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On the non-applicability of statistical models

December 14, 2017 9 comments

from Lars Syll

Eminent statistician David Salsburg is rightfully very critical of the way social scientists — including economists and econometricians — uncritically and without arguments have come to simply assume that they can apply probability distributions from statistical theory on their own area of research:

9780805071344We assume there is an abstract space of elementary things called ‘events’ … If a measure on the abstract space of events fulfils​ certain axioms, then it is a probability. To use probability in real life, we have to identify this space of events and do so with sufficient specificity to allow us to actually calculate probability measurements on that space … Unless we can identify [this] abstract space, the probability statements that emerge from statistical analyses will have many different and sometimes contrary meanings …

Kolmogorov established the mathematical meaning of probability: Probability is a measure of sets in an abstract space of events. All the mathematical properties of probability can be derived from this definition. When we wish to apply probability to real life, we need to identify that abstract space of events for the particular problem at hand … It is not well established when statistical methods are used for observational studies … If we cannot identify the space of events that generate the probabilities being calculated, then one model is no more valid than another … As statistical models are used more and more for observational studies to assist in social decisions by government and advocacy groups, this fundamental failure to be able to derive probabilities without ambiguity will cast doubt on the usefulness of these methods.

Wise words well worth pondering on.

As long as economists and statisticians cannot really identify their statistical models with real-world phenomena there is no real warrant for taking their statistical inferences seriously.   Read more…

Robert Lucas — nonsense on stilts

December 10, 2017 6 comments

from Lars Syll

In Michel De Vroey’s version of the history of macroeconomics, Robert Lucas’ declaration of the need for macroeconomics to be pursued only within ‘equilibrium discipline’ and declaring equilibrium to exist as a postulate, is hailed as a ‘Copernican revolution.’ Equilibrium is not to be considered something that characterises real economies, but rather ‘a property of the way we look at things.’ De Vroey  — approvingly — notices that this — as well as Lucas’ banning of disequilibrium as referring to ‘unintelligible behaviour’ — ‘amounts to shrinking the pretence of equilibrium theory.’

Mirabile dictu!

Is it really a feasible methodology for economists to make a sharp divide between theory and reality, and then — like De Vroey and Lucas — treat the divide as something recommendable and good? I think not.

Fortunately, there are other economists with a less devoted hagiographic attitude towards Lucas and his nonsense on stilts.

Read more…

Econometrics — still lacking valid ontological foundations

December 7, 2017 5 comments

from Lars Syll

Important and far-reaching problems still beset regression analysis and econometrics — many of which basically is a result of unsustainable ontological views.

complex-research-terminology-simMost econometricians have a nominalist-positivist view of science and models, according to which science can only deal with observable regularity patterns of a more or less lawlike kind. Only data matters and trying to (ontologically) go beyond observed data in search of underlying real factors and relations that generate the data is not admissible. All have to take place in the model of the econometric mind, since the real factors and relations according to the econometric (epistemologically based) methodology are beyond reach, since they, allegedly, are both unobservable and unmeasurable. This also means that instead of treating the model-based findings as interesting clues for digging deeper into real structures and mechanisms, they are treated as the endpoints of the investigation.

As mathematical statistician David Freedman writes in Statistical Models and Causal Inference (2010):  Read more…

The Victims of Game Theory

December 5, 2017 1 comment

from Lars Syll

gameImagine you and someone you do not know can share $100. It is up to you to propose how to divide the $100 between the two of you, and the other player will need to accept or reject your proposal. If he rejects the proposal, neither of you will receive anything. What sum will you offer the other player?

I have data on the choices of about 12,300 people, most of them students, who were asked this question. Nearly half of the participants (49%) offered the other player the fair offer of $50 …

The participants in the experiment who make the embarrassing offer of just $1 because they learned this in a game theory course are again the distinguished members of the Victims of Game Theory organization. And if they played the game in real life, their achievements would be inferior to those who had not become wise by studying game theory.

Ariel Rubinstein

Mainstream economics — an obscurantist waste of time

November 30, 2017 5 comments

from Lars Syll

One may perhaps, distinguish between obscure writers and obscurantist writers. The former aim at truth, but do not respect the norms for arriving at truth, such as focusing on causality, acting as the Devil’s Advocate, and generating falsifiable hypotheses. The latter do not aim at truth, and often scorn the very idea that there is such a thing as the truth …

obscurant-1The authors I have singled out are far from marginal, and in fact are at the core of the profession. Their numerous awards testify to this fact.

These writings have in common a somewhat uncanny combination of mathematical sophistication on the one hand and conceptual naiveté and empirical sloppiness on the other. The mathematics, which could have been a tool, is little more than toy. The steam engine was invented by Hero of Alexandria in the first century A. D., but he considered it mainly as a toy, not as a tool that could be put to productive use. He did apparently use it, though, for opening temple doors, so his engine wasn’t completely idling. Hard obscurantist models, too, may have some value as tools, but mostly they are toys.

I have pointed to the following objectionable practices:

2. Adopting huge simplifications that make the empirical relevance of the results essentially nil …

3. Assuming that the probabilities in a stochastic process are known to the agents … or even in some sense optimal …

7. Assuming that agents can choose optimal preferences …

11. Adhering to the instrumental Chicago-style philosophy of explanation, which emphasizes as-if rationality and denies that the realism of assumptions is a relevant issue.

Jon Elster

It’s hard not to agree with Elster’s critique of mainstream economics and its practice of letting models and procedures become ends in themselves, without considerations of their lack of explanatory value as regards real-world phenomena. For more on modern mainstream economics and this kind of wilfully silly obscurantism, yours truly self-indulgently recommend reading this article on RBC or this article on mainstream axiomatics.  Read more…

Chicago economics delirium VSOP

November 30, 2017 6 comments

from Lars Syll

lucasbob-1Macroeconomics was born as a distinct field in the 1940s (sic!), as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

Robert Lucas (2003)

In the past, I think you have been quoted as saying that you don’t even believe in the possibility of bubbles.

eugeneEugene Fama: I never said that. I want people to use the term in a consistent way. For example, I didn’t renew my subscription to The Economist because they use the world bubble three times on every page. Any time prices went up and down—I guess that is what they call a bubble. People have become entirely sloppy. People have jumped on the bandwagon of blaming financial markets. I can tell a story very easily in which the financial markets were a casualty of the recession, not a cause of it.

That’s your view, correct?

Fama: Yeah.

John Cassidy

Read more…

Chicago economics delirium

November 30, 2017 7 comments

from Lars Syll

I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis. That hypothesis has been tested and, with very few exceptions, found consistent with the data in a wide variety of markets …

Michael Jensen

Read more…

Swedish housing bubble soon to burst

November 27, 2017 6 comments

from Lars Syll

High and rising household indebtedness poses the greatest risk to the Swedish economy. Household indebtedness has been increasing in Sweden since the mid- 1990s. Home ownership financed by high levels of mortgage debt with variable interest rates makes households vulnerable to falling house prices and increasing interest rates …

swedish-household-debt-as-perc-of-disp-income-to-2013In the present Economic Commentary, we extend the earlier analysis by using updated data covering the period up to September 2017 … Our main findings can be summarised as follows:

1. Household debt continues to increase faster than income. The average DTI ratio increased from 326 per cent in September 2016 to 338 per cent in September 2017.
2. More households have high debts relative to their income. In 2017, 260 000 households had a DTI ratio exceeding 600 per cent. This is an increase of 27 000 households compared to 2016.
3. Household indebtedness is increasing for all income groups and age groups.

Sveriges Riksbank

House prices are increasing fast in EU. And more so in Sweden than in any other member state. Sweden’s house price boom started in mid-1990s, and looking at the development of real house prices during the last three decades there are reasons to be deeply worried. As even The Riksbank now admits, the indebtedness of the Swedish household sector has risen to alarmingly high levels.  Read more…

Randomization — a philosophical device gone astray

November 26, 2017 4 comments

from Lars Syll

When giving courses in the philosophy of science yours truly has often had David Papineau’s book Philosophical Devices (OUP 2012) on the reading list. Overall it is a good introduction to many of the instruments used when performing methodological and science theoretical analyses of economic and other social sciences issues.

Unfortunately, the book has also fallen prey to the randomization hype that scourges sciences nowadays.

philosophical-devices-proofs-probabilities-possibilities-and-setsThe hard way to show that alcohol really is a cause of heart disease is to survey the population … But there is an easier way … Suppose we are able to perform a ‘randomized experiment.’ The idea here is not to look at correlations in the population at large, but rather to pick out a sample of individuals, and arrange randomly for some to have the putative cause and some not.

The point of such a randomized experiment is to ensure that any correlation between the putative cause and effect does indicate a causal connection. This works​ because the randomization ensures that the putative cause is no longer itself systematically correlated with any other properties that exert a causal influence on the putative effect … So a remaining correlation between the putative cause and effect must mean that they really are causally connected.

The problem with this simplistic view on randomization is that the claims made by Papineau on behalf of randomization are both exaggerated and invalid:

Read more…

Randomized experiments — a dangerous idolatry

November 23, 2017 5 comments

from Lars Syll

Hierarchy-of-EvidenceNowadays many mainstream economists maintain that ‘imaginative empirical methods’ — especially randomized 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.’

It is widely believed among economists that the scientific value of randomization — contrary to other methods — is totally uncontroversial and that randomized experiments are free from bias. When looked at carefully, however, there are in fact few real reasons to share this optimism on the alleged ’experimental turn’ in economics. Strictly seen, randomization does not guarantee anything.

Assume that you are involved in an experiment where we examine how the work performance of Chinese workers (A) is affected by a specific ‘treatment’ (B). How can we extrapolate/generalize to new samples outside the original population (e.g. to the US)? How do we know that any replication attempt ‘succeeds’? How do we know when these replicated experimental results can be said to justify inferences made in samples from the original population? If, for example, P(A|B) is the conditional density function for the original sample, and we are interested in doing an extrapolative prediction of E [P(A|B)], how can we know that the new sample’s density function is identical with the original? Unless we can give some really good argument for this being the case, inferences built on P(A|B) is not really saying anything on that of the target system’s P(A|B).   Read more…

DSGE models are missing the point

November 21, 2017 9 comments

from Lars Syll

dsge

 

In a recent attempt to defend DSGE modelling, Lawrence Christiano, Martin Eichenbaum and Mathias Trabandt have to admit that DSGE models have failed to predict financial crises. The reason they put forward for this is that the models did not “integrate the shadow banking system into their analysis.” That certainly is true — but the DSGE problems go much deeper than that:  Read more…

Why Krugman and Stiglitz are no real alternatives to mainstream economics

November 18, 2017 22 comments

from Lars Syll

verso_978-1-781683026_never_let_a_serious_crisis__pb_edition__large_300_cmyk-dc185356d27351d710223aefe6ffad0cLittle in the discipline has changed in the wake of the crisis. Mirowski thinks that this is at least in part a result of the impotence of the loyal opposition — those economists such as Joseph Stiglitz or Paul Krugman who attempt to oppose the more viciously neoliberal articulations of economic theory from within the camp of neoclassical economics. Though Krugman and Stiglitz have attacked concepts like the efficient markets hypothesis … Mirowski argues that their attempt to do so while retaining the basic theoretical architecture of neoclassicism has rendered them doubly ineffective.

First, their adoption of the battery of assumptions that accompany most neoclassical theorizing — about representative agents, treating information like any other commodity, and so on — make it nearly impossible to conclusively rebut arguments like the efficient markets hypothesis. Instead, they end up tinkering with it, introducing a nuance here or a qualification there … Stiglitz’s and Krugman’s arguments, while receiving circulation through the popular press, utterly fail to transform the discipline.

Paul Heideman

Despite all their radical rhetoric, Krugman and Stiglitz are — where it really counts — nothing but die-hard mainstream neoclassical economists. Just like Milton Friedman, Robert Lucas or Greg Mankiw.  Read more…

The atomic hypothesis and the limits of econometrics

November 15, 2017 4 comments

from Lars Syll

4388529Our admiration for technical virtuosity should never blind us to the fact that we have to have a cautious attitude towards probabilistic inferences in economic contexts. Science should help us disclose causal forces behind apparent ‘facts.’ We should look out for causal relations, but econometrics can never be more than a starting point in that endeavour since econometric (statistical) explanations are not explanations in terms of mechanisms, powers, capacities or causes. Firmly stuck in an empiricist tradition, econometrics is only concerned with the measurable aspects of reality, But there is always the possibility that there are other variables – of vital importance and although perhaps unobservable and non-additive, not necessarily epistemologically inaccessible – that were not considered for the model. Those who were can hence never be guaranteed to be more than potential causes, and not real causes. A rigorous application of econometric methods in economics really presupposes that the phenomena of our real world economies are ruled by stable causal relations between variables. A perusal of the leading econom(etr)ic journals shows that most econometricians still concentrate on fixed parameter models and that parameter-values estimated in specific spatio-temporal contexts are presupposed to be exportable to totally different contexts. To warrant this assumption one, however, has to convincingly establish that the targeted acting causes are stable and invariant so that they maintain their parametric status after the bridging. The endemic lack of predictive success of the econometric project indicates that this hope of finding fixed parameters is a hope for which there really is no other ground than hope itself.  Read more…

The ‘tiny little problem’ with Chicago economics

November 11, 2017 19 comments

from Lars Syll

14-john-cochrane.w710.h473.2xEvery 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

And the tiny little problem? It’s utterly and completely wrong!

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. As some of my Swedish forerunners — Gunnar Myrdal and Erik Lindahl — stressed more than 80 years ago, it’s really a question of ex-ante and ex-post adjustments. And as further stressed by a famous English economist about the same time, what happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!  Read more…

When economists become as modest as the physicists

November 8, 2017 8 comments

from Lars Syll

In advanced economics the question would be: ‘What besides mathematics should be in an economics lecture?’ In physics the familiar spirit is Archimedes the experimenter. aaaaafeynBut in economics, as in mathematics itself, it is theorem-proving Euclid who paces the halls …

Economics … has become a mathematical game. The science has been drained out of economics, replaced by a Nintendo game of assumption-making …

Most thoughtful economists think that the games on the blackboard and the computer have gone too far, absurdly too far. It is time to bring economic observation, economic history, economic literature, back into the teaching of economics.

Economists would be less arrogant, and less dangerous as experts, if they had to face up to the facts of the world. Perhaps they would even become as modest as the physicists.

D. McCloskey

Pure game theory — an irrelevant tautology

October 31, 2017 18 comments

from Lars Syll

Applied game theory is a theory of real-world facts, where we use game theoretical definitions, axioms, theorems and (try to) test if real-world phenomena ‘satisfy’ the axioms and the inferences made from them. When confronted with the real world we can (hopefully) judge if game theory really tells us if things are as postulated by theory.

like-all-of-mathematics-game-theory-is-a-tautology-whose-conclusions-are-true-because-they-are-quote-1But there is also an influential group of game theoreticians that think that game theory is nothing but pure theory, an axiomatic-mathematical scientific theory that presents a set of axioms that people have to ‘satisfy’ by definition to count as ‘rational.’ Instead of confronting the theory with real-world phenomena it becomes a simple matter of definition if real-world phenomena are to count as signs of ‘rationality.’

This makes for ‘rigorous’ and ‘precise’ conclusions — but never about the real world. Pure game theory does not give us any information at all about the real world. It gives us absolutely irrefutable knowledge — but only since the knowledge is purely definitional.

Mathematical theorems are tautologies. They cannot be false because they do not say anything substantive. They merely spell out the implications of how things have been​ defined. The basic propositions of game theory have precisely the same character.

Ken Binmore 

Read more…

Chicago economists — people who have their heads fuddled with nonsense

October 29, 2017 20 comments

from Lars Syll

joblossMainstream macroeconomics has always had problems with the notion of involuntary unemployment. According to New Classical übereconomist Robert Lucas, an unemployed worker can always instantaneously find some job. No matter how miserable the work options are, “one can always choose to accept them,” according to Lucas:

KLAMER: My taxi driver here is driving a taxi, even though he is an accountant, because he can’t find a job …

LUCAS: I would describe him as a taxi driver [laughing], if what he is doing is driving a taxi.

KLAMER: But a frustrated taxi driver.

LUCAS: Well, we draw these things out of urns, and sometimes we get good draws, sometimes we get bad draws.

Arjo Klamer

In New Classical Economics Read more…

Twenty years ago

October 27, 2017 4 comments

from Lars Syll

Modern economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality(1997) Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject.

It is — sad to say — as relevant today as it was twenty years ago.

It is still a fact that within mainstream economics internal validity is what really counts and external validity is only rarely discussed. Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!

Using mathematics and logic is interesting and fun. It sharpens the mind. In pure mathematics and logic, we do not have to worry about external validity. But economics is not pure mathematics or logic. It’s about society. The real world. Forgetting that, economics becomes irrelevant pseudo-science.  Read more…

Do unrealistic economic models explain real-world phenomena?

October 26, 2017 16 comments

from Lars Syll

When applying deductivist thinking to economics, neoclassical economists usually set up ‘as if’ models based on a set of tight axiomatic assumptions from which consistent and precise inferences are made. The beauty of this procedure is, of course, that if the axiomatic premises are true, the conclusions necessarily follow. idealization-in-cognitive-and-generative-linguistics-6-728The snag is that if the models are to be relevant, we also have to argue that their precision and rigour still holds when they are applied to real-world situations. They often don’t. When addressing real economies, the idealizations and abstractions necessary for the deductivist machinery to work simply don’t hold.

If the real world is fuzzy, vague and indeterminate, then why should our models build upon a desire to describe it as precise and predictable? The logic of idealization is a marvellous tool in mathematics and axiomatic-deductivist systems, but a poor guide for action in real-world systems, in which concepts and entities are without clear boundaries and continually interact and overlap.

As Hans Albert has it:  Read more…

Joan Robinson and the inadequacies of revealed preference theory

October 22, 2017 5 comments

from Lars Syll

We are told nowadays that since utility cannot be measured it is not an operational concept, and that ‘revealed preference’ should be put in its place. Observable market behaviour will show what an individual chooses …

joanIt is just not true that market behaviour can reveal preferences. It is not only that the experiment of offering an individual alternative bundles of goods, or changing his income just to see what he will buy, could never be carried out in practice. The objection is logical, not only practical …

We can observe the reaction of an individual to two different sets of prices only at two different times. How can we tell what part of the difference in his purchases is due to the difference in prices and what part to the change in his preferences that has taken place meanwhile? There is certainly no presumption that his character has not changed, for soap and whisky are not the only goods whose use affects tastes. Practically everything develops either an inertia of habit or a desire for change.

We have got one equation for two unknowns. Unless we can get some independent evidence about preferences the experiment is no good. But it was the experiment that we were supposed to rely on to observe the preferences.

As so often, Robinson hits the nail on the head.   Read more…