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Three types of models – 5

January 11, 2020 24 comments

from Asad Zaman

It is important to understand that there are three type of models, corresponding the following diagram. The simplest type of model is a pattern in the data that we observe. A second type of model is a “mental model”. This is a structure we create in our own minds, in order to understand the patterns that we see in the observations. The third type of model is a structure of the hidden real world, which generates the patterns that we see. Some examples will be helpful in clarifying these ideas about the typology of models.

3Models

Empirical Models: The simplest kind of model consists of a pattern that we see in the observations. For example, read more

Errors of empiricism 4

January 8, 2020 Leave a comment

from Asad Zaman

Empiricism holds that observations are all that we have. We cannot penetrate through the observations to the hidden reality which generates these observations. Here is a picture which illustrates the empiricist view of the world:

ObservableReality

The wild and complex reality generates signals which we observe using our five senses. The aspects of reality which we can observe are the only things that we can know about reality. The true nature of hidden reality, as it really is, independent of our observations, is unknown and can never be known to us. Influential philosopher Kant calls it the “thing-in-itself”. Noumena is the wild reality, and Phenomena is what we can perceive/observe about the reality. Quote from Encyclopedia Britannica:  read more

Thinking about Thinking 3

January 6, 2020 1 comment

from Asad  Zaman

When we think about epistemology (theory of knowledge), then we are doing meta-thinking. That is, we are thinking about thoughts people have, which they think is “knowledge”.  Because there are many many wrong ideas, and very few right ideas, we must learn to think critically. Unless we do so, our thoughts will be captured by the enormous amounts of fake news which circulates on social media these days. Thinking about thinking, or Meta-Thought, is very different from the standard education which students receive. Instead of asking about the “models” in use, and assessing adequacy or failure of their “assumptions”, at the meta-level we ask how economists began to use these models instead of others, what kind of thoughts are promoted by such models, and what kinds of thoughts are blocked, because the models are incapable of expressing such ideas. This kind of higher-level thinking is completely missing from conventional textbooks.

To highlight the differences, we consider as an illustrative example, how Martin Osborne begins his textbook on game theory, and explains what game theory is about:  read more 

Models and Realities 2

January 3, 2020 Leave a comment

from Asad Zaman

Foundations for modern social sciences were laid in the early twentieth century, and were strongly influenced by logical positivism. The central idea of positivism is that science is true and valid because it deals (principally) with observables, while religion is false and invalid because it deals (principally) with unobservables. For a detailed discussion, see “Logical Positivism and Islamic Economics“.   Later, logical positivism had a spectacular collapse. It became clear to philosophers of science that the idea that we can base science purely on observables was seriously mistaken. Even those who were very strong proponents of positivism admitted that the philosophy was wrong. Strangely, this did not lead to rebuilding of the foundations for the social sciences. Especially in economics, the wrong philosophies about nature of human knowledge, which translate into bad theoretical models, continue to be used.  read more

Mistaken methodologies of science 1

December 30, 2019 4 comments

from Asad Zaman

The problem at the heart of modern economics is buried in the logical positivist methodological foundations created in the early twentieth century by Lionel Robbins. Substantive debates over the content actually strengthen the illusion of validity of these methods, and hence are counterproductive. As Solow said about Sargent and Lucas, you do not debate cavalry tactics at Austerlitz with a madman who thinks he is Napoleon Bonaparte, feeding his lunacy.  Modern Macro Models are based assumptions representing flights of fancy so far beyond the pale of reason that Romer calls them “post-real”.  But the problem does not lie in the assumptions – it lies deeper, in the methodology that allows us to nonchalantly make and discuss crazy assumptions. The license for this folly was given by Friedman: “Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality”; see Friedman’s Methodology: A Stake through the Heart of Reason. In this sequence of posts, I will explain how economic methodology went astray in the 20th Century, abandoning empirical evidence in favor of mathematical elegance and ideological purity. Many authors have noted this problem — for instance, Krugman writes that the profession (of economists) as a whole went astray because they mistook the beauty of mathematics for truth (see Quotes Critical of Economics). To explain the flaws of economic methodology, we need to discuss the relationship between economic models and reality.  read more

Foundations of probability 1-3

December 6, 2019 5 comments

from Asad Zaman

In this sequence of posts, I will go through a recent paper of mine, which explains that BOTH of the currently dominant approaches to probability are deeply, fundamentally, and irreparably flawed. The reason for this is that probability is a real-world phenomenon which is unobservable and unmeasurable. The early 20th Century foundations for probability were built at a time when logical positivism was dominant as the philosophy of science. Furthermore, despite its abandonment by philosophers, its central ideas continue to be widely believed, especially among economists. We will see that both frequentism and subjectivism are attempts to reduce the unobservable to the observable, but this is fundamentally impossible, and all such attempts are doomed to failure. Nonetheless, the charm of positivism and empiricism is so strong, that it prevents the formulation of the ideas necessary to see the problems with the current definitions of probability. An alternative method for thinking about probability, based on  Critical Realism, will also be offered. Based on my paper draft, I estimate that there will be about ten posts of about 1000 words each, though a few of them might be longer.  Here are the first three:

The Great Transformation of economic theory

October 29, 2019 28 comments

from Asad Zaman

In the Origins of Central Banking, we discussed how the Bank of England was created in 1694 to provide funding for a war with France. The success of this institution was noted, and it was replicated across Europe, so that Central Banks came into existence to finance the nearly continuous wars between European powers that characterized the 18th Century. The 19th Century was unusual in that European powers set aside differences to create a Hundred Years of Peace (1814 to 1914), in order to go on a spree of global colonization and conquest. The transition from war to peace also created a transformation in economic theories from Mercantilism to Free Trade. Some aspects of this transition are discussed below.

The Root of All Evil

An essential aspect of the Great Transformation from traditional, paternalistic societies to market societies involves re-engineering human motivations. The lust for money does not normally rank high as a driver of human behavior.   read more

Central Bank History (3/5) 1914-1980

October 9, 2019 Leave a comment

from Asad Zaman

This series of posts is based on a single lecture (Lecture 13 of Advanced Macro II) exploring the evolving functions of Central Banks through time. It goes through a vast amount of material in a very short time, and hence is a very sketchy treatment. This is the 3rd post,  which deals with the period from WW! to the 1980s.  read more

Central bank history (2/5) 1814-1914 hundred years peace

September 25, 2019 Leave a comment

from Asad Zaman

In previous post on the founding of the Bank of England, we have explained that Central Banks were created to provide financing for wars. In fulfilling this role, they had several advantages over the state, enabling them to get credit, and get it at low interest rates. For a number of reasons, this was not possible for sovereign states.  read more . . .

Game theory for humans with hearts

September 7, 2019 14 comments

from Asad Zaman

The following is a slightly revised excerpt of Section 1.2 from my paper on “Empirical Evidence Against Utility Theory“ – Game theorists rule out Humans with hearts by assumption. The excerpt provides some empirical evidence (not needed by anyone except economists) that human actually do have hearts, and this actually affects their behavior! surprise, surprise!

The “Goeree-Holt Humans with Hearts” (GHHwH) Game: Conventional game theory operates under the assumption that both players (A-player labelled Aleena, and B-player labelled Babar) are heartless human beings. They have no emotions; rather, they are disembodied brains floating in vats. For more explanation and discussion, see “Homo Economics: Cold, Calculating, and Callous“. Below we discuss a game described in Goeree, Jacob K. and Charles A. Holt (2001). “Ten Little Treasures of Game Theory and Ten Intuitive Contradictions,” American Economic Review, vol. 91(5): 1402-1422. They do not provide a name for this game, so we will call it the GH Humans with Hearts game; it is a convenient way to prove the human beings do not behave like homo economicus. Furthermore, this assertion is not a surprise to anyone except economists, who are trained to think like economists. This means deep training in learning to model human behaviour as heartless, which blinds them to the complex realities of human behaviour.  read more

MMT macro final (3/3) entanglement

August 5, 2019 Leave a comment

from Asad Zaman

Previous posts (  MMT Macro Final 1/3 , and  MMT Macro Final 2/3 ) have covered questions 1-4 and 5-8. This post covers the last 4 question of the MMT based  Advanced Macro course I taught last semester at PIDE. The central methodological difference at the heart of my course was the principle of EntanglementTheories cannot be understood outside their historical context, and history cannot be understood without understanding theories used by human agents to understand and respond to that history. This is one of the three methodological principles that I have extracted from a study of  Methodology of Polanyi’s Great Transformation . This issue is discussed in the answer to question 11 below. Because of its central importance, I have also tried to explain it in greater detail in a separate 18 min video lecture.   read more

Number Facts & Number Fictions

July 31, 2019 Leave a comment

from Asad Zaman

Excerpt from:  Real Statistics (3/4) Statistics as Rhetoric 

{Preliminary material explains that conventional approach statistics separates theory and application — the job of ths statistician is to analyze numbers – without knowing where the come from. The job of the Field Expert is to use objective statistical analysis of numbers to get better understanding of the realities which generate the numbers. In “Real Statistics”, we assert that these two tasks cannot be separated. Theory must always be studied within the context of real world application. Also, real world phenomena cannot be understood without application of theory} read more

MMT Macro Final (2/3)

July 19, 2019 10 comments

from Asad Zaman

Last semester I taught an MMT-based Macro course which attempted to re-integrate history into economics. The course was based on the premise that economic theories cannot be understood outside the historical context in which they were born. Standard graduate macro courses attempt to teach a body of theory which has been empirically falsified. My course had the goal of giving the student the ability to understand major economic events of the past century.  A previous post on  MMT Macro Final (1/3)  provided the first 4 questions and answers for the Final Exam, as a sample of what was taught. This post provides questions 5 to 8, together with the answers.  read more

MMT Macro Final Exam (1/3)

July 8, 2019 6 comments

from Asad Zaman

During the last two semesters, I taught Macroeconomics based on a new approach which re-incorporate the history that Economists forgot (See  Method or Madness?). The central idea of the course is that economic theories cannot be understood outside of their historical context. Conversely, economic history cannot be understood except by studying the economic theories (right or wrong) which were used by contemporaries to shape policy responses to historical events. The website for the entire course is “Macroeconomics“. In particular, Lecture 18B explains the principle of “Entanglement“. Below I provide Final Exam questions and answers, to give the flavor of the course. This post is about the first 4 out of 12 questions.

Q1: Stiglitz: “Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.” Explain the theory, and arguments for it. Then explain why it is sheer nonsense.  read more

The central message of MMT

July 5, 2019 33 comments

from Asad Zaman

The central message of MMT is that once the illusion of gold is removed from the picture, money is valued because everybody has confidence in it. This confidence can be safely created by sovereign authority. The King, or the state, can create any amount of money, without limits. There is no issue of sustainability of deficit. Creation of money has powerful effects on the economy, and printing too much money would definitely cause inflation, so it would never be advisable to freely print money. But the state does have the power to do so, and the state will never have to “pay back” for money it created today. The focus should shift from the wrong question of how the government can generate revenue to finance its spending, to the right question of what are the effects of money creation by the sovereign state? By analyzing the impact of money creation on employment, inflation, debt, we can figure out the right amount to create. The conventional idea of “neutrality of money” embodied in Real Business Cycles and DSGE models is a major obstacle in the path asking the right questions, because these theories say that the quantity of money does not matter.

https://weapedagogy.wordpress.com/2019/05/29/monetization-maturity-tranformation-and-mmt/

Employment for all

May 17, 2019 5 comments

from Asad Zaman

Global experience shows that market economies create massive inequalities, enriching the top one per cent, while leaving the bottom of the population far behind. One key to prosperity is to provide productive jobs for all who would like to participate in the production process. Unfortu­nately, contemporary macroeconomics, which was blind to the possibility of the global financial crisis, is not equipped with the ideas and tools required to create full employment.

Conventional macro blames the poor for their poverty, and suggests education and training to fit them into existing jobs. However, the private sector does not naturally create enough jobs to employ everyone. Experience with Keynesian remedies shows that expansionary monetary policy starts to create inflation a long time before full employment is achieved. Modern Monetary Theory provides a genuine alternative, a job guarantee (JG) programme.

Instead of preparing people to fit them into existing or potential private sector jobs by providing them with education and training, we must create jobs tailored to the people. Jobs should be provided to take people as and where they are. Skills should be provided via on-the-job training. There are a huge number of jobs which require low levels of skill and education, and provide enormous benefits to society, but are not profit-making for the private sector.

Planting trees, building roads, cleaning dams, infrastructure projects, a range of social services, all provide benefits to society, and make a measurable impact on appropriate measures of GNP, but may not be privately profitable.   read more . . . 

Employment for all

April 30, 2019 4 comments

from Asad Zaman

Global experience shows that market economies create massive inequalities, enriching the top one per cent, while leaving the bottom of the population far behind. One key to prosperity is to provide productive jobs for all who would like to participate in the production process. Unfortu­nately, contemporary macroeconomics, which was blind to the possibility of the global financial crisis, is not equipped with the ideas and tools required to create full employment.

Conventional macro blames the poor for their poverty, and suggests education and training to fit them into existing jobs. However, the private sector does not naturally create enough jobs to employ everyone. Experience with Keynesian remedies shows that expansionary monetary policy starts to create inflation a long time before full employment is achieved. Modern Monetary Theory provides a genuine alternative, a job guarantee (JG) programme.

Instead of preparing people to fit them into existing or potential private sector jobs by providing them with education and training, we must create jobs tailored to the people. Jobs should be provided to take people as and where they are.  read more . . . . 

Fear of Floating

April 15, 2019 3 comments

from Asad Zaman

Published in Dawn, Mar 27, 2019, a leading Pakistani newspaper, in context of public debate about moving to a floating exchange rate regime —

In 1971, when Nixon shocked the world by abandoning the convertibility of dollars to gold, he dragged all of us, unwillingly, into the modern era of floating exchange rates. Since then, economic theories have changed. But old habits die hard; economists and policymakers today continue to think and operate as if they live in the old world. This article examines the question of fixed versus floating exchange rate regimes from the new perspective of Modern Monetary Theory (MMT).  read more

Origins of central banking

April 5, 2019 21 comments

from Asad Zaman

In this post, we provide some details regarding the origins of the Bank of England, the mother of all Central Banks and discuss some implications of this early history for our modern world. A link to a video-lecture on the topic is given at the bottom of the post.

We start with an excerpt from Ellen Brown in the Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Below, selected passages from Chapter 6: Pulling The Strings Of The King: The Moneylenders Take England: [passages in italics are my comments on the text, rest are quotes]

The first passage discusses how Queen Elizabeth asserted her sovereign right to issue money, and how the financiers worked to undermine thisread more

The fallacy of Ricardian equivalence

March 29, 2019 Leave a comment

from Asad Zaman

StiglitzRicardian equivalence is taught in every graduate school in the country. It is also sheer nonsense  [see “Quotes Critical of Economics” for more.] This post explains why.

In this post, we will create a simple model that demonstrates some fundamental truth of Modern Monetary Theory.  This is a variant of “.Simple Model Explains Complex Keynesian Conceptss“, We will show the following phenomena

  1. A Market Economy naturally creates an equilibrium with high unemployment and under-employment, showing existence of under-employment equilibria
  2. Government Deficit Spending increases aggregate demand, and moves the economy to full employment.
  3. Deficit Spending, also massively improves social welfare, by providing food even to the unemployed, using the additional output created by the increased aggregate demand
  4. Deficit Spending is not  “FINANCED” from any source. Government spending money which it does not have, creates welfare by injecting money into the economy. This money leads to increased output and is not inflationary. The government can continue this deficit spending forever, without worrying about sustainability or “paying back” the debt.
  5. Government Deficit injects money into the system which is exactly equal to the PROFITS of the firms, plus the SAVINGS of the laborers. Since firms work for profits while households wish to save, neither can succeed UNLESS the government runs deficits. Thus deficit spending is crucial to a capitalist economy — without it there would be no profits for business, and without profits and savings the economy would collapse.   Read more