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Mainstream economics — a harmful fantasy

December 1, 2021 14 comments

from Lars Syll

The New Economics: A Manifesto: Keen, Steve: 9781509545285: Public Policy: Amazon CanadaAnyone who accepts the Neoclassical definition of ‘rational’ has, to some significant degree, lost touch with reality. So, I was expecting an ‘irrational’ reaction from this young zealot to my talk …

He tried to engage me in further debate after the session, and shouted ‘But we have to make some simplifying assumptions!’ at me as I left the seminar room. My riposte, cast over my receding shoulder, was ‘Mate, you have to learn the difference between a simplifying assumption and a fantasy’.

Many mainstream economists working in the field of economic theory think that their task is to give us analytical truths. That is great — from a mathematical and formal logical point of view. In science, however, it is rather uninteresting and totally uninformative! The framework of the analysis is too narrow. Even if economic theory gives us ‘logical’ truths, that is not what we are looking for as scientists. We are interested in finding truths that give us new information and knowledge of the world in which we live. Read more…

Rational expectations — the triumph of ideology over science

November 29, 2021 7 comments

from Lars Syll

Senate Banking Subcommittee On Financial Institutions Hearing With Stiglitz For more than 20 years, economists were enthralled by so-called “rational expectations” models which assumed that all participants have the same (if not perfect) information and act perfectly rationally, that markets are perfectly efficient, that unemployment never exists (except when caused by greedy unions or government minimum wages), and where there is never any credit rationing.

That such models prevailed, especially in America’s graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science. Unfortunately, students of these graduate programmes now act as policymakers in many countries, and are trying to implement programmes based on the ideas that have come to be called market fundamentalism … Good science recognises its limitations, but the prophets of rational expectations have usually shown no such modesty.

Joseph Stiglitz 

Read more…

The fatal flaw of mathematics

November 27, 2021 11 comments

from Lars Syll

Gödel’s incompleteness theorems raise important questions about the foundations of mathematics.

The most important concerns the question of how to select the specific systems of axioms that mathematics are supposed to be founded on. Gödel’s theorems irrevocably show that no matter what system is chosen, there will always have to be other axioms to prove previously unproved truths.

This, of course, ought to be of paramount interest for those mainstream economists who still adhere to the dream of constructing a deductive-axiomatic economics with analytic truths that do not require empirical verification. Since Gödel showed that any complex axiomatic system is undecidable and incomplete, any such deductive-axiomatic economics will always consist of some undecidable statements. When not even being able to fulfil the dream of a complete and consistent axiomatic foundation for mathematics, it’s totally incomprehensible that some people still think that could be achieved for economics. Read more…

What killed macroeconomics?

November 25, 2021 13 comments

from Lars Syll

The COVID-19 pandemic impelled governments to fall back on “fiscal Keynesianism,” because there was no way that just increasing the quantity of money could lead to the reopening of businesses that were prevented by law from doing so. Fiscal Keynesianism in the big lockdown meant issuing Treasury payments to people prevented from working.risk vs uncertainty

But now that the economy has reopened, the practical rationale for monetary and fiscal expansion has disappeared. Mainstream financial commentators believe the economy will bounce back as if nothing had happened. After all, economies fall into foxholes no more often than individuals normally do. So, the time has come to tighten both monetary and fiscal policy, because continued expansion of either or both will lead only to a “surge in inflation.” We can all breathe a sigh of relief; the trauma is over, and normal life without unemployment will resume.

Monetary policy works in theory but not in practice; fiscal policy works in practice but not in theory. Fiscal Keynesianism is still a policy in search of a theory. Read more…

More than economists

November 22, 2021 3 comments

from Lars Syll

Veblen, Keynes, and Hirschman were more than economists because they practiced their economics from a standpoint outside the profession, using it to criticize not only the assumption of rational self-interest, but also the consequences of economists’ indifference to “preferences.” Veblen’s standpoint was explicitly religious; he was still of a believing generation. Keynes, too, was an ethicist. G.E. Moore’s Principia Ethica remained what he called his “religion under the surface.” Hirschman wanted a “moral social science” that would be continually sensitive to the ethical content of its analysis …

Prof. Lord Robert Skidelsky (C. 1953-58), OB of the Month, July 2012 - Old  Brightonians - The Alumni of Brighton CollegeThese three economists’ frequently mocking style was their way of establishing their distance from their profession. Their irony was not ornamental but actually shaped the substance of their arguments. This style limited their impact on economics, but made them highly influential outside it, because critics of economics sensed something transgressive about them.

Systematic thinkers close a subject, leaving their followers with “normal” science to fill up the learned journals. Fertile ones open up their disciplines to critical scrutiny, for which they rarely get credit.

Robert Skidelsky

Rethinking economics

November 15, 2021 15 comments

from Lars Syll

marquesThe incorporation of new information makes sense only if the future is to be similar to the past. Any kind of empirical test, whatever form it adopts, will not make sense, however, if the world is uncertain because in such a world induction does not work. Past experience is not a useful guide to guess the future in these conditions (it only serves when the future, somehow, is already implicit in the present) … I believe the only way to use past experience is to assume that the world is repetitive. In a non-repetitive world in which relevant novelties unexpectedly arise testing is irrelevant …

Conceiving economic processes like sequences of events in which uncertainty reigns, where consequently there are “no laws”, nor “invariants” or “mechanisms” to discover, the kind of learning that experiments or last experience provide is of no use for the future, because it eliminates innovation and creativity and does not take into account the arboreal character and the open-ended nature of the economic process … However, as said before, we can gather precise information, restricted in space and time (data). But, what is the purpose of obtaining this sort of information if uncertainty about future events prevails? … The problem is that taking uncertainty seriously puts in question the relevance the data obtained by means of testing or experimentation has for future situations.

Marqués’ book is a serious challenge to much of mainstream economic thinking and its methodological and philosophical underpinnings. A must-read for anyone interested in the foundations of economic theory, showing how far-reaching the effects of taking Keynes’ concept of genuine uncertainty really are. Read more…

Making sense of economics

November 9, 2021 4 comments

from Lars Syll

The Assumptions Economists Make eBook : Schlefer, Jonathan: Kindle Store -  Amazon.comRobert Lucas, one of the most creative model-builders, tells a story about his undergraduate encounter with Gregor Mendel’s model of genetic inheritance. He liked the Mendelian model—“you could work out predictions that would surprise you”—though not the lab work breeding fruit flies to test it. (Economists are not big on mucking around in the real world.) Over the weekend, he enjoyed writing a paper comparing the model’s predictions with the class’s experimental results. When a friend returned from a weekend away without having written the required paper, Lucas agreed to let the friend borrow from his. The friend remarked that Lucas had forgotten to discuss how “crossing-over” could explain the substantial discrepancies between the model and experimental results. “Crossing-over is b—s—,” Lucas told his friend, a “label for our ignorance.” He kept his paper’s focus on the unadorned Mendelian model, and added a section arguing that experimental errors could explain the discrepancies. His friend instead appended a section on crossing-over. His friend got an A. Lucas got a C-minus, with a comment: “This is a good report, but you forgot about crossing-over.” Crossing-over is actually a fact; it occurs when a portion of one parent gene is incorporated in the other parent gene. But Lucas’s anecdote brilliantly illustrates the powerful temptation to model-builders—across the ideological spectrum—of ignoring inconvenient facts that don’t fit their models.

Economics may be an informative tool for research. But if its practitioners do not investigate and make an effort of providing a justification for the credibility of the assumptions on which they erect their building, it will not fulfil its task. There is a gap between its aspirations and its accomplishments, and without more supportive evidence to substantiate its claims, critics will continue to consider its ultimate arguments as a mixture of rather unhelpful metaphors and metaphysics. Read more…

Wealth inequality explained

November 4, 2021 5 comments

from Lars Syll

The logic of financial markets

November 2, 2021 3 comments

from Lars Syll

beautyProfessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each​ competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgement are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

J M Keynes General Theory

Still the best description of the logic of financial markets. Professional money management is at heart a guessing game where investors try to guess what other investors guess about other investors guess about the future …

On Diane Coyle’s Cogs and Monsters

October 30, 2021 2 comments

from Lars Syll

Cogs and Monsters: What Economics Is, and What It Should Be: Coyle, Diane:  9780691210599: Amazon.com: BooksMacroeconomists seem to me the biggest offenders in not taking such empirical issues (of practical data handling) seriously enough. This might sound like sheer contrarianism given that macroeconomists are constantly wielding data; after all, their business is analysing the behaviour of the whole economy and forecasting its future path. My concerns are, first, that too few think about the vast uncertainty associated with the statistics they download and use; and secondly, how difficult it is to draw definitive conclusions about economy-wide phenomena, the aggregated outcomes of choice made by millions of businesses and consumers interacting in specific historical and geographic contexts, and social and political relations.

There’s a lot in this new book by Diane Coyle that I like, and I highly recommend reading it.

Unfortunately, there are also some things in it I find very hard to swallow.

A recurrent theme in the book — as in her earlier The Soulful Science (2010) — is Coyle’s view that much of the critique waged against mainstream economics from heterodox economists like yours truly and others are more or less of a straw-man kind and that we haven’t really understood the fact that economics “has changed a lot in two decades.”

One example she refers to — to underpin her view — is the development of the ‘new’ behavioural, ‘experimental,’ and ’empirical turn’ in economics.

So let’s take a look at that and what some of us ‘heterodox’ economists really have had to say about it. Read more…

Of what use are RCTs?

October 27, 2021 4 comments

from Lars Syll

nancyIn her interesting Pufendorf lectures Nancy Cartwright presents a theory of evidence and explains why randomized controlled trials (RCTs) are not at all the “gold standard” that it has lately often been portrayed as. As yours truly has repeatedly argued on this blog (e.g. here and here), RCTs usually do not provide evidence that their results are exportable to other target systems. The almost religious belief with which its advocates portray it, cannot hide the fact that RCTs cannot be taken for granted to give generalizable results. That something works somewhere is no warranty for it to work for us or even that it works generally.

Milton Friedman — an intellectually dishonest peddler of neoliberalism

October 24, 2021 10 comments

from Lars Syll

Last Friday, November 9, saw the big “Milton Friedman Centennial” celebration at the University of Chicago’s Becker Friedman Institute for Research in Economics. It was a big day for fans of one of the Founding Fathers of neoliberal/libertarian  free-market ideology …

One episode in Milton Friedman’s career not celebrated (or even acknowledged) at last week’s centennial took place in 1946, the same year Friedman began peddling his pro-business “free market economics” ideology.

According to Congressional hearings on illegal lobbying activities ’46 was the year that Milton Friedman and his U Chicago cohort George Stigler arranged an under-the-table deal with a Washington lobbying executive to pump out covert propaganda for the national real estate lobby in exchange for a hefty payout, the terms of which were never meant to be released to the public.

The arrangement between Friedman and Stigler with the Washington real estate lobbyist was finally revealed during he Buchanan Committee hearings on illegal lobbying activities in 1950. But then it was almost entirely forgotten, including apparently by those celebrating the “Milton Friedman Centennial” last week in Chicago.

Mark Ames

David Card and the minimum wage myth

October 19, 2021 18 comments

from Lars Syll

Nobel Prize Economist David Card on testing Econ 101 theories in the real  world - MarketplaceBack in 1992, New Jersey raised the minimum wage by 18 per cent while its neighbour state, Pennsylvania, left its minimum wage unchanged. Unemployment in New Jersey should — according to mainstream economic theory’s competitive model — have increased relative to Pennsylvania. However, when ‘Nobel prize’ winning economist David Card and his colleague Alan Krueger gathered information on fast food restaurants in the two states to check what employment effects the minimum wage really have — using a basic difference-in-differences approach — it turned out that unemployment had actually decreased in New Jersey relative to that in Pennsylvania. Counter to mainstream theory we had an anomalous case of a backward-sloping supply curve.

Lo and behold!

But of course — when facts and theory don’t agree, it’s the facts that have to be wrong … Read more…

Raising Keynes

October 10, 2021 2 comments

from Lars Syll

The defeat and suppression of the classical perspective — with its evolutionary, institutionalist, and developmental descendants — cleared the way for a dogmatic economics that exalted self-regulating competitive markets …

As we have seen, this perspective soon ran into serious — but temporary — difficulties with the Great Depression, mass unemployment, and the rise of Keynes, whose theory is revived in Harvard University economist Stephen A. Marglin’s Raising Keynes …

Raising Keynes: A Twenty-First-Century General Theory (9780674971028):  Stephen A. Marglin - BiblioVaultMarglin’s basic argument is stated in two parts. First, he focuses on the “Keynesian first-pass model” in the context of the static, general equilibrium framework favored by John Hicks (this is known in textbooks as the IS-LM model). He concludes that within that framework, Keynes’s theory is reduced to dealing with “frictions and rigidities,” implying that “if only” markets were competitive in the neoclassical mode, mass unemployment could not exist …

In his “second-pass model,” Marglin resets Keynes in a dynamic frame, dealing with events and changes that occur through time … Like Keynes, Marglin argues, correctly, that in this world, persistent involuntary unemployment cannot be resolved by cutting wages and breaking unions, even if you can get away with doing these things. Here, Marglin is, in effect, restating what Keynes’s closest collaborators always argued. My first encounter with Robinson came in a University of Cambridge lecture hall in 1974. She had been sitting in to heckle Frank Hahn, one of the leading neoclassicists there at the time. As undergraduates fled the scene, I introduced myself and she invited me to lunch. Once seated in the buttery of the University Library, she started in: “You can’t put time on the IS-LM diagram. Time comes out of the blackboard.” I had no idea what she was talking about, but she certainly did (and now so do I) …

Marglin has taken 80 years of neoclassical distortions of Keynes, presented them with great clarity in their own language, and then pounded them into dust, pushing the detritus back into the faces of the high priests of the neoclassical synthesis, the New Keynesians, and the New Classical Economists. Raising Keynes issues a challenge that they would be cowardly to refuse – which is not to suggest that they won’t do their best to ignore it.

James K. Galbraith

Again — as so often — it turns out that when we economists disagree it ultimately boils down to methodology . Read more…

Mainstream economics — the poverty of fictional story-telling

October 6, 2021 4 comments

from Lars Syll

Why sci-fi and economics have more in common than you think | New HumanistOne of the limitations with economics is the restricted possibility to perform experiments, forcing it to mainly rely on observational studies for knowledge of real-world economies.

But still — the idea of performing laboratory experiments holds a firm grip of our wish to discover (causal) relationships between economic ‘variables.’If we only could isolate and manipulate variables in controlled environments, we would probably find ourselves in a situation where we with greater ‘rigour’ and ‘precision’ could describe, predict, or explain economic happenings in terms of ‘structural’ causes, ‘parameter’ values of relevant variables, and economic ‘laws.’

Galileo Galilei’s experiments are often held as exemplary for how to perform experiments to learn something about the real world. Galileo’s heavy balls dropping from the tower of Pisa, confirmed that the distance an object falls is proportional to the square of time and that this law (empirical regularity) of falling bodies could be applicable outside a vacuum tube when e. g. air existence is negligible. Read more…

Reinstating the gold standard

September 29, 2021 3 comments

from Lars Syll

Ninety years ago Keynes could congratulate Great Britain on finally having got rid of the biggest ”barbarous relic” of his time — the gold standard. He lamented that

advocates of the ancient standard do not observe how remote it now is from the spirit and the requirement of the age … [T]he long age of Commodity Money has at last passed away before the age of Representative Money. Gold has ceased to be a coin, a hoard, a tangible claim to wealth … It has become a much more abstract thing – just a standard of value; and it only keeps this nominal status by being handed round from time to time in quite small quantities amongst a group of Central Banks.

goldEnding the use of fiat money guaranteed by promises for currencies once more backed by gold is not the way out of the present economic crisis. Far from being the sole prophylactic against the alleged problems of fiat money, as the ‘gold bugs’ maintain, a return to gold would only make things far worse. So yours truly — just as Keynes did — most certainly rejects any proposals for restoring the gold standard.

The ‘gold bugs’ seem to forget that we actually have tried the gold standard before – in the era more or less between 1870 and 1930 – and with disastrous results! Read more…

‘New Keynesian’ macroeconomics — worse than useless

September 27, 2021 Leave a comment

from Lars Syll

Macroeconomic models may be an informative tool for research. But if practitioners of ‘New Keynesian’ macroeconomics do not investigate and make an effort of providing a justification for the credibility of the assumptions on which they erect their building, it will not fulfill its tasks. There is a gap between its aspirations and its accomplishments, and without more supportive evidence to substantiate its claims, critics will continue to consider its ultimate argument as a mixture of rather unhelpful metaphors and metaphysics. Maintaining that economics is a science in the ‘true knowledge’ business, yours truly remains a skeptic of the pretenses and aspirations of ‘New Keynesian’ macroeconomics. So far, I cannot really see that it has yielded very much in terms of realistic and relevant economic knowledge.

kKeynes basically argued that it was inadmissible to project history on the future. Consequently an economic policy cannot presuppose that what has worked before, will continue to do so in the future. That macroeconomic models could get hold of correlations between different ‘variables’ was not enough. If they could not get at the causal structure that generated the data, they were not really ‘identified.’ Dynamic stochastic general euilibrium (DSGE) macroeconomists — including ‘New Keynesians’ — has drawn the conclusion that the problem with unstable relations is to construct models with clear microfoundations where forward-looking optimizing individuals and robust, deep, behavioural parameters are seen to be stable even to changes in economic policies. As yours truly has argued in a couple of post (e. g. here and here), this, however, is a dead end. Read more…

Revealed preference theory — an empty tautology

September 22, 2021 2 comments

from Lars Syll

timthumbThe experiment reported here was designed to reflect the fact that revealed preference theory is concerned with hypothetical choices rather than actual choices over time. In contrast to earlier experimental studies, the possibility that the different choices are made under different preference patterns can almost be ruled out. We find a considerable number of violations of the revealed preference axioms, which contradicts the neoclassical theory of the consumer maximising utility subject to a given budget constraint. We should therefore pay closer attention to the limits of this theory as a description of how people actually behave, i.e. as a positive theory of consumer behaviour. Recognising these limits, we economists should perhaps be a little more modest in our ‘imperialist ambitions’ of explaining non-market behaviour by economic principles.

Reinhard Sippel 

Sippel’s experiment showed considerable violations of the revealed preference axioms and that from a descriptive point of view — as a theory of consumer behaviour — the revealed preference theory was of a very limited value.

The neoclassical theory of consumer behaviour has been developed in great part as an attempt to justify the idea of a downward-sloping demand curve. Read more…

Econometrics — a second-best explanatory practice

September 18, 2021 4 comments

from Lars Syll

Consider two elections, A and B. For each of them, identify the events that cause a given percentage of voters to turn out. Once we have thus explained the turnout in election A and the turnout in election B, the explanation of the difference (if any) follows automatically, as a by-product. As a bonus, we might be able to explain whether identical turnouts in A and B are accidental, that is, due to differences that exactly offset each other, or not. In practice, this procedure might be too demanding. The data or he available theories might not allow us to explain the phenomena “in and of themselves.” We should be aware, however, that if we do resort to explanation of variation, we are engaging in a second-best explanatory practice.

Modern econometrics is fundamentally based on assuming — usually without any explicit justification — that we can gain causal knowledge by considering independent variables that may have an impact on the variation of a dependent variable. This is however, far from self-evident. Often the fundamental causes are constant forces that are not amenable to the kind of analysis econometrics supplies us with. As Stanley Lieberson has it in Making It Count: Read more…

MMT and the deficit myth

September 15, 2021 17 comments

from Lars Syll

What Modern Monetary Theory (MMT) does is more or less what Knut Wicksell tried to do more than a hundred years ago, when he in 1898 wrote on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise). The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​ Read more…

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