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Maths and economics

April 4, 2020 Leave a comment

from Lars Syll

Many American undergraduates in Economics interested in doing a Ph.D. are surprised to learn that the first year of an Econ Ph.D. feels much more like entering a Ph.D. in solving mathematical models by hand than it does with learning economics. Typically, there is very little reading or writing involved, but loads and loads of fast algebra is required. Why is it like this? …

ecoOne reason to use math is that it is easy to use math to trick people. Often, if you make your assumptions in plain English, they will sound ridiculous. But if you couch them in terms of equations, integrals, and matrices, they will appear more sophisticated, and the unrealism of the assumptions may not be obvious, even to people with Ph.D.’s from places like Harvard and Stanford, or to editors at top theory journals such as Econometrica …

Given the importance of signaling in all walks of life, and given the power of math, not just to illuminate and to signal, but also to trick, confuse, and bewilder, it thus makes perfect sense that roughly 99% of the core training in an economics Ph.D. is in fact in math rather than economics.

Douglas L. Campbell

Indeed.

No, there is nothing wrong with mathematics per se.

No, there is nothing wrong with applying mathematics to economics. Read more…

Good reasons to become a Keynesian

April 3, 2020 4 comments

from Lars Syll

Until [2008], when the banking industry came crashing down and depression loomed for the first time in my lifetime, I had never thought to read The General Theory of Employment, Interest, and Money, despite my interest in economics … I had heard that it was a very difficult book and that the book had been refuted by Milton Friedman, though he admired Keynes’s earlier work on monetarism. I would not have been surprised by, or inclined to challenge, the claim made in 1992 by Gregory Mankiw, a prominent macroeconomist at Harvard, that “after fifty years of additional progress in economic science, The General Theory is an outdated book. . . . We are in a much better position than Keynes was to figure out how the economy works.”

adaWe have learned since [2008] that the present generation of economists has not figured out how the economy works …

Baffled by the profession’s disarray, I decided I had better read The General Theory. Having done so, I have concluded that, despite its antiquity, it is the best guide we have to the crisis … Read more…

Chicago economics — in praise of superficiality

April 2, 2020 Leave a comment

from Lars Syll

igTo observe that economics is based on a superficial view of individual and social behaviour does not seem to me to be much of an insight. I think it is exactly this superficiality that gives economics much of the power that it has. Its ability to predict human behaviour without knowing very much about the make up and lives of the people whose behaviour we are trying to understand.

Robert Lucas

The purported strength of Chicago — New Classical — macroeconomics is that it has firm anchorage in preference-based microeconomics, and especially that the decisions are taken by inter-temporal utility maximizing ‘forward-looking’ individuals.

To some of us, however, this has come at too high a price. The almost quasi-religious insistence that macroeconomics has to have microfoundations — without ever presenting neither ontological nor epistemological justifications for this claim — has put a blind eye to the weakness of the whole enterprise of trying to depict a complex economy based on an all-embracing representative actor equipped with superhuman knowledge, forecasting abilities and forward-looking rational expectations.

That anyone should take that kind of stuff seriously is totally and unbelievably ridiculous. Or as Robert Solow has it: Read more…

Covid-19 and the magic money tree

March 31, 2020 1 comment

from Lars Syll

What will be the lasting effects of the covid-19 pandemic? Start with the size of the state. Over the next year government debt will rise sharply, as spending jumps and tax revenues collapse. When the economy recovers, attention will turn to paying it down. “Capital and Ideology”, a new book by Thomas Piketty, shows that after the first and second world wars many governments in the West turned to heavier taxation of the incomes and wealth of the richest to achieve that goal …

treeCentral banks’ innovations will also have lasting consequences. Few economists believe that the explicit co-operation between the fiscal and monetary authorities risks creating runaway inflation … However, just as the use of quantitative easing in 2008-09 opened the door to more of the same down the road, it will become harder to make the argument that the “magic money tree” does not exist … If central banks promised to fund the government during the coronavirus pandemic, they might ask, then why shouldn’t they also fund it to launch an expensive war against a foreign enemy or to invest in a Green New Deal? Read more…

On the non-neutrality of money

March 28, 2020 19 comments

from Lars Syll

Paul Krugman has repeatedly over the years argued that we should continue to use neoclassical hobby horses like IS-LM and Aggregate Supply-Aggregate Demand models. Here’s one example:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I doubt that Keynes would have been impressed by having his theory being characterized with catchwords like “tendency to return to full employment” and “money is neutral in the long run.”

alfa

One of Keynes’s central tenets — in clear contradistinction to the beliefs of mainstream economists — is that there is no strong automatic tendency for economies to move toward full employment levels in monetary economies. Read more…

Econometric modelling as junk science

March 27, 2020 2 comments

from Lars Syll

Do you believe that 10 to 20% of the decline in crime in the 1990s was caused by an increase in abortions in the 1970s? Or that the murder rate would have increased by 250% since 1974 if the United States had not built so many new prisons? Did you believe predictions that the welfare reform of the 1990s would force 1,100,000 children into poverty?

qs-econometrics-titleIf you were misled by any of these studies, you may have fallen for a pernicious form of junk science: the use of mathematical modeling to evaluate the impact of social policies. These studies are superficially impressive. Produced by reputable social scientists from prestigious institutions, they are often published in peer reviewed scientific journals. They are filled with statistical calculations too complex for anyone but another specialist to untangle. They give precise numerical “facts” that are often quoted in policy debates. But these “facts” turn out to be will o’ the wisps …

These predictions are based on a statistical technique called multiple regression that uses correlational analysis to make causal arguments … The problem with this, as anyone who has studied statistics knows, is that correlation is not causation. A correlation between two variables may be “spurious” if it is caused by some third variable. Multiple regression researchers try to overcome the spuriousness problem by including all the variables in analysis. The data available for this purpose simply is not up to this task, however, and the studies have consistently failed.

Ted Goertzel

Read more…

Econometric testing

March 24, 2020 6 comments

from Lars Syll

Debating econometrics and its short-comings yours truly often gets the response from econometricians that “ok, maybe econometrics isn’t perfect, but you have to admit that it is a great technique for empirical testing of economic hypotheses.”

But is econometrics — really — such a great testing instrument?

ecokEconometrics is supposed to be able to test economic theories but to serve as a testing device you have to make many assumptions, many of which themselves cannot be tested or verified. To make things worse, there are also only rarely strong and reliable ways of telling us which set of assumptions is to be preferred. Trying to test and infer causality from (non-experimental) data you have to rely on assumptions such as disturbance terms being ‘independent and identically distributed’; functions being additive, linear, and with constant coefficients; parameters being’ ‘invariant under intervention; variables being ‘exogenous’, ‘identifiable’, ‘structural and so on. Unfortunately, we are seldom or never informed of where that kind of ‘knowledge’ comes from, beyond referring to the economic theory that one is supposed to test. Performing technical tests is of course needed, but perhaps even more important is to know — as David Colander recently put it — “how to deal with situations where the assumptions of the tests do not fit the data.” Read more…

Economics beyond neoliberalism

March 22, 2020 3 comments

from Lars Syll

We welcome Naidu, Rodrik, and Zucman’s contribution and the debate it has inspired. We share much of their agenda for an economics “beyond neoliberalism” …

imagesNonetheless, we believe that Naidu, Rodrik, and Zucman do not go far enough in their calls for reform. The vision they paint is still focused on the discipline of economics and anchored in the core ideas of neoclassical theory that dominated the field in the twentieth century …

The behavioral economics critique of the rational actor model has become mainstream. Yet despite this, much economic modeling, including much policy modeling, continues to use rational choice assumptions. There remains a perception that rational choice is a “good enough approximation” and that there is no acceptable alternative model … But if economists widened their view to include neuroscience, cognitive science, anthropology, social psychology, evolutionary biology, computer science, and philosophy, they would see that, over the last few decades, there has been a revolution in behavioral science that should have a major impact on economics. Read more…

COVID-19 depression antidote

March 21, 2020 1 comment

from Lars Syll

Ergodicity: a primer

March 18, 2020 4 comments

from Lars Syll

Why are election polls often inaccurate? Why is racism wrong? Why are your assumptions often mistaken? The answers to all these questions and to many others have a lot to do with the non-ergodicity of human ensembles. Many scientists agree that ergodicity is one of the most important concepts in statistics. So, what is it?

Suppose you are concerned with determining what the most visited parks in a city are. One idea is to take a momentary snapshot: to see how many people are this moment in park A, how many are in park B and so on. Another idea is to look at one individual (or few of them) and to follow him for a certain period of time, e.g. a year. Then, you observe how often the individual is going to park A, how often he is going to park B and so on.

slide_5Thus, you obtain two different results: one statistical analysis over the entire ensemble of people at a certain moment in time, and one statistical analysis for one person over a certain period of time. The first one may not be representative for a longer period of time, while the second one may not be representative for all the people.

The idea is that an ensemble is ergodic if the two types of statistics give the same result. Many ensembles, like the human populations, are not ergodic.

The importance of ergodicity becomes manifest when you think about how we all infer various things, how we draw some conclusion about something while having information about something else. For example, one goes once to a restaurant and likes the fish and next time he goes to the same restaurant and orders chicken, confident that the chicken will be good. Why is he confident? Or one observes that a newspaper has printed some inaccurate information at one point in time and infers that the newspaper is going to publish inaccurate information in the future. Why are these inferences ok, while others such as “more crimes are committed by black persons than by white persons, therefore each individual black person is not to be trusted” are not ok?

Read more…

Machine learning — puzzling ‘big data’ nonsense

March 16, 2020 7 comments

from Lars Syll

maIf we wanted highly probable claims, scientists would stick to​​ low-level observables and not seek generalizations, much less theories with high explanatory content. In this day​ of fascination with Big data’s ability to predict​ what book I’ll buy next, a healthy Popperian reminder is due: humans also want to understand and to explain. We want bold ‘improbable’ theories. I’m a little puzzled when I hear leading machine learners praise Popper, a realist, while proclaiming themselves fervid instrumentalists. That is, they hold the view that theories, rather than aiming at truth, are just instruments for organizing and predicting observable facts. It follows from the success of machine learning, Vladimir Cherkassy avers, that​ “realism is not possible.” This is very quick philosophy!

Quick indeed! Read more…

Statistical models for causation — a critical review

March 14, 2020 6 comments

from Lars Syll

maxresdefCausal inferences can be drawn from nonexperimental data. However, no mechanical rules can be laid down for the activity. Since Hume, that is almost a truism. Instead, causal inference seems to require an enormous investment of skill, intelligence, and hard work. Many convergent lines of evidence must be developed. Natural variation needs to be identified and exploited. Data must be collected. Confounders need to be considered. Alternative explanations have to be exhaustively tested. Before anything else, the right question needs to be framed. Naturally, there is a desire to substitute intellectual capital for labor. That is why investigators try to base causal inference on statistical models. The technology is relatively easy to use, and promises to open a wide variety of ques- tions to the research effort. However, the appearance of methodological rigor can be deceptive. The models themselves demand critical scrutiny. Mathematical equations are used to adjust for confounding and other sources of bias. These equations may appear formidably precise, but they typically derive from many somewhat arbitrary choices. Which variables to enter in the regression? What functional form to use? What assumptions to make about parameters and error terms? These choices are seldom dictated either by data or prior scientific knowledge. That is why judgment is so critical, the opportunity for error so large, and the number of successful applications so limited.

David Freedman 

Read more…

The Keynes/Hicks macro theory — the nonexistence of a New Keynesian unicorn

March 11, 2020 8 comments

from Lars Syll

islmPaul Krugman has on numerous occasions tried to defend “the whole enterprise of Keynes/Hicks macroeconomic theory” and especially his own somewhat idiosyncratic version of IS-LM.

The main problem, however, is that there is no such thing as a Keynes/Hicks macroeconomic theory!

So, let us get some things straight.

There is nothing in the post-General Theory writings of Keynes that suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s canonical statement of the essence of his theory in the 1937 QJE-article, there is nothing to even suggest that Keynes would have thought the existence of a Keynes-Hicks-IS-LM-theory anything but pure nonsense. So, of course, there can’t be any “vindication for the whole enterprise of Keynes/Hicks macroeconomic theory” – simply because “Keynes/Hicks” never existed.

And it gets even worse! Read more…

Econometrics — a critical realist critique

March 9, 2020 Leave a comment

from Lars Syll

Mainstream economists often hold the view that criticisms of econometrics are the conclusions of sadly misinformed and misguided people who dislike and do not understand much of it. This is really a gross misapprehension. To be careful and cautious is not the same as to dislike. keuzenkampAnd as any perusal of the mathematical-statistical and philosophical works of people like for example Nancy Cartwright, Chris Chatfield, Hugo Keuzenkamp, John Maynard Keynes, Tony Lawson, Asad Zaman, Aris Spanos, Duo Qin, and David Freedman, would show, the critique is put forward by respected authorities. I would argue, against “common knowledge”, that they do not misunderstand the crucial issues at stake in the development of econometrics. Quite the contrary. They — just as yours truly — know them all too well, and are not satisfied with the validity and philosophical underpinning of the assumptions made for applying its methods.

Let me try to do justice to the critical arguments on the logic of probabilistic induction and shortly elaborate — mostly from a philosophy of science vantage point — on some insights critical realism gives us on econometrics and its methodological foundations. Read more…

Why every econ paper should come with a warning label!

March 6, 2020 3 comments

from Lars Syll

e8f9b7fec248157b1989085deaa05dde-d7bu3k6It should be part of the academic competences of trained economists to be able to be clear about what their models are for; what the models are about; what the models are capable of doing, and what not; how reliable the models are; what sorts of criticisms have been levelled against the models and how the criticisms have been responded; what alternative models there are; etc. The challenge is not easy, and it is clear that it has not been met with sufficient exuberance and success. The capacity of writing “warning labels” would be part of the needed professional competence. Such warning labels would alert the relevant audiences to the capabilities and limitations of the models …

Exceptional amongst the social sciences is the role of the economics discipline in contemporary society, the intellectual and political authority economics enjoys regardless of its failures. Above, I cited Colander’s confession, “we pretend we understand more than we do” and we could add that economists do so in order to – or with the consequence of – protecting and promoting their socially acknowledged authority. In the worst case, there is a nightmarish scenario on which the more economists are consulted for policy advice, the more they need to pretend to know, and so the higher the likelihood of policies going astray. Avoiding the nightmare would require some smart restructuring of the institutions of the economics discipline.            Uskali Mäki

The history of econometrics

March 5, 2020 42 comments

from Lars Syll

9780199679348There have been over four decades of econometric research on business cycles …

But the significance of the formalization becomes more difficult to identify when it is assessed from the applied perspective …

The wide conviction of the superiority of the methods of the science has converted the econometric community largely to a group of fundamentalist guards of mathematical rigour … So much so that the relevance of the research to business cycles is reduced to empirical illustrations. To that extent, probabilistic formalisation has trapped econometric business cycle research in the pursuit of means at the expense of ends.

The limits of econometric forecasting have, as noted by Qin, been critically pointed out many times before. Trygve Haavelmo assessed the role of econometrics — in an article from 1958 — and although mainly positive of the “repair work” and “clearing-up work” done, Haavelmo also found some grounds for despair: Read more…

Econometrics — the scientific illusion of an empirical failure

March 3, 2020 4 comments

from Lars Syll

Ed Leamer’s Tantalus on the Road to Asymptopia is one of yours truly’s favourite critiques of econometrics, and for the benefit of those who are not versed in the econometric jargon, this handy summary gives the gist of it in plain English:

noahtantalus

Most work in econometrics and regression analysis is made on the assumption that the researcher has a theoretical model that is ‘true.’ Based on this belief of having a correct specification for an econometric model or running a regression, one proceeds as if the only problem remaining to solve have to do with measurement and observation. Read more…

Econometrics — a crooked path from cause to effect

February 27, 2020 48 comments

from Lars Syll

In their book Mastering ‘Metrics: The Path from Cause to Effect Joshua Angrist and Jörn-Steffen Pischke write:

masteringOur first line of attack on the causality problem is a randomized experiment, often called a randomized trial. In a randomized trial, researchers change the causal variables of interest … for a group selected using something like a coin toss. By changing circumstances randomly, we make it highly likely that the variable of interest is unrelated to the many other factors determining the outcomes we want to study. Random assignment isn’t the same as holding everything else fixed, but it has the same effect. Random manipulation makes other things equal hold on average across the groups that did and did not experience manipulation. As we explain … ‘on average’ is usually good enough.

Angrist and Pischke may “dream of the trials we’d like to do” and consider “the notion of an ideal experiment” something that “disciplines our approach to econometric research,” but to maintain that ‘on average’ is “usually good enough” is an allegation that in my view is rather unwarranted, and for many reasons. Read more…

The ‘New Keynesian’ Monetarist fantasy is finally over

February 24, 2020 4 comments

from Lars Syll

monKenneth Rogoff of Harvard recently argued that fiscal stabilization policy “is far too politicized to substitute consistently for modern independent technocratic central banks.” But instead of considering how this defect might be overcome, Rogoff sees no alternative to continuing with the prevailing monetary-policy regime – despite the overwhelming evidence that central banks are unable to play their assigned role. At least fiscal policy might in principle be up to the task of economic stabilization; there is no chance that central banks will be …

A less skeptical observer than Rogoff would have looked more closely at proposals to strengthen automatic fiscal stabilizers, rather than dismissing them on the grounds that they will have (bad) “incentive effects” and that policymakers will override them on occasion. For example, a fair observer would at least be open to the idea of a public-sector job guarantee of the sort envisaged by the 1978 Humphrey-Hawkins Act in the US, which authorized the federal government to create “reservoirs of public employment” to balance fluctuations in private spending …

To be sure, both the design and implementation of such a job guarantee would give rise to problems. But for both political and economic reasons, one should try to tackle them rather than concluding, as Rogoff does, that, “with monetary policy hampered and fiscal policy the main game in town, we should expect more volatile business cycles.” We have the intelligence to do better than that.

Robert Skidelsky

Great post!

Paul Krugman had a Read more…

Paul Romer explains what went wrong with economics

February 22, 2020 45 comments

from Lars Syll

Economists cannot simply dismiss as “absurd” or “impossible” the possibility that our profession has imposed total costs that exceed total benefits. And no, building a model which shows that it is logically possible for economists to make a positive net contribution is not going to make questions about our actual effect go away. Why don’t we just stipulate that economists are now so clever at building models that they can use a model to show that almost anything is logically possible. Then we could move on to making estimates and doing the math.

washing-hands-23043In the 19th century, when it became clear that the net effect of having a doctor assist a woman in child-birth was to increase the probability that she would die, western society faced a choice:

– Get rid of doctors; or
– Insist that they wash their hands.

I do not want western society to get rid of economists. But to remain viable, our profession needs to be open to the possibility that in a few cases, a few of its members are doing enormous harm; then it must take on a collective responsibility for making sure that everyone keeps their hands clean.

Paul Romer

Mainstream economic theory today is still in the story-telling business whereby economic theorists create mathematical make-believe analogue models of the target system – usually conceived as the real economic system. Read more…