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Consistency and validity is not enough!

May 23, 2015 2 comments

from Lars Syll

Neoclassical economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality. As Julian Reiss writes:  Read more…

Categories: methodology

Paul Romer is ‘busy’ …

May 21, 2015 8 comments

from Lars Syll

About math: I have an undergraduate degree in physics. I’ve seen clear evidence that math can facilitate scientific progress toward the truth.

If you think that math is worthless or dangerous, I’m sure that there are people who will be happy to discuss this with you. I’m not interested. I’m busy.  too-busy-people-workplace-ecard-someecards

About truth and science: My fundamental premise is that there is an objective notion of truth and that science can help us make progress toward truth.

If you do not accept this premise, I’m sure that there are people who would be happy to debate it with you. I’m not interested. I’m busy.

Paul Romer

Hmm …  Read more…

“The Scientist and the Church “

May 21, 2015 1 comment

 

Cover of The Scientist and the ChurchThe Scientist and the Church
Shimshon Bichler and Jonathan Nitzan

Published 21 June 2015 by WEA Books $10
337 pages

The Scientist and the Church is a wide-ranging biography of research, showcasing Bichler and Nitzan’s attempts to break through the stifling dogmas of the academic church and chart a new scientific cosmology of capitalism. Central to the authors’ work is the notion that capital is not a productive economic category but capitalized power, and that capitalism should be conceived and researched not as a mode of production and consumption but as a mode of power.

The articles collected in this volume outline the general contours of their approach, flesh out some of their recent research and offer personal insights into the broader politics of their journey. The first chapters reexamine the common foundations of the neoclassical and Marxist doctrines, sketch the contours of the authors’ alternative cosmology of capitalized power, identify the asymptotes – or limits – of this power and explore the all-encompassing logic of modern finance. Subsequent chapters research the connection between redistribution and cyclical crises, reassess the Marxist nexus between imperialism and financialism, rethink the oft-misunderstood role of crime and punishment in the capitalist mode of power and articulate a new theory and history of Middle-East energy conflicts. The closing chapters include two big-picture interviews, as well as riveting reflections on the authors’ own scientific clashes with the church.

Categories: WEA Books

Modelling consistency and real world non-coherence in mainstream economics

May 20, 2015 1 comment

from Lars Syll

9781138851023

In those cases where economists do focus on questions of market or competitive equilibrium etc., the formulators of the models in question are often careful to stress that their theorising has little connection with the real world anyway and should not be used to draw conclusions about the latter, whether in terms of efficiency or for policy or whatever.

In truth in those cases where mainstream assumptions and categories are couched in terms of economic systems as a whole they are mainly designed to achieve consistency at the level of modelling rather than coherence with the world in which we live.

This concern for a notion of consistency in modelling practice is true for example of the recently fashionable rational expectations hypothesis, originally formulated by John Muth (1961), and widely employed by those that do focus on system level outcomes. The hypothesis proposes that predictions attributed to agents (being theorised about) are treated as being essentially the same as (consistent with)  those generated by the economic model within which the same agents are theorised. As such the proposal is clearly no more than a technique for (consistency in) modelling, albeit a bizarre one. Significantly any assertion that the expectations held (and so model in which they are imposed) are essentially correct, is a step that is additional to assuming rational expectations.

Read more…

Paul Romer on math masquerading as science

May 19, 2015 3 comments

from Lars Syll

I have a new paper in the Papers and Proceedings Volume of the AER that is out in print and on the AER website …

Paul_RomerThe point of the paper is that if we want economics to be a science, we have to recognize that it is not ok for macroeconomists to hole up in separate camps, one that supports its version of the geocentric model of the solar system and another that supports the heliocentric model …

The usual way to protect a scientific discussion from the factionalism of academic politics is to exclude people who opt out of the norms of science. The challenge lies in knowing how to identify them.

From my paper:

“The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.”

Read more…

Changing our development paradigms

May 19, 2015 2 comments

from Asad Zaman  (reposted from the WEA Pedagogical Blog)

Growing up in British India, my father learnt that Great Powers had certain special characteristics. For global influence, they had to have sea power which required indented coastlines and natural harbours, coal mines for energy, extensive telegraph cables for communications. Furthermore, they had to have a cold climate to make them hardy, and be isolated from the mainland so as to have natural defences against potential rivals and enemies. In light of these criteria, it would be obvious even to a child, that the UK was the sole and unrivalled leader of the world. Read more…

Piketty and the non-applicability of neoclassical economics

May 17, 2015 5 comments

from Lars Syll

economic-mythIn yours truly’s On the use and misuse of theories and models in economics the author of Capital in the Twenty-First Century is criticized for not being prepared to fully take the consequences of marginal productivity theory — and the alleged close connection between productivity and remuneration postulated in mainstream income distribution theory — over and over again being disconfirmed both by history and, as shown already by Sraffa in the 1920s and in the Cambridge capital controversy in the 1960s, also from a theoretical point of view: Read more…

“This may all sound far-fetched, but the idea has been developed in some detail by a Norwegian academic, Trond Andresen”

May 15, 2015 4 comments

The conservative UK newspaper The Telegraph has featured an article “How to end boom and bust: make cash illegal” about Trond Andresen’s RWER paper “Improved macroeconomic control with electronic money and modern monetary theory”.  It has already attracted over 3,000 comments.

“Fear the Economics Textbook (Story of the Next Crook)”

May 13, 2015 6 comments

from Steve Ziliak

I believe that you and readers of Real World Economics Blog would like to know about an “economics rap battle” that is challenging more than orthodox economics.

Here is some discussion at Inside Higher Ed, together with the opposing videos:
https://www.insidehighered.com/news/2015/05/06/roosevelt-u-classs-rap-video-challenges-george-masons-hayek-fan-videos

Lyrics for my and my students at Roosevelt University in Chicago’ “Fear the Economics Textbook (Story of the Next Crook)” video are here:
http://blogs.roosevelt.edu/sziliak/fear-the-economics-textbook-a-rap-video/

The reply from the National Review is amusing but predictable:
http://www.nationalreview.com/phi-beta-cons/418134/professor-who-misunderstands-what-economics-about-george-leef

In solidarity,  Steve

Categories: students, teaching

In search of causality

May 13, 2015 Leave a comment

from Lars Syll

dilbert

One of the few statisticians that I have on my blogroll is Andrew Gelman.  Although not sharing his Bayesian leanings, yours truly finds  his open-minded, thought-provoking and non-dogmatic statistical thinking highly recommendable. The plaidoyer here below for “reverse causal questioning” is typical Gelmanian:

When statistical and econometrc methodologists write about causal inference, they generally focus on forward causal questions. We are taught to answer questions of the type “What if?”, rather than “Why?” Following the work by Rubin (1977) causal questions are typically framed in terms of manipulations: if x were changed by one unit, how much would y be expected to change? But reverse causal questions are important too … In many ways, it is the reverse causal questions that motivate the research, including experiments and observational studies, that we use to answer the forward questions …  Read more…

Categories: econometrics, methodology

The Economy of the Hamster

May 11, 2015 1 comment

The Economy of the Hamster  Cover of The Economy of the Hamster
Mauro Gallegati

Published 11 May 2015 by WEA Books $10

“After the financial crisis and the economic collapse of the Eurozone, many are asking “Quo Vadis”?: humanity, where are you going? Mauro Gallegati asks this from both a complex systems and a quintessentially Italian perspective, challenging our obsession with growth, the inappropriate worship of GDP, and the failed experiment of the Euro, and asking what could be the sustainable economy of the future”.  Steve Keen

About the book 

Read more…

Categories: WEA Books

The shifting battleground

May 11, 2015 5 comments

from Asad Zaman

The bull charges the red flag being waved by the matador, and is killed because he makes a mistake in recognising the enemy. Samuel Huntington argued that the era of the clash of nations is over. However, he created a red flag when he painted the civilisation of Islam as the new enemy. Trillions of dollars have been spent in fighting this enemy, created to distract attention from the real enemy.

The financial deregulation initiated in the Reagan-Thatcher era in the 1980s was supposed to create prosperity. In fact, it has resulted in a sky-rocketing rise in inequality. The gap between the richest and the poorest has become larger than ever witnessed in history. Countless academic articles and books have been written to document, explain and attempt to provide solutions to the dramatic increase in inequality. The American public does not need these sophisticated data and theories; it experiences the fact, documented in The Wall Street Journal, that the quality of jobs and wage earnings are lower today than they were in the 1970s. Growing public awareness is reflected in several movies about inequality. For instance, Elysium depicts a world where the super-rich have abandoned the ruined surface of the planet Earth to the proles, and live in luxury on a satellite.  Read more…

Why the ergodic theorem is not applicable in economics

May 8, 2015 40 comments

from Lars Syll

At a realistic level of analysis, Keynes’ claim that some events could have no probability ratios assigned to them can be represented as rejecting the belief that some observed economic phenomena are the outcomes of any stochastic process: probability structures do not even fleetingly exist for many economic events.

7107nQVwWOLIn order to apply probability theory, one must assume replicability of the experiment under the same conditions so that, in principle, the moments of the random functions can be calculated over a large number of realizations …

For macroeconomic functions it can be claimed that only a single realization exists since there is only one actual economy; hence there are no cross-sectional data which are relevant. If we do not possess, never have possessed, and conceptually never will possess an ensemble of macroeconomic worlds, then the entire concept of the definition of relevant distribution functions is questionable. It can be logically argued that the distribution function cannot be defined if all the macroinformation which can exist is only a finite part (the past and the present) of a single realization. Since a universe of such realizations must at least conceptually exist for this theory to be germane, the application of the mathematical theory of stochastic processes to macroeconomic phenomena is therefore questionable, if not in principle invalid.

Paul Davidson

Read more…

Categories: Uncategorized

Sleepwalking to extinction

May 7, 2015 15 comments

When, on May 10th 2013 scientists at Mauna Loa Observatory on the big island of Hawaii announced that global CO2 emissions had crossed a threshold at 400 parts per million (ppm) for the first time in millions of years, a sense of dread spread around the world and not only among climate scientists. CO2 emissions have been relentlessly climbing since Charles David Keeling first set up his tracking station near the summit of Mauna Loa Observatory in 1958 to monitor average daily global CO2 levels. At that time, CO2 concentrations registered 315ppm. CO2 emissions and atmospheric concentrations have been relentlessly climbing ever since and, as the records show, temperatures rises will follow. For all the climate summits, the promises of “voluntary restraint,” the carbon trading and carbon taxes, the growth of CO2 emissions and atmospheric concentrations has not just been relentless, it has been accelerating in what scientists have dubbed the “Keeling Curve.” Read more…

Categories: WEA Books

Income inequality begins at birth and these are the stats that prove it.

May 6, 2015 4 comments

from John Komlos

Even conservative Republican Alan Greenspan, an ardent advocate of free markets, is beginning to see inequality as a fundamental threat to the system and admits that,

“You cannot have the benefits of capitalist market growth without the support of a significant proportion, and indeed, virtually all of the people; and if you have an increasing sense that the rewards of capitalism are being distributed unjustly the system will not stand.”

Well, the system was not standing very sturdily during the days of rage in Baltimore or in Ferguson. So we need to look beyond the ugly surface manifestations of young black men being shot in the back or suffocated and consider the deeper socioeconomic plight of this demographic in this country in 2015. The truth of the matter is that people of color are disadvantaged by the current socio-economic system from the very beginning of their lives.

Problem no. 1: babies born in low-income neighborhoods will go to bad schools.  Read more…

Categories: The Economy

The limits of statistical inference

May 6, 2015 2 comments

from Lars Syll

causationCausality in social sciences — and economics — can never solely be a question of statistical inference. Causality entails more than predictability, and to really in depth explain social phenomena require theory. Analysis of variation — the foundation of all econometrics — can never in itself reveal how these variations are brought about. First when we are able to tie actions, processes or structures to the statistical relations detected, can we say that we are getting at relevant explanations of causation.

For more on these issues — see the chapter “Capturing causality in economics and the limits of statistical inference” in my On the use and misuse of theories and models in economics.

Rational expectations — totally incredible bogus

May 4, 2015 7 comments

from Lars Syll

Roman Frydman is Professor of Economics at New York University and a long time critic of the rational expectations hypothesis. In his seminal 1982 American Economic Review article Towards an Understanding of Market Processes: Individual Expectations, Learning, and Convergence to Rational Expectations Equilibrium — an absolute must-read for anyone with a serious interest in understanding what are the issues in the present discussion on rational expectations as a modeling assumption — he showed that models founded on the rational expectations hypothesis are inadequate as representation of economic agents’ decision making.

Those who want to build macroeconomics on microfoundations usually maintain that the only robust policies and institutions are those based on rational expectations and representative actors. As yours truly has tried to show in On the use and misuse of theories and models in economics there is really no support for this conviction at all. On the contrary. If we want to have anything of interest to say on real economies, financial crisis and the decisions and choices real people make, it is high time to place macroeconomic models building on representative actors and rational expectations-microfoundations where they belong – in the dustbin of history.  Read more…

War and peace and the steady-state economy

May 2, 2015 6 comments

from Herman Daly

My parents were children during WW I, the so-called “war to end all wars.” I was a child in WW II, an adolescent in the Korean War, and except for a physical disability would likely have been drafted to fight in the Vietnam War. Then came Afghanistan, Iraq, the continuous Arab-Israeli conflict, ISIS, Ukraine, Syria, etc. Now as a senior citizen, I see that war has metastasized into terrorism. It is hard to conceive of a country at war, or threatened by terrorism, moving to a steady state economy.

Peace is necessary for real progress, including progress toward a steady state economy. While peace should be our priority, might it nevertheless be the case that working toward a steady state economy would further the goal of peace? Might growth be a major cause of war, and the steady state a necessity for eliminating that cause? I think this is so. Read more…

C. T. Kurien’s book Wealth and Illfare is now available in EPUB (for iPad) and MOBI (for Kindle) formats as well as PDF. ($10)

May 1, 2015 Leave a comment

Cover of Wealth and Illfare: An Expedition through Real Life Economics

Wealth and Illfare: An Expedition through Real Life Economics
C. T. Kurien

WEALTH and ILLFARE is intended for readers who do not have much knowledge in economics, but are eager to know how economic systems function.

In particular, it deals with the phenomenon that many find disturbing, the soaring affluence of the few and the continuing misery of the many that is increasingly becoming evident globally and in our country.

Ownership and control over resources, different forms of mediation and asymmetry of information are identified as clues for any interested reader to develop skills to study real life economic problems.

It is a unique and timely contribution by a reputed practitioner who, over the past half a century, has influenced generations of students and through his earlier writings the general public as well.

Categories: WEA Books

Validating assumptions

April 30, 2015 1 comment

from Lars Syll

Piketty uses the terms “capital” and “wealth” interchangeably to denote the total monetary value of shares, housing and other assets. “Income” is measured in money terms. We shall reserve the term “capital” for the totality of productive assets evaluated at constant prices. The term “output” is used to denote the totality of net output (value-added) measured at constant prices. Piketty uses the symbol β to denote the ratio of “wealth” to “income” and he denotes the share of wealth-owners in total income by α. In his theoretical analysis this share is equated to the share of profits in total output. Piketty documents how α and β have both risen by a considerable amount in recent decades. He argues that this is not mere correlation, but reflects a causal link. It is the rise in β which is responsible for the rise in α. To reach this conclusion, he first assumes that β is equal to the capital-output ratio K/Y, as conventionally understood. From his empirical finding that β has risen, he concludes that K/Y has also risen by a similar amount. According to the neoclassical theory of factor shares, an increase in K/Y will only lead to an increase in α when the elasticity of substitution between capital and labour σ is greater than unity. Piketty asserts that this is the case. Indeed, based on movements α and β, he estimates that σ is between 1.3 and 1.6 (page 221).  Read more…

Categories: methodology
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