Archive

Author Archive

Economics becomes more precise and rigorous — and totally useless

April 4, 2019 41 comments

from Lars Syll

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

This is deeply worrying.

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

How did we end up in this sad state?

Philip Mirowski gives the following answer:

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

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

Read more…

RCTs — a method in search of ontological foundations

April 1, 2019 6 comments

from Lars Syll

dessin2sRCTs treat social reality as though some simulacrum of laboratory conditions was a feasible and appropriate scientific method to apply, but in development research, unlike laboratory condition treatments, interventions are not manipulations of individuated and additive or simply combinable material components … but rather intervention into material social relations. While for the former, assuming away or stripping away everything other than a given effect focus can reveal the underlying invariant mechanics of that effect, in the latter one cannot take it as given that there is an underlying invariant mechanics that will continue to apply and one is just as liable to be assuming or stripping away what is important to the constitution of the material social relations … As such, RCTs may make for poor social science, because the approach is based on a mismatch between the RCT procedure and the constitution of reality under investigation—including the treatment of humans as deliberative centers of ultimate concern. In any case, technical sophistication is no guarantor of appropriately conceived “rigour” if the orientation of methods is inappropriate …

Jamie Morgan

Read more…

Why are we getting dumber and dumber?

March 30, 2019 19 comments

from Lars Syll

Human ñ business evolution

It probably shouldn’t worry us if some pocket of the population saw a decline in IQ as things like education and diet affect IQ and these factors can vary from one group or time to another. But according to this new study it doesn’t appear to be some small segment of the population whose IQ is going down. It appears to be the entire nation of Norway.

When scientists from the Norway’s Ragnar Frisch Centre for Economic Research analyzed some 730,000 IQ tests given to Norwegian men before their compulsory military service from 1970 to 2009, they found that average IQ scores were actually sinking. And not just by some miniscule amount. Each generation of Norwegian men appear to be getting around seven IQ points dumber. Read more…

The real public debt problem

March 28, 2019 11 comments

from Lars Syll

The claim that our public debt is excessive has been used as a major justification for austerity – cuts in spending. That massive debt, we are told, 1) must be repaid, 2) threatens our country with bankruptcy, and 3) is a burden on future generations. All these are wrong. Let me explain why …

austerity-george-osborne-desktopBritain’s national currency is managed by our central bank, the Bank of England, owned by the citizens of the United Kingdom (that is, our elected government). As a result, the British government can never default on its bonds. Our government can replace maturing public bonds with new ones. Should private buyers, households and businesses, refuse to purchase the new bonds at the interest rate set by the British government, our government can sell them to the Bank of England …

The debt is nothing more than pieces of paper that the government promises to buy back on a specific date. These pieces of paper can be bought back with new pieces of paper (new bonds) with later buy-back dates. If the private owners of the debt paper do not want the new bonds (new debt paper), our government can sell those new bonds to the Bank of England for cash and use the cash to pay the bond holders.

John Weeks

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases. Read more…

The rational expectations putsch

March 27, 2019 7 comments

from Lars Syll

The tiny little problem that there is no hard empirical evidence that verifies rational expectations models doesn’t usually bother its protagonists too much. how-many-irrational-assumptions-are-needed-for-economist-to-use-rational-expectationsRational expectations überpriest Thomas Sargent has defended the epistemological status of the rational expectations hypothesis arguing that since it “focuses on outcomes and does not pretend to have behavioral content,” it has proved to be “a powerful tool for making precise statements.”

Precise, yes, but relevant and realistic? I’ll be dipped!

In their attempted rescue operations, rational expectationists try to give the picture that only heterodox economists like yours truly are critical of the rational expectations hypothesis.

But, on this, they are, simply … eh … wrong.

Let’s listen to Nobel laureate Edmund Phelps — hardly a heterodox economist — and what he has to say: Read more…

Public debt — questions and answers

March 24, 2019 6 comments

from Lars Syll

Can a government go bankrupt?
No. You cannot be indebted to yourself.

Can a central bank go bankrupt?
No. A central bank can in principle always ‘print’ more money.

Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.

Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.

Does maintaining full employment mean the government has to increase its debt?
No.

Read more…

How to teach economics if you have a dissenting perspective

March 21, 2019 11 comments

from Lars Syll

teaching-economics-6-638Issue #1: How do you teach the introductory economics courses if you have a dissenting perspective? Mankiw lays out three alternatives, teaching the mainstream and suppressing your own views, teaching minority or fringe views (i.e. your own), or not teaching introductory econ at all. He says the second option is “pedagogical malpractice” … I opted for an approach neither of them consider, to present mainstream economics in the third person: this is what that particular group thinks. Allow for a critical distancing, which is not the same as critique. I didn’t write “this stuff is garbage”, but “here are the assumptions that conventional economists make that distinguish their approach from others.” Whenever possible, I point out where other disciplines differ, and while I encourage students to judge for themselves, I don’t pressure them into adopting any one point of view. This is called critical thinking, and it barely exists in the world of economics textbooks, which proselytize shamelessly. Read more…

Labor’s share — the ‘stylized fact’ that isn’t a fact at all

March 19, 2019 6 comments

from Lars Syll

jonvollrAccording to one of the most widely used textbooks on mainstream theories of economic growth, one can for the United States “calculate labor’s share of GDP by looking at wage and salary payments and compensation for the self-employed as a share of GDP. These calculations reveal that the labor share has been relatively constant over time, at a value of around 0.7.”

But is this “classic stylized fact” — that the labour share is relatively constant over time at around two-thirds — really true? One would, I guess, certainly have doubts after reading Piketty and taking part in the present discourses on economic inequality.

Sometimes a little data can do wonders. So let’s have a look at a couple of graphs that give us some: Read more…

How to make economics a relevant science again

March 16, 2019 25 comments

from Lars Syll

Economists are struggling to explain recent productivity developments, the implications of rising inequality, the impact of persistently negative interest rates in the eurozone … and the sudden slowdown in European growth …

None of this is a huge surprise, given the profession’s embrace of simplistic theoretical assumptions and excessive reliance on mathematical techniques that prize elegance over real-world applicability …

perfectly-good-econ-theoryAll of this should tell economists that there is plenty of room for improvement, and that they need to expand the scope of their analysis to take into account human interactions, distributional effects, financial-economic feedback mechanisms, and technological change. But this cannot just be about devising new analytical models within the field; economists also must incorporate insights from other disciplines that the profession has overlooked.

A discipline long dominated by “high priests” must now adopt a more open mindset … Without significant adjustments, mainstream economics will remain two steps behind changing realities on the ground, and economists will be risking a further loss of credibility and influence. In an era of concern about climate change, political upheavals and technological disruption, the shortcomings of mainstream economics must be addressed posthaste.

Yes indeed — what shall mainstream economists do when the modelling​ assumptions made are shown to be harmful and not even remotely matching reality? Read more…

Your model is consistent? So what?

March 14, 2019 12 comments

from Lars Syll

In the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality.

errorineconomicsThere is a difference between having evidence for some hypothesis and having evidence for the hypothesis relevant for a given purpose. The difference is important because scientific methods tend to be good at addressing hypotheses of a certain kind and not others: scientific methods come with particular applications built into them … The advantage of mathematical modelling is that its method of deriving a result is that of mathematical proof: the conclusion is guaranteed to hold given the assumptions. However, the evidence generated in this way is valid only in abstract model worlds while we would like to evaluate hypotheses about what happens in economies in the real world … The upshot is that valid evidence does not seem to be enough. What we also need is to evaluate the relevance of the evidence in the context of a given purpose.

Even if some people think that there has been a kind of empirical revolution in economics lately, yours truly would still argue that empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. The one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics, still roosts the roost.  Read more…

Brad DeLong admits neoliberal era has come to an end

March 12, 2019 13 comments

from Lars Syll

Should Democrats lean away from market-friendly stances and get comfortable with big government again? Should they embrace an ambitious 2020 candidate like Sanders and policies like the Green New Deal, or stick with incrementalists like former Vice President Joe Biden and more market-oriented ideas like Obamacare?

austerOne of the most interesting takes I’ve seen on this debate came from Brad DeLong, an economist at the University of California-Berkeley … one of the market-friendly, “neoliberal” Democrats who have dominated the party for the last 20 years …

Yet DeLong believes that the time of people like him running the Democratic Party has passed. “The baton rightly passes to our colleagues on our left,” DeLong wrote. “We are still here, but it is not our time to lead” …

Zack Beauchamp/Vox

Economists — in many ways separated from the ​life of ordinary people — are with their ‘the model is the message’ thinking particularly inclined to confuse the things of logic with the logic of things. But as we all know, neoliberalism is nothing but a self-serving con endorsing pernicious moral cynicism and gobsmacking ideological trash maintaining that unregulated capitalism is a ‘superlatively moral system’: Read more…

Econometric beasts of bias

March 11, 2019 4 comments

from Lars Syll

In an article posted earlier on this blog — What are the key assumptions of linear regression models? — yours truly tried to argue that since econometrics doesn’t content itself with only making ‘optimal’ predictions,” but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — and that most important of these are additivity and linearity.

overconfidenceLet me take the opportunity to elaborate a little more on why I find these assumptions of such paramount importance and ought to be much more argued for — on both epistemological and ontological grounds — if at all being used.

Limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we ‘export’ them to our ‘target systems,’ we have to be able to show that they do not only hold under ceteris paribus conditions and a fortiori only are of limited value to our understanding, explanations or predictions of real economic systems.

Read more…

Summers​ shameless assault on MMT

March 10, 2019 30 comments

from Lars Syll

First,​ it was Paul Krugman. Then came Kenneth Rogoff. And now Lawrence Summers has felt the urge to attack MMT and defend mainstream economics:

summersThere is widespread frustration with the performance of the economy … Altered economic conditions have led to the development of new economic ideas … And now, these new ideas are being oversimplified and exaggerated by fringe economists who hold them out as offering the proverbial free lunch: the ability of the government to spend more without imposing any burden on anyone …

Modern monetary theory is fallacious at multiple levels. First, it holds out the prospect that somehow by printing money, the government can finance its deficits at zero cost … Second, contrary to the claims of modern monetary theorists, it is not true that governments can simply create new money to pay all liabilities coming due and avoid default …

For neither the right nor the left is there any such thing as a free lunch.

Larry Summers

Now compare that to what the same Summers wrote​ just a couple of years ago: Read more…

Krugman a Keynesian? No way!

March 8, 2019 10 comments

from Lars Syll

In his critique of MMT the last couple of weeks, Krugman has claimed Stephanie Kelton and other MMTers have got things terribly wrong:

Anyway, what actually happens at least much of the time – although, crucially, not when we’re at the zero lower bound – is more or less the opposite: political tradeoffs determine taxes and spending, and monetary policy adjusts the interest rate to achieve full employment without inflation. Under those conditions budget deficits do crowd out private spending, because tax cuts or spending increases will lead to higher interest rates.

Paul Krugman

And this comes from someone who calls himself a Keynesian economist! The problem with his view is, of course, that it has nothing at all in common​ with Keynes — and that is utterly and completely wrong! Read more…

Economic ideas you should forget — the axioms of revealed preference

March 6, 2019 2 comments

from Lars Syll

economic-ideas-you-should-forgetThe axioms of revealed preference have been part of the foundations of economics since they were formulated by Paul Samuelson in 1947. These principles allowed economists to continue to use the calculus of utilitarianism even though utilitarianism had ceased to be a fashionable philosophical doctrine. And they enabled economists to give a particular, and special, meaning to the term rationality. In modern economics rationality is equated with consistency.

But consistency, as Ralph Waldo Emerson said, is ‘the hobgoblin of little minds, adored by little statesmen and philosophers and divines’. Ordinary people do not equate rationality with consistency. It is consistent but not rational to maintain the belief that there are fairies at the bottom of the garden …

The problem is that in a complex world, there is no objective means of defining whether two situations are in fact the same or are different. This is particularly problematic when this axiomatic approach is applied to choices made with imperfect knowledge and under radical uncertainty, which in practice describes most of the choices we make in the real world.

John Kay

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

Kelton and Krugman — MMT vs IS-LM

March 3, 2019 8 comments

from Lars Syll

UnknownIs there some reason the straightforward framework Krugman laid out is wrong? Yes, as even its creator went on to acknowledge. MMT rejects the IS-LM framework that Krugman uses to demonstrate the conclusion that widening budget deficits put upward pressure on interest rates and crowd out private investment.

The model remains the workhorse for many mainstream Keynesians. MMT considers it fundamentally flawed …

Keep this in mind: Higher deficits give rise to higher interest rates, which give rise to lower investment. The last bit is referred to as “crowding out.” This is the inherent tradeoff that MMT denies and Krugman defends.

And it’s easy for him to defend it because his model assumes a fixed money supply, which paves the way for the crowding-out effect!

Krugman’s framework treats investment as a simple function of the interest rate. Higher rates mean lower investment, and vice versa. Central banks can juice (or slow) the economy simply by lowering (or raising) interest rates. It’s Pavlovian in its simplicity: stimulus-response.

Keynes’s analysis was more nuanced. Investment decisions were forward-looking, heavily influenced by “animal spirits,” and overwhelmingly dependent on the state of profit expectations. When the profit outlook is sufficiently grim, no amount of rate cutting will entice businesses to borrow and invest in new plant and equipment (think Great Recession).

Stephanie Kelton

Read more…

Krugman vs Kelton on the fiscal-monetary tradeoff

March 1, 2019 11 comments

from Lars Syll

stefPaul Krugman is back again telling usthat he doesn’t really want to spend time on arguing about MMT — and then goes on complaining that well-known MMTer Stephanie Kelton says things “obviously indefensible.” What has especially irritated the self-proclaimed ‘conventional’ Keynesian is that Kelton “seems to claim that expansionary fiscal policy … will lead to lower, not higher interest rates.”

Now, the logic behind Krugman’s “conventional Keynesian” loanable-funds-IS-LM-theory is that if the government is going to pursue an expansionary fiscal policy it will have to borrow money and thereby increase the demand for loanable funds which will — “other things equal” — lead to higher interest rates and less private investment.

The loanable funds theory is in many regards nothing but an approach where the ruling rate of interest in society is — pure and simple — conceived as nothing else than the price of loans or credits set by banks and determined by supply and demand in the same way as the price of cars and raincoats.

It is a beautiful fairy tale, but the problem is that banks are not barter institutions that transfer pre-existing loanable funds from depositors to borrowers. Why? Because, in the real world, there simply are no pre-existing loanable funds. Banks create new funds — credit — only if someone has previously got into debt! Banks are monetary institutions, not barter vehicles. Read more…

The limits of probabilistic reasoning

February 27, 2019 59 comments

from Lars Syll

Almost a hundred years after John Maynard Keynes wrote his seminal A Treatise on Probability (1921), it is still very difficult to find statistics books that seriously try to incorporate his far-reaching and incisive analysis of induction and evidential weight.

keynesreadingbookThe standard view in statistics — and the axiomatic probability theory underlying it — is to a large extent based on the rather simplistic idea that more is better. But as Keynes argues — more of the same is not what is important when making inductive inferences. It’s rather a question of “more but different.”

Variation, not replication, is at the core of induction. Finding that p(x|y) = p(x|y & w) doesn’t make w irrelevant. Knowing that the probability is unchanged when w is present gives p(x|y & w) another evidential weight. Running 10 replicative experiments do not make you as sure of your inductions as when running 10 000 varied experiments — even if the probability values happen to be the same. Read more…

MMT — Krugman still does not get it!

February 24, 2019 16 comments

from Lars Syll

mmtKrugman complains that Lerner was too “cavalier” in his discussion of monetary policy since he called for the interest rate to be set at the level that produces “the most desirable level of investment” without saying exactly what that rate should be.

It’s an odd critique, since Krugman himself subscribes to the idea that monetary policy should target an invisible “neutral rate,” a so-called r-star that exists when the economy is neither depressed nor overheating. For what it’s worth, research suggests the neutral rate “may be flat-out wrong,” and Fed Chairman Jerome Powell has admitted that the Fed has been too cavalier in relying “on variables that cannot be measured directly and which can only be estimated with great uncertainty.”

But Lerner wasn’t trying to use interest rates to optimize the economy. That was a job for fiscal policy. He argued that the government should be prepared to spend whatever is necessary to sustain full employment without raising taxes or borrowing …

Krugman’s other objection is that Lerner “didn’t fully address the limitations, both technical and political, on tax hikes/or spending cuts” as a means of fighting inflation.

In fact, Lerner actually had quite a lot to say about this. Here’s the opening sentence to an entire chapter on the subject in his 1951 book “The Economics of Employment”: Read more…

What it takes​ to become a great economist

February 21, 2019 10 comments

from Lars Syll

The master-economist must possess a rare combination of gifts …​ He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.

John Maynard Keynes

Economics students today are complaining more and more about the way economics is taught. The lack of fundamental diversity — not just path-dependent elaborations of the mainstream canon — and narrowing of the curriculum, dissatisfy econ students all over the world. The frustrating lack of real-world relevance has led many of them to demand the discipline to start developing a more open and pluralistic theoretical and methodological attitude. Read more…