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Chicago economics — garbage in, gospel out

May 20, 2019 2 comments

from Lars Syll

Savings-and-InvestmentsEvery dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.

John Cochrane

The problem with this view is, of course, that it is utter and complete nonsense!

What Cochrane is reiterating here is nothing but Say’s law, basically saying that savings are equal to investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. Read more…

Don’t think like a freak

May 17, 2019 4 comments

from Lars Syll

In their latest book, Think Like a Freak, co-authors Steven Levitt and Stephen Dubner tell a story about meeting David Cameron in London before he was Prime Minister. They told him that the U.K.’s National Health Service — free, unlimited, lifetime health care — was laudable but didn’t make practical sense.

“We tried to make our point with a thought experiment,” they write …

1643.Lebowski.jpg-610x0Rather than seeing the humor and realizing that health care is just like any other part of the economy, Cameron abruptly ended the meeting, demonstrating one of the risks of ‘thinking like a freak’ …

So what do Dubner and Levitt make of the Affordable Care Act, aka Obamacare?

“I do not think it’s a good approach at all,” says Levitt … Purchasing health care is almost exactly like purchasing any other good in the economy …”   Aaron Task

Portraying health care as “just like any other part of the economy” is, of course, nothing but total horseshit. Read more…

General equilibrium — economics as ideology

May 16, 2019 8 comments

from Lars Syll

what-ifAlthough I never believed it when I was young and held scholars in great respect, it does seem to be the case that ideology plays a large role in economics. How else to explain Chicago’s acceptance of not only general equilibrium but a particularly simplified version of it as ‘true’ or as a good enough approximation to the truth? Or how to explain the belief that the only correct models are linear and that the von Neuman prices are those to which actual prices converge pretty smartly? This belief unites Chicago and the Classicals; both think that the ‘long-run’ is the appropriate period in which to carry out analysis. There is no empirical or theoretical proof of the correctness of this. But both camps want to make an ideological point. To my mind that is a pity since clearly it reduces the credibility of the subject and its practitioners.

Frank Hahn

I can’t but agree. You could, of course, as Brad DeLong has asserted, consider modern mainstream economics to be in fine shape “as long as it is understood as the ideological and substantive legitimating doctrine of the political theory of possessive individualism” and if you Read more…

The MMT debate

May 15, 2019 16 comments

from Lars Syll

Modern economics is sick

May 12, 2019 6 comments

from Lars Syll

mark-blaug-900pxModern economics is sick. Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences for understanding the economic world. Economists have converted the subject into a sort of social mathematics in which analytical rigour is everything and practical relevance is nothing …

If there is such a thing as “original sin” in economic methodology, it is the worship of the idol of the mathematical rigour invented by Arrow and Debreu in 1954 …

The result of all this is that we now understand almost less of how actual markets work than did Adam Smith or even Léon Walras … We have even forgotten that markets adjust as often in terms of quantities rather than prices, as in labour markets and customer commodity markets, as Alfred Marshall knew very well but Walras overlooked; so well have we forgotten that fact that a whole branch of economics sprang up in the 1960s and 70s to provide ‘microfoundations’ for Keynesian macroeconomics​ …

Indeed, much of modern microeconomics might be fairly described as a kind of geography that consists entirely of images of cities but providing no maps of how to reach a city either from any other city or from the countryside.

Mark Blaug

Mark Blaug (1927-2011) did more than any other economist to establish the philosophy and methodology of economics a respected subfield within economics. Blaug’s The methodology of economics (1980) is still a landmark — and the first textbook on economic methodology yours truly had to read as a student. Read more…

Debunking NAIRU

May 10, 2019 7 comments

from Lars Syll

powemp3In our extended NAIRU model, labor productivity growth is included in the wage bargaining process … The logical consequence of this broadening of the theoretical canvas has been that the NAIRU becomes endogenous itself and ceases to be an attractor — Milton Friedman’s natural, stable and timeless equilibrium point from which the system cannot permanently deviate. In our model, a deviation from the initial equilibrium affects not only wages and prices (keeping the rest of the system unchanged) but also demand, technology, workers’ motivation, and work intensity; as a result, productivity growth and ultimately equilibrium unemployment will change. There is in other words, nothing natural or inescapable about equilibrium unemployment, as is Friedman’s presumption, following Wicksell; rather, the NAIRU is a social construct, fluctuating in response to fiscal and monetary policies and labor market interventions. Its ephemeral (rather than structural) nature may explain why the best economists working on the NAIRU have persistently failed to agree on how high the NAIRU actually is and how to estimate it.

Servaas Storm & C. W. M. Naastepad

Many politicians and economists subscribe to the NAIRU story and its policy implication that attempts to promote full employment is doomed to fail since governments and central banks can’t push unemployment below the critical NAIRU threshold without causing harmful runaway inflation. Read more…

Revisiting the foundations of randomness and probability

May 7, 2019 9 comments

from Lars Syll

dudeRegarding models as metaphors leads to a radically different view regarding the interpretation of probability. This view has substantial advantages over conventional interpretations …

Probability does not exist in the real world. We must search for her in the Platonic world of ideals. We have shown that the interpretation of probability as a metaphor leads to several substantial changes in interpretations and justifications for conventional frequentist procedures. These changes remove several standard objections which have been made to these procedures. Thus our model seems to offer a good foundation for re-building our understanding of how probability should be interpreted in real world applications. More generally, we have also shown that regarding scientific models as metaphors resolves several puzzles in the philosophy of science.

Asad Zaman

Although yours truly has to confess of not being totally convinced that redefining​ probability as a metaphor is the right way to go forward on these foundational issues, Zaman’s article​ sure raises some very interesting questions on the way the concepts of randomness and probability are used in economics. Read more…

Keynes’ General Theory at 80 – lessons learned and lost

May 3, 2019 8 comments

from Lars Syll

A couple of years ago — when visiting one of Helsinki’s many nice cafés and restaurants — yours truly read the following inscription on a mirror and thought Keynes must have been here … s-l300

Anyhow — slides from yours truly’s keynote presentation at the Kalevi Sorsa Foundation celebration of the 80th anniversary of Keynes’ General Theory is available here.

Why do women still earn less than men?

May 2, 2019 2 comments

from Lars Syll

Spending the morning going through Francine Blau’s and Lawrence Kahn’s JEL survey of modern research on the gender wage gap, yours truly was struck almost immediately how little that research really has accomplished in terms of explaining gender wage discrimination. With all the heavy regression and econometric alchemy used, wage discrimination is somehow more or less conjured away …

Trying to reduce the risk of having established only ‘spurious relations’ when dealing with observational data, statisticians and econometricians standardly add control variables. The hope is that one thereby will be able to make more reliable causal inferences. But — as Keynes showed already back in the 1930s when criticizing statistical-econometric applications of regression analysis — if you do not manage to get hold of all potential confounding factors, the model risks producing estimates of the variable of interest that are even worse than models without any control variables at all. Conclusion: think twice before you simply include ‘control variables’ in your models!

That women are working in different areas than men, and have other educations than men, etc., etc., are not only the result of ‘free choices’ causing a gender wage gap, but actually to a large degree itself the consequence of discrimination. Read more…

On the use of logic and mathematics in economics

May 1, 2019 17 comments

from Lars Syll

1200-453314475-deductive-reasoning-example-4Logic, n. The art of thinking and reasoning in strict accordance with the limitations and incapacities of the human misunderstanding. The basic of logic is the syllogism, consisting of a major and a minor premise and a conclusion – thus:

Major Premise: Sixty men can do a piece of work sixty times as quickly as one man.

Minor Premise: One man can dig a post-hole in sixty seconds; Therefore-
Conclusion: Sixty men can dig a post-hole in one second.

This may be called syllogism arithmetical, in which, by combining logic and mathematics, we obtain a double certainty and are twice blessed.

Ambrose Bierce The Unabridged Devil’s Dictionary

In mainstream economics, both logic and mathematics are used extensively. And most mainstream economists sure look upon themselves as “twice blessed.”

Is there any scientific ground for that blessedness? None whatsoever! Read more…

Paul Davidson and yours truly on Keynesian and Knightian​ uncertainty

April 28, 2019 2 comments

from Lars Syll

PaulA couple of years ago yours truly had an interesting discussion — on the Real-World Economics Review Blog — with Paul Davidson on ergodicity and the differences between Knight and Keynes re uncertainty. It all started with me commenting on Davidson’s article Is economics a science? Should economics be rigorous? :

LPS: Read more…

On the impossibility of objectivity in science

April 27, 2019 6 comments

from Lars Syll

objOperations Research does not incorporate the arts and humanities largely because of its distorted belief that doing so would reduce its objectivity, a misconception it shares with much of science. The meaning of objectivity is less clear than that of optimality. Nevertheless, most scientists believe it is a good thing. They also believe that objectivity in research requires the exclusion of any ethical-moral values held by the researchers. We need not argue the desirability of objectivity so conceived; it is not possible.

Most, if not all, scientific inquiries involve either testing hypotheses or estimating the values of variables. Both of these procedures necessarily involve balancing two types of error. Hypotheses-testing procedures require use of a significance level, the significance of which appears to escape most scientists. Their choice of such a level is usually made unconsciously, dictated by convention. This level, as many of you know, is a probability of rejecting a hypothesis when it is true. Naturally, we would like to make this probability as small as possible. Unfortunately, however, the lower we set this probability, the higher is the probability of accepting a hypothesis when it is false. Therefore, choice of a significance level involves a value judgment by the scientist about the relative seriousness of these two types of error. The fact that he usually makes this value judgment unconsciously does not attest to his objectivity, but to his ignorance. Read more…

Vickrey on deficits and obfuscatory financial rectitude

April 24, 2019 7 comments

from Lars Syll

wvickreyWe are not going to get out of the economic doldrums as long as we continue to be obsessed with the unreasoned ideological goal of reducing the so-called deficit. The ‘deficit’ is not an economic sin but an economic necessity […]

The administration is trying to bring the Titanic into harbor with a canoe paddle, while Congress is arguing over whether to use an oar or a paddle, and the Perot’s and budget balancers seem eager to lash the helm hard-a-starboard towards the iceberg. Some of the argument seems to be over which foot is the better one to shoot ourselves in. We have the resources in terms of idle manpower and idle plants to do so much, while the preachers of austerity, most of whom are in little danger of themselves suffering any serious consequences, keep telling us to tighten our belts and refrain from using the resources that lay idle all around us.

Alexander Hamilton once wrote “A national debt, if it be not excessive, would be for us a national treasure.” William Jennings Bryan used to declaim, “You shall not crucify mankind upon a cross of gold.” Today’s cross is not made of gold, but is concocted of a web of obfuscatory financial rectitude from which human values have been expunged.

William Vickrey

This — really — should not be so hard to understand. Read more…

Is public debt — really — a burden on future generations?

April 22, 2019 6 comments

from Lars Syll

The real issue … is not whether it is possible to shift a burden (either in the present or in the future) from some people to other people, but whether it is possible by internal borrowing to shift a real burden from the present generation, in the sense of the present economy as a whole, onto a future generation, in the sense of the future economy as a whole … The latter is impossible because a project that uses up resources needs the resources at the time that it uses them up, and not before or after.

204545_600This basic proposition is true of all projects that use up resources … The proposition holds as long as the project​ is financed internally, so that there are no outsiders to take over the current burden by providing the resources and to hand back the burden in the future by asking for the return of the resources.
It is necessary for economists to keep repeating​ this basic proposition because one of their main duties is to keep warning people against the fallacy of composition. To anyone who sees only a part of the economy it does seem possible to borrow from the future because he tends to assume that what is true of the part is true of the whole.

Abba Lerner

Public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Read more…

Radical uncertainty — a question of economic methodology

April 13, 2019 39 comments

from Lars Syll

Between 1920 and 1950, a debate took place which defined the future of economics in the second half of the 20th century. On one side were John Maynard Keynes and Frank Knight; on the other, Frank Ramsey and Jimmie Savage.

UnknownKnight and Keynes believed in the ubiquity of “radical uncertainty”. Not only did we not know what was going to happen, we had a very limited ability to even describe the things that might happen. They distinguished risk, which could be described with the aid of probabilities, from real uncertainty—which could not. In Knight’s world, such uncertainties gave rise to the profit opportunities which were the dynamic of a capitalist economy. Keynes saw these uncertainties as at the root of the inevitable instability in such economies.

Their opponents insisted instead that all uncertainties could be described probabilistically. And their opponents won, not least because their probabilistic world was convenient: it could be described axiomatically and mathematically.

It is difficult to exaggerate the practical consequence of the outcome of that technical argument. To acknowledge the role of radical uncertainty is to knock away the foundations of finance theory and much modern macroeconomics. But the reigning consensus is beset with glaring weaknesses. Keynes and Knight were right, and their opponents wrong. And recognition of that is a necessary preliminary to the rebuilding of a more relevant economic theory.

John Kay

Many economists have over time tried to diagnose what’s the problem behind the ‘intellectual poverty’ that characterizes modern mainstream economics. Read more…

Sweden as a case of MMT

April 11, 2019 5 comments

from Lars Syll

According to the Swedish government official website, “Historically, the Swedish economy suffered from low growth and high inflation,” which the nation overcame with “inventive and courageous reforms” that “succeeded in maintaining control over public spending.

“First, in 1996, a ceiling for public spending was introduced. This was accompanied by the addition of the ‘surplus goal’ … for the government budget.”

dumstrut​Swedish government spending reforms were the consequence of a financial crisis in the early 1990s that saw the economy collapse into three years of recession and the nationalization of two major banks …

From 1971 to the 1990s crisis, Sweden experienced a mash-up of Green New Deal extreme government spending and “Modern Monetary Theory” loose money and enormous deficits. Government spending rose to over 70 percent and deficits rose to over 10 percent of GDP, while inflation soared to double-digit rates.

Sweden has trod the ground U.S. progressives wish to cover, and the only gains came when the social democratic fantasy was unwound.

Douglas Carr / The Hill

Now, this is one of the lousiest pieces of history revisionism I’ve ever come across.  Read more…

The real debt problem

April 9, 2019 6 comments

from Lars Syll

The ad nauseam repeated claim that our public debt is excessive and that we have to balance the public budget is nothing but absolute nonsense. The harder politicians — usually on the advice of mainstream establishment economists — try to achieve balanced budgets for the public sector, the less likely they are to succeed in their endeavour.darling-let-s-get-deeply-into-debt And the more the citizens have to pay for the concomitant austerity policies these wrong-headed politicians and economists recommend as ‘the sole solution.’

One of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external … A variant of the false analogy is the declaration that national debt puts an unfair burden on our children, who are thereby made to pay for our extravagances. Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them all together​ they will no more be impoverished by making the repayments than they will be enriched by receiving them.

Abba Lerner The Burden of the National Debt (1948)

Few issues in politics and economics are nowadays more discussed — and less understood — than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the — especially macroeconomic — calamities and evils a large public debt is supposed to result in — unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc. Read more…

Mainstream theories of income distribution

April 7, 2019 8 comments

from Lars Syll

rigged_coverMarkets are never just given. Neither God nor nature hands us a worked-out set of rules determining the way property relations are defined, contracts are enforced, or macroeconomic policy is implemented. These matters are determined by policy choices. The elites have written these rules to redistribute income upward. Needless to say, they are not eager to have the rules rewritten — which means they also have no interest in even having them discussed.

But for progressive change to succeed, these rules must be addressed. While modest tweaks to tax and transfer policies can ameliorate the harm done by a regressive market structure, their effect will be limited. The complaint of conservatives — that tampering with market outcomes leads to inefficiencies and unintended outcomes — is largely correct, even if they may exaggerate the size of the distortions from policy interventions. Rather than tinker with badly designed rules, it is far more important to rewrite the rules so that markets lead to progressive and productive outcomes in which the benefits of economic growth and improving technology are broadly shared.

As has become abundantly clear to students of economics these days, mainstream textbook economics has pretty little in common with the real world in which we actually live. Read more…

The randomistas revolution

April 6, 2019 1 comment

from Lars Syll

RandomistasIn his new history of experimental social science — Randomistas: How radical researchers are changing our world — Andrew Leigh gives an introduction to the RCT (randomized controlled trial) method for conducting experiments in medicine, psychology, development economics, and policy evaluation. Although it mentions there are critiques that can be waged against it, the author does not let that shadow his overwhelmingly enthusiastic view on RCT.

Among mainstream economists, this uncritical attitude towards RCTs has become standard. Nowadays many mainstream economists maintain that ‘imaginative empirical methods’ — such as natural experiments, field experiments, lab experiments, RCTs — can help us to answer questions concerning the external validity of economic models. In their view, they are more or less tests of ‘an underlying economic model’ and enable economists to make the right selection from the ever-expanding ‘collection of potentially applicable models.’

When looked at carefully, however, there are in fact few real reasons to share this optimism on the alleged ’empirical turn’ in economics. Read more…

Economics becomes more precise and rigorous — and totally useless

April 4, 2019 41 comments

from Lars Syll

Nowadays there is almost no place whatsoever in economics education for courses in the history of economic thought and economic methodology. The standard view among mainstream economists is that students shouldn’t think about what they are doing, but just do it.

This is deeply worrying.

A science that doesn’t self-reflect and asks important methodological and science-theoretical questions about the own activity, is a science in dire straits. The main reason why mainstream economics has increasingly become more and more useless as a public policy instrument is to be found in its perverted view on the value of methodology.

How did we end up in this sad state?

Philip Mirowski gives the following answer:

philAfter a brief flirtation in the 1960s and 1970s, the grandees of the economics profession took it upon themselves to express openly their disdain and revulsion for the types of self-reflection practiced by ‘methodologists’ and historians of economics, and to go out of their way to prevent those so inclined from occupying any tenured foothold in reputable economics departments …

Once this policy was put in place, and then algorithmic journal rankings were used to deny hiring and promotion at the commanding heights of economics to those with methodological leanings. Consequently, the grey-beards summarily expelled both philosophy and history from the graduate economics curriculum; and then, they chased it out of the undergraduate curriculum as well.

Read more…