (which may or may not be false), or a farmer who has had to borrow seed corn from his neighbour and is indebted to him personally whether or not he is able to repay it (with or without adding a “thank you” or hire fee). I suspect most people these days see the banking system as a person lending seed corn, not as an organisation out to “make money” by hiring out emply promises.

      So is your “new paradigm” not still that old paradigm, but with good neighbours Directly Gifting the seedcorn and our gratefully Reciprocating when our neighbour is in need? Quite right, too, but this paradigm still doesn’t make us aware of today’s reality in which corporations (non-existent legal “persons”) are hiring out misleading empty promises,” so what will change?

      As I see it, the new paradigm has to be a reinterpretation of what we now see, as when the apparant motion of the sun was recognised as due to the spinning of the earth. My version of that, in short, is to see money not as something we are indebted for, nor even the credit which we need to survive and thrive as persons, but simply as a sign for a credit limit. If I have two pounds I can buy two pounds-worth of goods. If my credit card has a limit of £5000, I can buy up to £5000 of goods, but I soon learn that exhausts my credit worthiness until I replenish it (not pay it back) as a good citizen who tries to “earn his keep”.

      • Craig
        December 14, 2018 at 5:07 pm

        Dave,

        Your question to me basically expresses the difference between the “loanable funds” hypothesis and the endogenous money one, the latter of which has been established by heterodox economists as the actual reality today. Unfortunately neither loanable funds nor endogenous money gets us to a solution to the fact that the rate of flow of total costs and so prices exceeds the rate of flow of total individual incomes as C. H. Douglas discovered or that Steve Keen we’re caught between a rock (continuous debt build up) and the hard place (of recession)….if the system doesn’t continuously borrow, as Steve Keen has re-discovered.

        The new paradigm of Direct and Reciprocal Monetary Gifting cuts the above Gordian Knot by finding the specific point in time and the economic process (retail sale) where a simple but elegant reciprocal monetary policy is able to resolve the four deepest problems of modern economies:
        1) systemic austerity
        2) Individual income scarcity
        3) chronic inflation and
        4) autocratic financial control into

        1) and 2) systemic and individual monetary abundance
        3) price deflation painlessly and beneficially integrated into profit making systems and
        4) a publicly administered financial system whose benevolence enables competitive commercial agents to thrive by gifting sufficient amounts of purchasing power into “the many hands of individuals.

      • December 14, 2018 at 10:53 pm

        Craig, it seems the reason you keep speaking Greek is that you can’t read English. Despite my explaining Copernicus you still think money orbits the economy as the sun orbits the earth! In an honest world money gets written off when its message has been recorded.

        I don’t know if there is a Greek translation of Adam Smith, but in the index of my English version what we now call a Ponzi scheme is summarised as “Circulation – the dangerous practice of raising money by, p.248”. By p.255 he is saying “The bank of England is the greatest bank of circulation in Europe. … The credit of the new government, established by the Revolution, we may believe [without surprise], must have been very low when it was obliged to borrow [submit to blackmail] at so high an interest”. By p.258 Smith is recognising what I have shown more generally: “The circulation of every country may be considered as divided into two different branches; the circulation of the dealers with one another, and the circulation between the dealers and the consumers”. Aristotle called the second of these ‘economics’, the first ‘chrematics’. Being Greek, this has of course passed most of us by, but I am surprised, Craig, that you too are mistaking chrematics for economics. Have you never gained experience of the real economy by having to work for a living?

      • Craig
        December 15, 2018 at 12:41 am

        Look, Dave, I’m well aware of both how income is distributed via employment and how money circulates between businesses as business revenue, after all I’ve read much of C. H. Douglas whose A + B theorem was correctly derived from doing the calculus on the cost accounting data of total individual incomes created by businesses and their total costs. So what?

        If the rate of flow of every enterprise’s total costs exceeds the rate of flow of total individual incomes distributed by them then the macro-economy is in an inherent disequillibrated state of individual income scarcity…even if banks keep injecting money at 0% interest (which of course they don’t) because they enjoy a monopoly paradigm of Debt ONLY which again, even at 0% interest incurs an additional cost in debt service.

        The answer therefore is Monetary Gifting of sufficient quantity and at a significant point (retail sale/the terminal ending point of production where it becomes consumption) by a central monetary authority.

        As I have posted here several times Steve Keen re-discovered the problem Douglas initially found but via an abstract differential equation process.

        All I keep saying is: OKAY WE ALL AGREE SYSTEMIC AUSTERITY AND INDIVIDUAL MONETARY SCARCITY ARE THE PROBLEM….LET’S SOLVE IT WITH A UNIVERSAL DIVIDEND AND AN INTELLIGENT AND INSIGHTFUL RECIPROCAL MONETARY POLICY AT RETAIL SALE. WHAT ARE WE WAITING FOR?????????????

      • December 15, 2018 at 1:28 pm

        Craig, your reference to C H Douglas leads to an intelligible account at https://en.wikipedia.org/wiki/Social_credit. That actually demonstrates the logic of the A + B theorem, which is not only reasonable but has a most interesting and graphic way of dealing with time. At the end of the section on his Philosophy one finds him rejecting Dialectical Materialism for arguing from the [molecular] particular to the general. Quite right, if it does. I’m arguing it develops continually from the universal [energetic motion] to the most general to the increasingly specific; he saw both the trinitarian and water phase transitions. I understand what he says earlier about the Canon of Christianity being ideas written in both the historical and “mystical” body of Christ. His Lutheran “unearned grace” is too black and white, missing the need to respond gratefully for what we have been given by at least trying to look after it so it passes on. Under ‘Criticism and Rebuttal’, the Alberta Social Credit government says what I say: “The fallacy in the [quantity of money] theory lies in the incorrect assumption that money ‘circulates’, whereas it is issued against production, and withdrawn as purchasing power as the goods are bought for consumption.”

        I don’t agree that systemic austerity and individual monetary scarcity are the problem. That’s like saying the problem is a fever and spots when its actually smallpox. We need to get rid of the disease [misinterpretation of money], not the symptoms.

      • Craig
        December 15, 2018 at 5:57 pm

        “I don’t agree that systemic austerity and individual monetary scarcity are the problem.”

        They ARE the problematic systemic economic effects, the solution is transforming those realities with the new paradigm of direct and reciprocal monetary gifting. Social Credit was and still is a superior economic theory to Keynesianism which was finance’s fall back position to Social Credit after the war. Neo-liberalism which Keynesianism was morphed into was perfectly predictable because reforms are always palliatives of the ruling paradigm and never last or resolve its problems. I have taken Social Credit and, being aware of the signatures of imminent and actual paradigm change and the underlying lessons and experiences of the world’s major wisdom traditions made it both a paradigm change and a TOE. That’s a big claim, but I stand by it. Wisdom by definition is profound. Grace is capable of integrating and resolving science and religion into spirituality and capitalism and socialism into the profit making system of direct monetary distributism via its relevant monetary and economic aspect of gifting. No mysticism necessary, just the full consciousness of wisdom and its pinnacle concept and experience.

  6. December 14, 2018 at 2:46 am

    Lars Syll is not logically wrong in pointing out that internal consistency is not the unique property a good science must satisfy. But, what was the result or effect of this post? The comments here have no serious inquiry on how to reconstruct the economics. Undecided truth value, sneering, fitting, utopian thinking, etc.! Is this a way to try to find an underlying “mechanism that generates the flux of the phenomena”? Is this a way to capture economics’ essential movement? It is true that Tony Lawson and Lars Syll have for many years been urging economists to pay attention to ontological foundations, but what Lars has written above has no such effects and let people simply think loose and enhance idle armchair economists. Something must be wrong!

    • Craig
      December 14, 2018 at 6:20 am

      You cannot impose freedom, you can only enable and continue to create it.  Therefore, the idea that Wisdomics-Gracenomics is utopian is false. A utopia is an hierarchically imposed one size fits all “solution”. Wisdomics-Gracenomics enables and creates the possibility for individuals and commercial agents….to create THEIR OWN ideal scene.  It’s an important distinction to realize.

      Macro-economics is a very recent body of knowledge born into a 5000 year old monetary and financial paradigm….that it swallowed whole. Hence it has fallen into both obsessive orthodoxy and iconoclasm which is the perfect prescription for obsessive theoretical contention and confusion leading eventually to systemic collapse and political and social disintegration.

      Discover the new paradigm and theorizing is a straight forward rational, policy and philosophical process.

    • December 14, 2018 at 4:26 pm

      One last quote:

      Joking decides great things,
      Stronger and better oft than earnest can. ~ John Milton

      • Craig
        December 14, 2018 at 5:15 pm

        peter,

        Because humor/levity is an aspect of grace. Why? Because laughter is a momentary release from the mistaken burden of obsessive earnestness. Of course grace being the concept of unitary opposites it’s also appropriate and contextual earnestness.

    • December 14, 2018 at 4:40 pm

      Then there’s this from Niels Bohr:

      What is it that we humans depend on? We depend on our words… Our task is to communicate experience and ideas to others. We must strive continually to extend the scope of our description, but in such a way that our messages do not thereby lose their objective or unambiguous character … We are suspended in language in such a way that we cannot say what is up and what is down. The word “reality” is also a word, a word which we must learn to use correctly.
      Quoted in Philosophy of Science Vol. 37 (1934), p. 157, and in The Truth of Science : Physical Theories and Reality (1997) by Roger Gerhard Newton, p. 176

      Combine this with the factoid that Olivia Newton John, singer and actress, star of the movie “Grease”, with John Travolta, was granddaughter of Niels Bohr and you have a pretty good summary of the surreal nature of this world.

      • December 14, 2018 at 5:00 pm

        Sorry. Make that Max Born, the other father of Quantum Mechanics. Kind of makes my point about the uncertain nature of our perceived and remembered reality though.
        Or as Monty Python said:
        What do I mean when I say: what do I mean?

      • Craig
        December 14, 2018 at 5:20 pm

        The Pythons may have expressed the zen koan for the modern age. And the answer is the same as it was millennia ago….consciousness/self awareness.

  7. Helen Sakho
    December 14, 2018 at 2:57 am

    Something is definitely very wrong! Lawson has his own detached style and Lars appears to wish to appeal to a sense of Economic realism where none has existed for as long as I can recall. Isn’t it time they all moved on and took our readers and students along, and perhaps some us too? Yours truly have more than repeatedly argued that the real issues surrounding humanity are: poverty and destitution, war and conflict, arms race, corruption and whatever else has gone with this era of greed at an EVER EXPANDING RATE.

    • edward k ross
      December 15, 2018 at 8:46 pm

      Dear Helen as a person of real experience and the courage to speak your mind clearly and identify where the economic conversation needs to begin and then progress to action. Furthermore as a few economists have commented not addressing these problems only promotes greed, hatred, corruption and the destruction of humanity. I also agree with your comments re readers and students and think that The Econocracy on the perils of leaving economics to the experts,(recommended to me the posts) is a good start for students. May you enjoy Christmas and its message of love one and other Ted

  8. Frank Salter
    December 14, 2018 at 9:58 am

    The proposition that “Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model,” is false to fact. Other comments above have shown counter-examples. However, for the proposition to be fully examined, it is necessary to deal with specific examples not generalities. Fitted equations of any ilk are merely concrete representations of the data. Abstract representation of equations of physical data MUST satisfy the quantity calculus. I know that NO conventional analysis provides even one equation satisfying the quantity calculus. That is, there is NO valid quantitative conventional theory at all.

    While I can imagine many who read this will find this difficult to accept, it is the simple truth. To move on, as suggested by others above, the quantity calculus needs to be invoked to invalidate the false hypotheses masquerading as theory.

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