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Two must-read statistics books

July 18, 2019 3 comments

from Lars Syll

freedmanMathematical statistician David Freedman‘s Statistical Models and Causal Inference (Cambridge University Press, 2010)  and Statistical Models: Theory and Practice (Cambridge University Press, 2009) are marvellous books. They ought to be mandatory reading for every serious social scientist — including economists and econometricians — who doesn’t want to succumb to ad hocassumptions and unsupported statistical conclusions!

Read more…

What is ergodicity?

July 16, 2019 7 comments

from Lars Syll

Time to explain ergodicity …

The difference between 100 people going to a casino and one person going to a casino 100 times, i.e. between (path dependent) and conventionally understood probability. The mistake has persisted in economics and psychology since age immemorial.

Consider the following thought experiment.

skin_in_the_gameFirst case, one hundred persons go to a Casino, to gamble a certain set amount each and have complimentary gin and tonic … Some may lose, some may win, and we can infer at the end of the day what the “edge” is, that is, calculate the returns simply by counting the money left with the people who return. We can thus figure out if the casino is properly pricing the odds. Now assume that gambler number 28 goes bust. Will gambler number 29 be affected? No.

You can safely calculate, from your sample, that about 1% of the gamblers will go bust. And if you keep playing and playing, you will be expected have about the same ratio, 1% of gamblers over that time window.

Now compare to the second case in the thought experiment. One person, your cousin Theodorus Ibn Warqa, goes to the Casino a hundred days in a row, starting with a set amount. On day 28 cousin Theodorus Ibn Warqa is bust. Will there be day 29? No. He has hit an uncle point; there is no game no more.

No matter how good he is or how alert your cousin Theodorus Ibn Warqa can be, you can safely calculate that he has a 100% probability of eventually going bust.

The probabilities of success from the collection of people does not apply to cousin Theodorus Ibn Warqa. Let us call the first set ensemble probability, and the second one time probability (since one is concerned with a collection of people and the other with a single person through time). Now, when you read material by finance professors, finance gurus or your local bank making investment recommendations based on the long term returns of the market, beware. Even if their forecast were true (it isn’t), no person can get the returns of the market unless he has infinite pockets and no uncle points. The are conflating ensemble probability and time probability. If the investor has to eventually reduce his exposure because of losses, or because of retirement, or because he remarried his neighbor’s wife, or because he changed his mind about life, his returns will be divorced from those of the market, period.

Nassim Taleb

Taleb’s excellent example shows why the difference between ensemble and time averages is of such importance in economics. Read more…

Why economic models do not give us explanations

July 14, 2019 17 comments

from Lars Syll

Unicorn-2Economic models frequently invoke … entities that do not exist, such as perfectly rational agents, perfectly inelastic demand functions, and so on. As economists often defensively point out, other sciences too invoke non-existent entities, such as the frictionless planes of high-school physics. But there is a crucial difference: the false-ontology models of physics and other sciences are empirically constrained. If a physics model leads to successful predictions and interventions, its false ontology can be forgiven, at least for instrumental purposes — but such successful prediction and intervention is necessary for that forgiveness … The idealizations of economic models, by contrast, have not earned their keep in this way. So the problem is not the idealizations in themselves so much as the lack of empirical success they buy us in exchange. As long as this problem remains, claims of explanatory credit will be unwarranted.

A. Alexandrova & R. Northcott

Econometrics — a con art with no relevance whatsoever to real world economics

July 12, 2019 4 comments

from Lars Syll

Econometrics-as-a-Con-Art-Imad-A-Moosa

Econometrics looks “sciency”. Once in a seminar presentation I displayed two equations, one taken from Econometrica and the other from the Journal of Theoretical and Experimental Physics and challenged the audience to tell me which is which. No one volunteered to tell me which is which, including at least one hard-core econometrician. Economics is a social science where the behaviour of decision makers is not governed purely by economic considerations but also by social and psychological factors, which are not amenable to econometric testing. This is why no economic theory holds everywhere all the time. And this is why the results of empirical testing of economic theories are typically a mixed bag. And this is why econometricians use time-varying parametric estimation to account for changes in the values of estimated parameters over time (which means that the underlying relationship does not have the universality of a law). And this is why there are so many estimation methods that can be used to produce the desired results. In physics, on the other hand, a body falling under the force of gravity travels with an acceleration of 32 feet per second per second – this is true anywhere any time. In physics also, the boiling point of water under any level of atmospheric pressure can be predicted with accuracy.

Unlike physicists, econometricians are in a position to obtain the desired results, armed with the arsenal of tools produced by econometric theory. Read more…

Paul Samuelson — a case of badly invested intelligence

July 10, 2019 9 comments

from Lars Syll

Paul Samuelson claimed that the ‘ergodic hypothesis’ is essential for advancing economics from the realm of history to the realm of science.

But is it really tenable to assume that ergodicity is essential to economics?

The answer can only be — as I have argued

here

here

here

here

and

here — NO WAY!

Obviously yours truly is far from the only researcher being critical of Paul Samuelson. This is what Ole Peters writes in a highly interesting article on Samuelson’s stance on the ‘ergodic hypothesis’: Read more…

Time

July 8, 2019 7 comments

from Lars Syll


Time is what prevents everything from happening at once. To simply assume that economic processes are ergodic and concentrate on ensemble averages — and hence in any relevant sense timeless — is not a sensible way for dealing with the kind of genuine uncertainty that permeates real-world economies. Read more…

Game theorists — people carried away by fictions

July 7, 2019 9 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

Pure game theorists, like Ken Binmore, give us analytical truths — truths by definition. Read more…

What can we learn from economic models?

July 6, 2019 9 comments

from Lars Syll

Sektome economic methodologists have lately been arguing that economic models may well be considered ‘minimal models’ that portray ‘credible worlds’ without having to care about things like similarity, isomorphism, simplified representationality or resemblance to the real world. These models are said to resemble ‘realistic novels’ that portray ‘possible worlds’. And sure: economists constructing and working with that kind of models learn things about what might happen in those ‘possible worlds’. But is that really the stuff real science is made of? I think not. As long as one doesn’t come up with credible export warrants to real-world target systems and show how those models — often building on idealizations with known to be false assumptions — enhance our understanding or explanations about the real world, well, then they are just nothing more than just novels.  Showing that something is possible in a ‘possible world’ doesn’t give us a justified license to infer that it therefore also is possible in the real world. ‘The Great Gatsby’ is a wonderful novel, but if you truly want to learn about what is going on in the world of finance, I would recommend rather reading Minsky or Keynes and directly confront real-world finance. Read more…

The explanation paradox in economics

July 4, 2019 5 comments

from Lars Syll

hotHotelling’s model, then, is false in all relevant senses … And yet, it is considered explanatory. Moreover, and perhaps more importantly, it feels explanatory. If we have not thought much about Hotelling’s kind of cases, it seems that we have genuinely learned something. We begin to see Hotelling situations all over the place. Why do electronics shops in London concentrate in Tottenham Court Road and music shops in Denmark Street? Why do art galleries in Paris cluster around Rue de Seine? Why have so many hi-fi-related retailers set up business in Calle Barquillo in Madrid such that it has come to be known as ‘Calle del Sonido’ (Street of Sound)? And why the heck are most political parties practically indistinguishable? But we do not only come to see that, we also intuitively feel that Hotelling’s model must capture something that is right. Read more…

The logic of economic models

July 3, 2019 5 comments

from Lars Syll

nancyAnalogue-economy models may picture Galilean thought experiments or they may describe credible worlds. In either case we have a problem in taking lessons from the model to the world. The problem is the venerable one of unrealistic assumptions, exacerbated in economics by the fact that the paucity of economic principles with serious empirical content makes it difficult to do without detailed structural assumptions. But the worry is not just that the assumptions are unrealistic; rather, they are unrealistic in just the wrong way.

Nancy Cartwright

One 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.

Read more…

Chicago style response to critique

July 1, 2019 8 comments

from Lars Syll

In a post up here earlier this week yours truly questioned the scientific value of Chicago economics. I took as an example the SMD theorem, that has unequivocally showed that there does not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of a general equilibrium solution — and that it, therefore, is intellectually dishonest to just go on pretending that it is still acceptable to model real-world economies building on the assumption that an entire economy can be modelled as a representative actor and that this is a valid procedure.

And as usual, when those Chicago economists respond to the critique, they
immediately want to divert the attention into focusing on mathematical technicalities.

As if that was the problem! It is not.

The basic problem is that Read more…

Georgescu-Roegen — the bioeconomic approach to climate change and growth

June 30, 2019 48 comments

from Lars Syll

grPositivism does not seem to realize at all that the concept of verifiability — or that the position that ‘the meaning of a proposition is the method of its verification’ — is covered by a dialectical penumbra in spite of the apparent rigor of the sentences used in the argument …

I hope the reader will not take offense at the unavoidable conclusion that most of the time all of us talk some nonsense, that is, express our thoughts in dialectical terms with no clear-cut meaning …

The position that dialectical concepts should be barred from science because they would infest it with muddled thinking, is, therefore, a flight of fancy — unfortunately, not an innocuous one. For it has bred another kind of muddle that now plagues large sectors of social sciences: arithmomania. To cite a few cases from economics alone. The complex notion of economic developmet has been reduced to a number, the income per capita. The dialectical spectrum of human wants … has long since been covered under the colorless numerical concept of ‘utility’ for which, moreover, nobody has yet been able to provide an actual procedure of measurement.

In the postwar period, it has become increasingly clear that economic growth has not only brought greater prosperity. The other side of growth, in the form of pollution, contamination, wastage of resources, and climate change, has emerged as perhaps the greatest challenge of our time. Read more…

Teaching of economics — captured by a small and dangerous sect

June 29, 2019 7 comments

from Lars Syll

Dept_of_Econ_Fac_Pic

The fallacy of composition basically consists of the false belief that the whole is nothing but the sum of its parts.  In the society and in the economy this is arguably not the case. An adequate analysis of society and economy a fortiori can’t proceed by just adding up the acts and decisions of individuals. The whole is more than a sum of parts. Read more…

The weird absence of money and finance in economic theory

June 27, 2019 54 comments

from Lars Syll

Consider the problem of money. Money is of central importance to any modern capitalist market economy. Yet it is mainly sociologists, philosophers and dissenters that have maintained an interest in what money “is” with a view to continued critique and development … One might think this is because economics has already provided an agreed clear concept of money. But this is not the case. Contemporary economics defines money in terms of function (unit of account, store of value, medium of exchange), but puts aside both the actual history of money (after an origin story) and the conceptual problem of money, both of which likely affect the functionality of money in the broader sense of its role and consequence in real systems … Read more…

Chicago economics — a pseudo-scientific zombie

June 26, 2019 20 comments

from Lars Syll

A couple of years ago, in a lecture on the US recession, Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturns in the US economy and its future prospects.

lucasLucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big – but smaller – dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery from where the US economy is today, maintaining that past experience would suggest an “automatic” recovery, if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the new classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But — if left to run its course unimpeded by European type welfare state activities — the free market will fix it all. Read more…

Why statistics does not give us causality

June 25, 2019 3 comments

from Lars Syll

If contributions made by statisticians to the understanding of causation are to be taken over with advantage in any specific field of inquiry, then what is crucial is that the right relationship should exist between statistical and subject-matter concerns …

introduction-to-statistical-inferenceWhere the ultimate aim of research is not prediction per se but rather causal explanation, an idea of causation that is expressed in terms of predictive power — as, for example, ‘Granger’ causation — is likely to be found wanting. Causal explanations cannot be arrived at through statistical methodology alone: a subject-matter input is also required in the form of background knowledge and, crucially, theory …

Likewise, the idea of causation as consequential manipulation is apt to research that can be undertaken primarily through experimental methods and, especially to ‘practical science’ where the central concern is indeed with ‘the consequences of performing particular acts’. The development of this idea in the context of medical and agricultural research is as understandable as the development of that of causation as robust dependence within applied econometrics. However, the extension of the manipulative approach into sociology would not appear promising, other than in rather special circumstances … The more fundamental difficulty is that, under the — highly anthropocentric — principle of ‘no causation without manipulation’, the recognition that can be given to the action of individuals as having causal force is in fact peculiarly limited.

John H. Goldthorpe

Causality in social sciences — and economics — can never solely be a question of statistical inference.  Read more…

User guides to models

June 22, 2019 4 comments

from Lars Syll

user-guides-5

In Dani Rodrik’s Economics Rules it is argud that ‘the multiplicity of models is economics’ strength,’ and that a science that has a different model for everything is non-problematic, since

economic models are cases that come with explicit user’s guides — teaching notes on how to apply them. That’s because they are transparent about their critical assumptions and behavioral mechanisms.

Hmm …

That really is at odds with yours truly’s experience from studying and teaching mainstream economic models during four decades. Read more…

My philosophy of economics

June 18, 2019 22 comments

from Lars Syll

A critique yours truly sometimes encounters is that as long as I cannot come up with some own alternative to the failing mainstream theory, I shouldn’t expect people to pay attention.

This is, however, to totally and utterly misunderstand the role of philosophy and methodology of economics!

As John Locke wrote in An Essay Concerning Human Understanding:

19557-004-21162361The Commonwealth of Learning is not at this time without Master-Builders, whose mighty Designs, in advancing the Sciences, will leave lasting Monuments to the Admiration of Posterity; But every one​e must not hope to be a Boyle, or a Sydenham; and in an Age that produces such Masters, as the Great-Huygenius, and the incomparable Mr. Newton, with some other of that Strain; ’tis Ambition enough to be employed as an Under-Labourer in clearing Ground a little, and removing some of the Rubbish, that lies in the way to Knowledge.

That’s what philosophy and methodology can contribute to economics — clearing obstacles to science by clarifying limits and consequences of choosing specific modelling strategies, assumptions, and ontologies. Read more…

Mainstream economics — a case of explanatory disaster

June 17, 2019 24 comments

from Lars Syll

To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe. These are necessary conditions, not sufficient ones. Rational-choice theory often fails on both counts. The theory may be indeterminate, and people may be irrational. e201ada1b6In what was perhaps the first sustained criticism of the theory, Keynes emphasized indeterminacy, notably because of the pervasive presence of uncertainty. His criticism applied especially to cases where agents have to form expectations about the behavior of other agents or about the development of the economy in the long run. In the wake of the current economic crisis, this objection has returned to the forefront. Before the crisis, going back to the 1970s, the main objections to the theory were based on pervasive irrational behavior. Experimental psychology and behavioral economics have uncovered many mechanisms that cause people to deviate from the behavior that rational-choice theory prescribes.

Disregarding some more technical sources of indeterminacy, the most basic one is embarrassingly simple: how can one impute to the social agents the capacity to make the calculations that occupy many pages of mathematical appendixes in the leading journals of economics and political science and that can be acquired only through years of professional training? …

I believe that much work in economics and political science that is inspired by rational-choice theory is devoid of any explanatory, aesthetic or mathematical interest, which means that it has no value at all. I cannot make a quantitative assessment of the proportion of work in leading journals that fall in this category, but I am confident that it represents waste on a staggering scale.

Jon Elster

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

Methodological arrogance

June 16, 2019 8 comments

from Lars Syll

arroganceSo what do I mean by methodological arrogance? I mean an attitude that invokes micro-foundations as a methodological principle — philosophical reductionism in Popper’s terminology — while dismissing non-microfounded macromodels as unscientific. To be sure, the progress of science may enable us to reformulate (and perhaps improve) explanations of certain higher-level phenomena by expressing those relationships in terms of lower-level concepts. That is what Popper calls scientific reduction. But scientific reduction is very different from rejecting, on methodological principle, any explanation not expressed in terms of more basic concepts.

And whenever macrotheory seems inconsistent with microtheory, the inconsistency poses a problem to be solved. Solving the problem will advance our understanding. But simply to reject the macrotheory on methodological principle without evidence that the microfounded theory gives a better explanation of the observed phenomena than the non-microfounded macrotheory … is arrogant. Microfoundations for macroeconomics should result from progress in economic theory, not from a dubious methodological precept.

David Glasner

For more on microfoundations and the dangers of methodological arrogance, read yours truly’s RWER-paper Micro versus Macro .