from Lars Syll
BBC report on the need for rethinking economics and the way we teach it.
from Asad Zaman
After having examined a lot of relevant, useful and insightful material on the failure of orthodoxy, some of which that came up in the responses to my post, I have come to a conclusion that there is a viable project we could undertake together, which has the chance of creating a revolution. There are several points that need to be taken in consideration to shape the project.
Insight Number 1:
The first point comes from Edward Fullbrook’s remark that:
If Samuelson had any claim to genius it was that he understood better than anyone else that nothing in economics is nearly as important as Economics 101. Marshall, Samuelson’s target, understood it also.
Samuelson’s was the textbook which defined economics in the twentieth century. I propose that we work together on writing the textbook which will define economics in the twenty first century. Read More
from Lars Syll
Mathematics, especially through the work of David Hilbert, became increasingly viewed as a discipline properly concerned with providing a pool of frameworks for possible realities …
This emergence of the axiomatic method removed at a stroke various hitherto insurmountable constraints facing those who would mathematise the discipline of economics. Researchers involved with mathematical projects in economics could, for the time being at least, postpone the day of interpreting their preferred axioms and assumptions. There was no longer any need to seek the blessing of mathematicians and physicists or of other economists who might insist that the relevance of metaphors and analogies be established at the outset. In particular it was no longer regarded as necessary, or even relevant, to economic model construction to consider the nature of social reality, at least for the time being
When residents of Ferguson, Missouri, took to the streets last August to protest the death of Michael Brown, an unarmed black teenager killed by a white police officer, the events dramatically exposed an image of modern policing that most Americans rarely see: columns of police pointing military weaponry at peaceful protestors. But the ongoing tension between residents and police in Ferguson was also indicative of another, less visual development in how the police are used to oppress impoverished communities: using law enforcement to extract revenue from the poor.
from Lars Syll
So far we have shown that for two prominent questions in the economics of education, experimental and non-experimental estimates appear to be in tension. Furthermore, experimental results across different contexts are often in tension with each other. The first tension presents policymakers with a trade-off between the internal validity of estimates from the “wrong” context, and the greater external validity of observational data analysis from the “right” context. The second tension, between equally well-identifed results across contexts, suggests that the resolution of this trade-off is not trivial. There appears to be genuine heterogeneity in the true causal parameter across contexts.
These findings imply that the common practice of ranking evidence by its level of “rigor”,
without respect to context, may produce misleading policy recommendations … Read more…
from Asad Zaman
On the RWER Blog, Paul David would like heterodox economists to see reason — read and understand the original Keynes. Justaluckyfool would like us to read, understand and implement Soddy’s financial engineering. On the WEA Pedagogy Blog, Paul Grignon ridicules economists’ understanding of money, and offers an alternative. Egmont Kakarot-Handtke , Xavi Mir, and Jeff offer alternative axiomatizations, and principles which would fix the problems with neoclassical theories. Others who have not spoken up on these threads have their own solutions to the problems of the world.
I am trying to offer a meta-analysis here, as noted by davetaylor1. All heterodox economists agree on one thing, by definition of heterodoxy: orthodox economics contains (huge) errors. INSTEAD of explaining what these errors are and trying to fix them, I would like to stand back from the fray and try to examine what is going on from a distance. WHAT makes certain theories popular? WHY do most people come to believe in theories? WHAT causes changes in these beliefs? By studying the Methodology of Polanyi’s Great Transformation, I came to the understanding that theories can only be understood within their historical context. This understanding is violently in conflict with the conception of knowledge, based on positivist ideas, that I learned in the universities. Contrary to positivist ideas, to understand the process of emergence of theories, and how these theories change over time, one has to do analysis at three levels simultaneously:
LEVEL 1: The Historical Facts, the Context, The Various Groups engaged in the struggle for power, and their interests and ideological positions.
from Lars Syll
We must learn WHY the argument for revealed preference, which deceived Samuelson, is wrong. As per standard positivist ideas, preferences are internal to the heart and unobservable; hence they cannot be used in scientific theories. So Samuelson came up with the idea of using the observable Choices – unobservable preferences are revealed by observable choices … Yet the basic argument is wrong; one cannot eliminate the unobservable preference from economic theories. Understanding this error, which Samuelson failed to do, is the first knot to unravel, in order to clear our minds and hearts of the logical positivist illusions.
Asad Zaman’s blog post made me come to think about an article on revealed preference theory that yours truly wrote almost twenty-five years ago and got published in History of Political Economy (no. 25, 1993).
Paul Samuelson wrote a kind letter and informed me that he was the one who had recommended it for publication. But although he liked a lot in it, he also wrote a comment — published in the same volume of HOPE — saying: Read more…
Here is a comment on Asad Zaman’s Fundamental Flaws of Conventional Economics that deserves its own post.
graccibrosJanuary 29, 2016 at 5:52 pm
Yes, let me wade in but not too deeply. I was intrigued by your very first itemization about logical positivism having failed as a theory of knowledge, and especially your mention of it excluding morality. Since I am reading the late Joe Bageant’s “Deer Hunting with Jesus,” his book about the alienation of white working class Americans from upper middle class liberals, and them not voting the logical positivistic formulations of their own economic self interest, please note that this segment of America is where the morality contained in the Evangelical Movement/Fundamentalism has its deepest roots. They listen to Larry Summers tone, condescension (even as Larry has moved left, which he tries to hide by using terms like “secular stagnation) and run into the arms of Donald Trump, not Hillary Clinton…and who knows about Bernie Sanders.
from Asad Zaman
My recent post on RWER Blog asks if there is a “CORE of heterodox economics” which we can all believe in? From the responses to my previous post on whether or not there was a core set of heterodox beliefs, it became clear to me that I have started in the wrong place. Before starting the task of constructing an alternative paradigm, we must clear away the debris of the ruins of the conventional paradigm. Frederic Lee & Steve Keen remarked in the introduction to their article on the “The incoherent emperor: a heterodox critique of neoclassical microeconomic theory” that heterodox economists often come to the defense of conventional economics, because they are ignorant of the vast range of devastating critiques against these theories. To create a revolution, we must change from lukewarm heterodoxy (a partial rejection combined with a partial acceptance of the errors of conventional theories) to a genuinely radical approach requiring a complete rejection. When the errors of the conventional approach become as obvious as the error in “2+2=5”. we will not waste time coming up with new proofs that this is a fallacious calculation.
I would like to put forth a few propositions which provide a clear demonstration of the errors of conventional economic theory. I am hoping that disagreements about these central propositions can be cleared away by discussion, so that we can create consensus about complete rejection of conventional economic theories. After this step is completed, we could move forward to thinking about how to construct alternative foundations.
Propositions: Methodological Mistakes Read more…
from Lars Syll
In the model [Gali, Smets and Wouters, Unemployment in an Estimated New Keyesian Model (2011)] there is perfect consumption insurance among the members of the household. Because of separability in utility, this implies that consumption is equalized across all workers, whether they are employed or not … Workers who find that they do not have to work are unemployed or out of the labor force, and they have cause to rejoice as a result. Unemployed workers enjoy higher utility than the employed because they receive the same level of consumption, but without having to work.
from Maria Alejandra Madi
Despite the sluggishness in the global economy, officially recorded remittances to developing countries have been growing and the number of international migrants was expected to surpass 250 million in 2015. Among the migration corridors, Mexico-United States accounted for 13 million migrants in 2013. Russia-Ukraine was the second largest, followed by Bangladesh-India, and Ukraine-Russia.
Remittance flows to developing countries are currently higher than three times the amount of flows related to official development assistance. Accordingly the World Bank’s Migration and Development Unit report, officially recorded remittances to developing countries reached almost $534 billion in 2012 and $601 billion in 2015. As remittance flows include unrecorded flows through formal and informal channels, the actual amount of money that is transferred cross-border to family members might be significantly higher. read more
from Lars Syll
The unpopularity of the principle of organic unities shows very clearly how great is the danger of the assumption of unproved additive formulas. The fallacy, of which ignorance of organic unity is a particular instance, may perhaps be mathematically represented thus: suppose f(x) is the goodness of x and f(y) is the goodness of y. It is then assumed that the goodness of x and y together is f(x) + f(y) when it is clearly f(x + y) and only in special cases will it be true that f(x + y) = f(x) + f(y). It is plain that it is never legitimate to assume this property in the case of any given function without proof.
J. M. Keynes “Ethics in Relation to Conduct” (1903)
Since econometrics doesn’t content itself with only making optimal predictions, but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — most important of these are additivity and linearity. Important, simply because if they are not true, your model is invalid and descriptively incorrect. It’s like calling your house a bicycle. No matter how you try, it won’t move you an inch. When the model is wrong — well, then it’s wrong.
from Asad Zaman
In January 1997, the annual convention of the American Economic Association included a session entitled “Is There a Core of Practical Macroeconomics That We Should All Believe?”. Several prominent macro-economists presented their takes on this issue. Since the authors were macroeconomists, it is not surprising that many of them start their papers with a “resounding” yes. However, reading the papers, we find only a host of confusions and contradictions. When asserting a core belief, each author discusses many controversies surrounding that core belief. Furthermore, the core varies from author to author. Also, after the Global Financial Crisis of 2007-8, none the core beliefs appear to be tenable. None of the extant Macro models contains any suggestion of the possibility of such a severe macroeconomic disturbance.
Readers of the RWER blog have been treated to a virtually inexhaustible collection of critiques of conventional economic theories. Furthermore, the blog posts are only a small sample of critical materials gathered at length in many books and papers. Nonetheless, there is no doubt that conventional economics remains firmly entrenched in universities as well as governments, international institutions and all corridors of power. Given that conventional economics is seriously defective, why is this the case, and what can we do to change thing? Read more…
from Norbert Häring
A central bank governor in Athens conspires with the President of the Republic to sabotage the negotiation strategy of his government to weaken it in its negotiations with the European Central Bank. After the government has capitulated, this governor, who is a close friend of the new finance minister and boss of the finance ministers wife, and the President of the Republic travel together to the ECB to collect their praise and rewards. This is not an invention, this is now documented.
On 19 January the German Central Bank in Frankfurt informed the media that the Greek President Prokopis Pavlopoulos visited the ECB and met with ECB-President Mario Draghi, and that he was accompanied by the President of the Greek central Bank, Yanis Stournaras.
Remember. When the Syriza-led government in Athens was in tense negotiations with the European institutions, the ECB excerted pressure by cutting Greek banks off the regular financing operations with the ECB. They could get euros only via Emergency Liquidty Assistance from the Greek central bank and the ECB placed a strict limit on these. Finance minister Yanis Varoufakis worked on emergency plans to keep the payment system going in case the ECB would cut off the euro supply completely.
from Lars Syll
Mainstream — neoclassical — economics has become increasingly irrelevant to the understanding of the real world. The main reason for this irrelevance is the failure of economists to match their deductive-axiomatic methods with their subject.
The idea that a good scientific theory must be derived from a formal axiomatic system has little if any foundation in the methodology or history of science. Nevertheless, it has become almost an article of faith in modern economics. I am not aware, but would be interested to know, whether, and if so how widely, this misunderstanding has been propagated in other (purportedly) empirical disciplines. The requirement of the axiomatic method in economics betrays a kind of snobbishness and (I use this word advisedly, see below) pedantry, resulting, it seems, from a misunderstanding of good scientific practice …
This doesn’t mean that trying to achieve a reduction of a higher-level discipline to another, deeper discipline is not a worthy objective, but it certainly does mean that one cannot just dismiss, out of hand, a discipline simply because all of its propositions are not deducible from some set of fundamental propositions. Insisting on reduction as a prerequisite for scientific legitimacy is not a scientific attitude; it is merely a form of obscurantism
from Lars Syll
Oxford macroeconomist Simon Wren-Lewis has a post up on his blog discussing whether mainstream macroeconomics is eclectic or not. His answer is — both yes and no:
Does this mean academic macroeconomics is fragmented into lots of cliques, some big and some small? Not really … This is because these models (unlike those of 40+ years ago) use a common language …
It means that the range of assumptions that models (DSGE models if you like) can make is huge. There is nothing formally that says every model must contain perfectly competitive labour markets where the simple marginal product theory of distribution holds, or even where there is no involuntary unemployment, as some heterodox economists sometimes assert. Most of the time individuals in these models are optimising, but I know of papers in the top journals that incorporate some non-optimising agents into DSGE models. So there is no reason in principle why behavioural economics could not be incorporated …
It also means that the range of issues that models (DSGE models) can address is also huge …
Mainstream academic macro is very eclectic in the range of policy questions it can address, and conclusions it can arrive at, but in terms of methodology it is quite the opposite.
Wren-Lewis tries to give a picture of modern macroeconomics as a pluralist enterprise. Read more…
from Lars Syll
There have been over four decades of econometric research on business cycles … The formalization has undeniably improved the scientific strength of business cycle measures …
But the significance of the formalization becomes more difficult to identify when it is assessed from the applied perspective, especially when the success rate in ex-ante forecasts of recessions is used as a key criterion. The fact that the onset of the 2008 financial-crisis-triggered recession was predicted by only a few ‘Wise Owls’ … while missed by regular forecasters armed with various models serves us as the latest warning that the efficiency of the formalization might be far from optimal. Remarkably, not only has the performance of time-series data-driven econometric models been off the track this time, so has that of the whole bunch of theory-rich macro dynamic models developed in the wake of the rational expectations movement, which derived its fame mainly from exploiting the forecast failures of the macro-econometric models of the mid-1970s recession.
The limits of econometric forecasting has, as noted by Qin, been critically pointed out many times before.
Trygve Haavelmo — with the completion (in 1958) of the twenty-fifth volume of Econometrica — assessed the the role of econometrics in the advancement of economics, and although mainly positive of the “repair work” and “clearing-up work” done, Haavelmo also found some grounds for despair: Read more…
from Claude Hillinger
Federico Fubini has published a highly relevant article The Closed Marketplace of Economic Ideas regarding the remarkable stability of the rankings of top economists in the face of the evident failure of their theories.
Fubini compares this stability with the greater variability in the rankings of the largest corporations. This comparison is irrelevant since the two fields are entirely different. More relevant would be a comparison with a ranking in natural science. I don’t have such a ranking comparison, but it is obvious that if it were made say in physics, the ranking would be even more stable going back to Newton, or Galileo, or even Archimedes. The physicists discovered lasting truths and there is no reason for ever reducing their fame. So, is all well with economics? Does not any successful science produce a stable list of its greatest contributors? A genuine science does, a pseudo-science unfortunately does also!
Those wondering how economics came to its present sorry state may wish to consult my recent e-Book on the subject: Unnatural science: The conflict between reason and ideology in economics and the other social sciences
from Jorge Buzaglo
It is interesting to see how the picture changes completely when we measure arms exports per capita for the 15 largest expporters (for the same year (2014), in million (1990) dollars): Read more…
from Lars Syll
Yesterday John Kay had an interesting article about models and forecasting in Financial Times:
A bane of this economist’s life is the belief that economics is clairvoyance. I should, according to this view, be offering prognostications of what gross domestic product growth will be this year and when the central bank will raise interest rates …
What was the right answer on January 1 1989 to the question “will the Berlin Wall be pulled down in 1989?” A shrewd commentator would have said (though few did) something like “almost certainly the Wall will stand but you should understand the potentially destructive forces undermining the Soviet engine and the East German state”. That type of response combines probabilistic and narrative thinking.
But people long for certainties, though they know they cannot have them. I have learnt that few really want answers when they ask me to predict GDP growth or advise whether interest rates will rise in the third quarter. It is usually easy to move the subject on to something more interesting than macroeconomic forecasting.
Kay’s remarks — and Tony Yates comments on them — made me think about an article that Oxford macroeconomist Simon Wren-Lewis wrote on models and forecasts a couple of years ago, saying that “macroeconomic forecasts are always bad,” but, on the other hand, since they are “probably no worse than intelligent guesses” and anyway are “not obviously harmful,” we have no reason to complain. Read more…