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The alleged success of econometrics

July 8, 2020 1 comment

from Lars Syll

Man calculating from ladderEconometricians typically hail the evolution of econometrics as a “big success”. For example, Geweke et al. (2006) argue that “econometrics has come a long way over a relatively short period” … Pagan (1987) describes econometrics as “outstanding success” because the work of econometric theorists has become “part of the process of economic investigation and the training of economists” …

These claims represent no more than self-glorifying rhetoric … The widespread use of econometrics is not indicative of success, just like the widespread use of drugs does not represent social success. Applications of econometric methods in almost every field of economics is not the same as saying that econometrics has enhanced our understanding of the underlying issues in every field of economics. It only shows that econometrics is no longer a means to an end but rather the end itself. The use of econometric models by government agencies has not led to improvement in policy making, as we move from one crisis to another …

The observation that econometric theory has become part of the training of economists and the other observation of excess demand for well-trained econometricians are far away from being measures of success … The alleged success of econometrics has led to the production of economics graduates who may be good at number crunching but do not know much about the various economic problems faced by humanity. It has also led to the brain drain inflicted on the society by the movement of physicists, mathematicians and engineers to economics and finance, particularly those looking for lucrative jobs in the financial sector. At the same time, some good economists have left the field or retired early because they could not cope with the success of econometrics.

Imad Moosa / RWER

Mainstream economists often hold the view that if you are critical of econometrics it can only be because you are a sadly misinformed and misguided person who dislikes and does not understand much of it.

As Moosa’s eminent article shows, this is, however, nothing but a gross misapprehension. Read more…

Inequality and luxury

July 4, 2020 3 comments

from Lars Syll

thThus luxury is being hollowed out. For in the middle of general fungibility, happiness clings without exception to what is not fungible. No exertion of humanity, no formal reasoning can alter the fact that the clothing which shimmers like a fairy-tale is worn by the one and only, not by twenty-thousand others. Under capitalism, the utopia of the qualitative — what by virtue of its difference and uniqueness does not enter into the ruling exchange relationship — flees into the fetish character. But this promise of happiness in luxury presupposes once more privilege, economic inequality, precisely a society based on fungibility. That is why the qualitative itself turns into a special case of quantification, the not-fungible into the fungible, luxury into comfort and in the end into senseless gadgets. In such a circle the principle of luxury goes to pieces even without the leveling tendency of mass society, over which the reactionaries sentimentally fuss and fume. The inner composition of luxury is not indifferent to what useless things, through their total embedding in the realm of usefulness, experience. Its remainders, even objects of the greatest quality, already look like junk.

T. W. Adorno

An interview with Stephanie Kelton

July 3, 2020 4 comments

from Lars Syll

Cody Fenwick: What drives the biggest misunderstandings about government debt in our national conversation?

mythEverything is wrong. The way we talk about federal government debt is, from my perspective, we say things like we’re borrowing from China and foreigners. Hillary Clinton said when she was secretary of State that it’s a national security threat. People talk about it representing a liability to all of us, so we hear people talk about “your share [of the national debt],”  a burden on future generations, that it ultimately has to be paid back, that it’s going to require higher taxes in the future. I could keep going.

So what connects all these misunderstandings? Are we thinking of the government too much like a household or a business?  Read more…

Hicks’ chef-d’oeuvre

June 28, 2020 Leave a comment

from Lars Syll

When we cannot accept that the observations, along the time-series available to us, are independent, or cannot by some device be divided into groups that can be treated as independent, we get into much deeper water. For we have then, in strict logic, no more than one observation, all of the separate items having to be taken together. For the analysis of that the probability calculus is useless; it does not apply. We are left to use our judgement, making sense of what has happened as best we can, in the manner of the historian. Applied economics does then come back to history, after all.

hicksI am bold enough to conclude, from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed. We have no business to turn to them automatically; we should always ask ourselves, before we apply them, whether they are appropriate to the problem at hand. Very often they are not. Thus it is not at all sensible to take a small number of observations (sometimes no more than a dozen observations) and to use the rules of probability to deduce from them a ‘significant’ general law. For we are assuming, if we do so, that the variations from one to another of the observations are random, so that if we had a larger sample (as we do not) they would by some averaging tend to disappear. But what nonsense this is when the observations are derived, as not infrequently happens, from different countries, or localities, or industries — entities about which we may well have relevant information, but which we have deliberately decided, by our procedure, to ignore. By all means let us plot the points on a chart, and try to explain them; but it does not help in explaining them to suppress their names. The probability calculus is no excuse for forgetfulness.

John Hicks’ Causality in economics is an absolute masterpiece. It ought to be on the reading list of every course in economic methodology.

The rhetoric of imaginary populations

June 25, 2020 Leave a comment

from Lars Syll

The most expedient population and data generation model to adopt is one in wh

morgich the population is regarded as a realization of an infinite super population. This setup is the standard perspective in mathematical statistics, in which random variables are assumed to exist with fixed moments for an uncountable and unspecified universe of events …

This perspective is tantamount to assuming a population machine that spawns

individuals forever (i.e., the analog to a coin that can be flipped forever). Each individual is born as a set of random draws from the distributions of Y¹, Y°, and additional variables collective

ly denoted by S …

Because of its expediency, we will usually write with the superpopulation model in the background, even though

the notions of infinite superpopulations and sequences of sample sizes approaching infinity are manifestly unrealistic
.

In econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come into the picture. Read more…

What is theory?

June 23, 2020 2 comments

from Lars Syll

what is theoryEconomics is a discipline with the avowed ambition to produce theory for the real world. But it fails in this ambition, Lars Pålsson Syll asserts in Chapter 12, at least as far as the dominant mainstream neoclassical economic theory is concerned. Overly confident in deductivistic Euclidian methodology, neoclassical economic theory lines up series of mathematical models that display elaborate internal consistency but lack clear counterparts in the real world. Such models are at best unhelpful, if not outright harmful, and it is time for economic theory to take a critical realist perspective and explain economic life in depth rather than merely modeling it axiomatically.

The state of economic theory is not as bad as Pålsson Syll describes, Fredrik Hansen retorts in Chapter 13. Looking outside the mainstream neoclassic tradition, one can find numerous economic perspectives that are open to other disciplines and manifest growing interest in methodological matters. He is confident that theoretical and methodological pluralism will be able to refresh the debate on economic theory, particularly concerning the nature of realism in economic theory, a matter about which Pålsson Syll and Hansen clearly disagree.

Read more…

The ultimate takedown of teflon coated defenders of rational expectations

June 21, 2020 3 comments

from Lars Syll

James Heckman, winner of the “Nobel Prize” in economics (2000), did an interview with John Cassidy in 2010. It’s an interesting read (Cassidy’s words in italics):

What about the rational-expectations hypothesis, the other big theory associated with modern Chicago? How does that stack up now?

heckmanI could tell you a story about my friend and colleague Milton Friedman. In the nineteen-seventies, we were sitting in the Ph.D. oral examination of a Chicago economist who has gone on to make his mark in the world. His thesis was on rational expectations. After he’d left, Friedman turned to me and said, “Look, I think it is a good idea, but these guys have taken it way too far.”

It became a kind of tautology that had enormously powerful policy implications, in theory. But the fact is, it didn’t have any empirical content. When Tom Sargent, Lard Hansen, and others tried to test it using cross equation restrictions, and so on, the data rejected the theories. There were a certain section of people that really got carried away. It became quite stifling. Read more…

Social science — a plaidoyer

June 17, 2020 18 comments

from Lars Syll

One of the most important tasks of social sciences is to explain the events, processes, and structures that take place and act in society. But the researcher cannot stop at this. As a consequence of the relations and connections that the researcher finds, a will and demand arise for critical reflection on the findings. To show that unemployment depends on rigid social institutions or adaptations to European economic aspirations to integration, for instance, constitutes at the same time a critique of these conditions. It also entails an implicit critique of other explanations that one can show to be built on false beliefs. The researcher can never be satisfied with establishing that false beliefs exist but must go on to seek an explanation for why they exist. What is it that maintains and reproduces them? To show that something causes false beliefs – and to explain why – constitutes at the same time a critique. Read more…

Econometric self-deceptions

June 13, 2020 1 comment

from Lars Syll

One may wonder how much calibration adds to the knowledge of economic structures and the deep parameters involved …

The pitfalls of econometrics | LARS P. SYLLFirst, few ‘deep parameters’ have been established at all …

Second, even where estimates are available from micro-econometric investigations, they cannot be automatically imported into aggregated general equilibrium models …

Third, calibration hardly contributes to growth of knowledge about ‘deep parameters’. These deep parameters are confronted with a novel context (aggregate time-series), but this is not used for inference on their behalf. Rather, the new context is used to fit the model to presumed ‘laws of motion’ of the economy …

Hugo Keuzenkamp

Epic fraud: How to succeed in science (without doing any)There are many kinds of useless economics held in high regard within mainstream economics establishment today. Few — if any — are less deserved than the macroeconomic theory/method — mostly connected with Nobel laureates Finn Kydland, Robert Lucas, Edward Prescott and Thomas Sargent — called calibration.

Hugo Keuzenkamp and yours truly are certainly not the only ones having doubts about the scientific value of calibration. In Journal of Economic Perspective (1996, vol. 10) Lars Peter Hansen and James J. Heckman write: Read more…

MMT — Keynesianism with an expansionary twist

June 11, 2020 8 comments

from Lars Syll

Expansionary policy with a strong redistributive component is an attractive proposal … Higher output and real wages would likely stimulate productivity growth. Global warming can and should be attacked seriously.

With regard to foundation myths for MMT, Chartalism adds little to the observation that a modern macro economy operates on the basis of fiat money supported by state power which transcends enforcing the mere payment of taxes.

unnamedFunctional finance is the heart of fiscalist Keynesianism incorporating automatic stabilizers for the business cycle. The MMT job guarantee proposal could be helpful as a supplement to the existing system of stabilizers …

A fiscal expansion poses the risk of price inflation. It is unlikely to turn into a Wicksellian cumulative process so long as wages are repressed. But ending wage repression is presumably an MMT policy objective …

MMT’s aims are exemplary but their intellectual support adds little to the ideas of Godley, Lerner, and Keynes. The doctrine blends them effectively but is certainly no striking new intellectual synthesis.

Lance Taylor

Taylor may be right on the question of how much — as a macroeconomic theory — MMT really has added to the Keynes-Lerner-Godley-Minsky framework. But there is undoubtedly at least one positive contribution of MMT — especially from a European point of view — and that is that it has made it transparently clear why the euro-experiment has been such a monumental disaster. The neoliberal dream of having over-national currencies just doesn’t fit well with reality. When an economy is in a crisis, it must be possible for the state to manage and spend its own money to stabilize the economy. Read more…

What’s the use of economics?

June 7, 2020 33 comments

from Lars Syll

The simple question that was raised during a recent conference … was to what extent has — or should — the teaching of economics be modified in the light of the current economic crisis? The simple answer is that the economics profession is unlikely to change. Why would economists be willing to give up much of their human capital, painstakingly nurtured for over two centuries? For macroeconomists in particular, the reaction has been to suggest that modifications of existing models to take account of ‘frictions’ or ‘imperfections’ will be enough to account for the current evolution of the world economy. The idea is that once students have understood the basics, they can be introduced to these modifications.

However, other economists such as myself feel that we have finally reached the turning point in economics where we have to radically change the way we conceive of and model the economy. The crisis is an opportune occasion to carefully investigate new approaches. Paul Seabright hit the nail on the head; economists tend to inaccurately portray their work as a steady and relentless improvement of their models whereas, actually, economists tend to chase an empirical reality that is changing just as fast as their modelling. I would go further; rather than making steady progress towards explaining economic phenomena professional economists have been locked into a narrow vision of the economy. We constantly make more and more sophisticated models within that vision until, as Bob Solow put it, “the uninitiated peasant is left wondering what planet he or she is on” (Solow 2006) … Read more…

MMT — neither modern, nor monetary

June 5, 2020 13 comments

from Lars Syll

Voltaire once said of the Holy Roman Empire that it was “Neither Holy, nor Roman, nor an Empire”. Something similar might be said of Modern Monetary Theory … It is neither modern, nor genuinely monetary, and it is at least as much a set of policy proposals as a theory.

Modern-Monetary-Theory-It might be thought that “modern” refers to the fiat money world in which we have lived since major currencies broke with gold convertibility in the 1930s … In fact, however, it is a kind of inside joke, motivated by this observation of Keynes

“The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contracts. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time – when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern states and has been so claimed for some four thousand years at least. (Keynes 1930, p. 4).”

As regards “monetary”, MMT is notable for its rejection of concerns about the money supply, and monetary measures of budget balance and public debt. On the contrary, its focus is on the employment of the real resources available to the economy …

Finally, in theoretical terms, MMT offers little in the way of radical innovation. Rather it is a variant of traditional Keynesianism, drawing heavily on the functional finance approach of Abba Lerner (1943), and rejecting both the Hicks-Samuelson neoclassical synthesis and (even more strongly) the ‘New Keynesian’. The central point of functional finance is that, since the budget balance is a policy instrument, it is incorrect to think of taxes as ‘financing’ public expenditure. Rather, for any given level of public spending, taxes ensure that the budget balance is at a level (which may be a surplus or deficit in conventional accounting terms) sufficient to keep the economy in a stable equilibrium with full employment and low inflation.MMT incorporates some post-Keynesian ideas, such as Minsky’s (1982) model of financial instability, but makes little use of other post-Keynesian ideas, such as that of fundamental uncertainty.

MMT is also prominently associated with particular policy proposals, such as that for a Jobs Guarantee. This is a variant of the traditional Keynesian case for full employment based on aggregate demand management, but is not unique to MMT.

John Quiggin

Although it may sound somewhat dismissive of MMT, I think Quiggin gets it right here. Read more…

Randomization

June 3, 2020 1 comment

from Lars Syll

A great video, but — there’s always a but — unfortunately also not without some analytical shortcomings. Read more…

Microfoundations — neither law nor true

May 31, 2020 7 comments

from Lars Syll

micro

Simon Wren-Lewis is one of many mainstream economists that staunchly defends the idea that having microfoundations for macroeconomics moves macroeconomics forward. A couple of years ago he wrote this:

I think the two most important microfoundation led innovations in macro have been intertemporal consumption and rational expectations …  [T]he adoption of rational expectations was not the result of some previous empirical failure. Instead it represented, as Lucas said, a consistency axiom …

I think macroeconomics today is much better than it was 40 years ago as a result of the microfoundations approach.

On this kind of argumentation I would like to add the following comments: Read more…

Economic models and reality

May 25, 2020 5 comments

from Lars Syll

assumptionsThe abandonment of efforts to match real structures has led to disaster, as models of economic theory have grown progressively distant from reality. Attempts to fix the problem have failed to address the cause. Economists look at bad models, and say we should replace these by better models. But the process by which models are evaluated, the underlying methodology, is not examined. The real problem lies much deeper than bad models and ludicrous assumptions. Bad assumptions would quickly be replaced by better ones if the methodology insisted on correction of models to match reality. The real problem is the lack of a progressive methodology. When our mental models are attempts to approximate reality, then, when they fail, we try to improve the match to reality. Our models become better as approximations to the hidden structures of reality. However, when we abandon efforts to match reality, our mental models can become progressively worse as approximations to reality while becoming better at providing a match to observations …

The problem can be fixed only if we adopt a realist philosophy of science. Critical realism offers an extremely useful alternative to current economic and econometric methodology. A realist philosophy has the possibility of learning from experience. Even if we start with ridiculous assumptions, we will modify them in face of empirical evidence to the contrary. In complete contrast, economists stubbornly stick to assumptions known to be false because the standard methodology says that false assumptions are not a problem for models. There is no hope for progress in economics until we abandon Friedman’s methodological prescriptions according to which the more ludicrous our assumptions, the better our model.

Asad Zaman

Yes indeed, critical realism offers a useful alternative to current economic methodology. In a time when scientific relativism is still on the march, it is important to keep up the critical realist claim for not reducing science to a pure discursive level. Read more…

Rational choice theory — an abysmal failure

May 23, 2020 10 comments

Lars Syll

bunbgeThough an enthusiast of reason, I believe that rational choice theory has failed abysmally, and it saddens me that this failure has brought discredit upon the very enterprise of serious theorizing in the field of social study …

Rational choice theory is far too ambitious. In fact, it claims to explain everything social in terms of just three assumptions that would hold for all individuals in all social groups and in every historical period. But a Theory of Everything does not explain anything in particular … And being unable to account for differences among individuals and for the variety of social interactions, systems, processes, and institutions, the theory is bound to be unrealistic, i. e., false …

The reader may feel that my criticism is excessive: that I am throwing the baby out along with the bath water. My reaction is that there is no baby … It died long ago from mathematical anemia, from deficiency in the enzymes required to digest the simplest social facts, and from lack of exposure to the sound and light and fury of the social weather.

Most mainstream economists want to explain social phenomena, structures and patterns, based on the assumption that the agents are acting in an optimizing — rational — way to satisfy given, stable and well-defined goals. Read more…

Econometrics — a Keynesian perspective

May 21, 2020 Leave a comment

from Lars Syll

istheseptuagintaIt will be remembered that the seventy translators of the Septuagint were shut up in seventy separate rooms with the Hebrew text and brought out with them, when they emerged, seventy identical translations. Would the same miracle be vouchsafed if seventy multiple correlators were shut up with the same statistical material? And anyhow, I suppose, if each had a different economist perched on his a priori, that would make a difference to the outcome.

J M Keynes

Mainstream economists today usually subscribe to the idea that although mathematical-statistical models are not ‘always the right guide for policy,’ they are still somehow necessary for making policy recommendations. The models are supposed to supply us with a necessary ‘discipline of thinking.’

This emphasis on the value of modelling should come as no surprise. Mainstreamers usually vehemently defend the formalization and mathematization that comes with the insistence of using a model-building strategy in economics. Read more…

How the model became the message in economics

May 18, 2020 14 comments

from Lars Syll

In The World in the Model Mary Morgan gives a historical account of how the model became the message in economics. On the question of how the models provide a method of enquiry where they can function both as “objects to enquire into” and as “objects to enquire with”, Morgan argues that model reasoning involves a kind of experiment. She writes:

It may help to clarify my account of modelling as a double method of enquiry in economics if we compare it with two of the other reasoning styles … the method of mathematical postulation and proof and the method of laboratory experiment.

If we portray mathematical modelling as a version of the method of mathematical postulation and proof … models can indeed be truth-makers about that restricted and mathematical small world … But whether they can come to valid conclusions about the behaviour of their actual economic universe is a much more difficult problem …

If we make the alternative comparison with laboratory experiments … the important question of whether the results of the experiment on the model can be transferred to the world that the model represents can be considered an inference problem …

Of course, model experiments in economics are usually pen-and-paper, calculator, or computer, experiments on a model world or an analogical world … not laboratory experiments on the real world …

The experiments made on models are different from the experiments made in the laboratory … because model experiments are less powerful as an epistemic genre. It does make a difference to the power and scope of inference that the model experiment is carried out on a pen-and-paper represenation, that is on the world in the model, not on the world itself.

Now, I think it is but fair to say that field experiments, model experiments and laboratory experiments, are basically facing the same problems in terms of generalizability and external validity. Read more…

The representative agent — a theoretical cul-de-sac

May 16, 2020 5 comments

from Lars Syll

anwar-shaikh-1Rigorous macroeconomics must therefore ground its analysis in individual behavior, recognize that only a few key variables carry over to the aggregate level, and generally posit distinct functional forms at the macro level. Keynes and Kalecki are eminent examples of this. Keynes builds his analysis of aggregate consumption on personal income and a variety of subjective and objective factors that influence individual savings (non-consumption) behavior. He is also careful to note that institutional and organizational factors play an important role. Despite all of this, he only requires that aggregate real consumption be a function of real income with the property that the marginal propensity to consume be less than one. Kalecki’s theory of price follows a similar path from micro to macro. It begins with an equation for the price of an individual firm which depends on the relative size of the firm, its sales promotion apparatus, the union power of its employees. Yet the industry price level has a different function form, tied to a reduced set of variables consisting of the industry’s average unit costs and average degree of monopoly power (through which all others variables are expressed) … Similar paths can be traced in Marx, Schumpeter, and many other great economists. Macroeconomic analysis was already rigorous before it was diverted by neoclassical analysis into the theoretical cul-de-sac of a hyperrational representative agent.

Since there will generally be many micro foundations consistent with some given aggregate pattern, empirical support for an aggregate hypothesis does not constitute empirical support for any particular micro foundation … The question, of course, is why on earth would one insist on deriving policy implications from foundations that deliberately misrepresent actual individual behavior?

Anwar Shaikh

Yes indeed, why would one derive policy implications from something that is nothing but a convenient untruth? Read more…

Crazy econometricians

May 14, 2020 1 comment

from Lars Syll

With the-dappled-worlda few notable exceptions, such as the planetary systems, our most beautiful and exact applications of the laws of physics are all within the entirely artificial and precisely constrained environment of the modern laboratory … Haavelmo remarks that physicists are very clever. They confine their predictions to the outcomes of their experiments. They do not try to predict the course of a rock in the mountains and trace the development of the avalanche. It is only the crazy econometrician who tries to do that, he says.