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Teaching inequality: Notes on Piketty, Stiglitz and Harvey

July 2, 2015 Leave a comment

from Maria Alejandra Madi and the WEA Pedagogy Blog

The relevance of wealth and income inequality has been acknowledged by unorthodox writers for some time. The recent success of Piketty’s book (2014) shows that the wider public is also interested in this issue.  Piketty’s  15-year program of empirical research conducted in conjunction with other scholars analyzed  the evolution of income and wealth (which he calls capital) over the past three centuries in leading high-income countries. Among the lessons, he highlighted;  Read more…

Categories: ethics, teaching

DSGE macro-models criticism, a round up. Part 6. Consumption

June 17, 2015 1 comment

Looking at neoclassical macro-models through the lens of economic statistics. Today: consumption.

According to a Eurostat headline, “In 2014, CO2 emissions in the EU estimated to have decreased by 5% compared with 2013“. It is important to know if this decline was caused by technological progress or by lower consumption and/or investment. Alas, these data are too vague and fuzzy to answer such questions, as the article also states:

It should … be noted that imports and exports of energy products have an impact on CO2 emissions in the country where fossil fuels are burned: for example if coal is imported this leads to an increase in emissions, while if electricity is imported, it has no direct effect on emissions in the importing country

Can’t economic statisticians do better than this? Yes, they can.  A Eurostat publication about this states:  Read more…

Noah Smith is wrong on the experimental turn in empirical economics

June 15, 2015 Leave a comment

from Lars Syll

The increasing use of natural and quasi-natural experiments in economics during the last couple of decades has led Noah Smith to — on his blog Noahpinion today — triumphantly declare it as a major step on a recent path toward empirics, where instead of being a “deductive, philosophical field,” economics is now increasingly becoming  an “inductive, scientific field.”

Smith is especially apostrophizing the work of Joshua Angrist and Jörn-Steffen Pischke, so lets start with one of their later books and see if there is any real reason to share Smith’s optimism on this ’empirical turn’ in economics.

In their new book, Mastering ‘Metrics: The Path from Cause to Effect, Angrist and Pischke write: Read more…

Categories: methodology

Rational expectations — only for Gods and idiots

June 14, 2015 1 comment

from Lars Syll

56238100In a laboratory experiment  run by James Andreoni and Tymofiy Mylovanov — presented here — the researchers induced common probability priors, and then told all participants of the actions taken by the others. Their findings is very interesting, and says something rather profound on the value of the rational expectations hypothesis in standard  neoclassical economic models: Read more…

Categories: methodology

Beyond “antibiotic and rat poison”

June 11, 2015 3 comments

from David Ruccio

There is something fundamentally unstable—and ultimately dangerous—about the liberal critique of austerity.

Consider the recent essay on “The Economic Consequences of Austerity” by Amartya Sen. On one hand, he correctly criticizes the austerity effects associated with the deficit-cutting measures that have been imposed in Western Europe in the years following the crash of 2007-08 (and reminds readers of Keynes’s critique of the austerity measures the Allied Powers were threatening to impose on Germany in the Treaty of Versailles).

But then Sen accepts, without any further argument, the need for “real institutional reform” in Europe: “from the avoidance of tax evasion and the fixing of more reasonable retiring ages to sensible working hours and the elimination of institutional rigidities, including those in the labour markets.”

In other words, Sen is attempting to distinguish between the “antibiotic” of institutional reform and the “rat poison” of austerity. Read more…

What can econometrics achieve?

June 10, 2015 Leave a comment

from Lars Syll

A popular idea in quantitative social sciences is to think of a cause (C) as something that increases the probability of its effect or outcome (O). That is:

P(O|C) > P(O|-C)

However, as is also well-known, a correlation between two variables, say A and B, does not necessarily imply that that one is a cause of the other, or the other way around, since they may both be an effect of a common cause, C.

causation-2In statistics and econometrics we usually solve this “confounder” problem by “controlling for” C, i. e. by holding C fixed. This means that we actually look at different “populations” – those in which C occurs in every case, and those in which C doesn’t occur at all. This means that knowing the value of A does not influence the probability of C [P(C|A) = P(C)]. So if there then still exist a correlation between A and B in either of these populations, there has to be some other cause operating. But if all other possible causes have been “controlled for” too, and there is still a correlation between A and B, we may safely conclude that A is a cause of B, since by “controlling for” all other possible causes, the correlation between the putative cause A and all the other possible causes (D, E,. F …) is broken.  Read more…

Categories: econometrics

Public policies, corporations and social needs: rethinking development

June 10, 2015 Leave a comment

from Maria Alejandra Madi and the WEA Pedagogy Blog

The target of economics education is the comprehension of the reality in its economic dimensions, that is to say, the understanding of the practices and ideas that support the evolution of the reproduction of material life. However, following John Kenneth Galbraith, we can say that economics is overwhelmed by an “uncorrected obsolescence”.   Consequently, each generation faces many new economic and social challenges. As Alfred Marshall wrote in the preface to his Principles of Economics, economic conditions are constantly changing and each generation looks at its own problems in its own way”.

Indeed, the current political, economic and social features of  globalization configures a rupture in relation to the Bretton Woods institutions. The contemporary institutional set up is the result of deep transformations that characterized the outcomes of the crisis of the accumulation pattern in the 1970s and 1980s.  The financialization of the global economy produced great transformations in the growth dynamics since the decisions related to investment, production and employment are increasingly subordinated to the short-term financial commitments of big corporations.  Besides, further deep structural changes have involved increasing capital mobility and the growing importance of institutional investors as managers of “financial savings”. Read more…

Categories: teaching

Austerity policies — prescribing rat poison for ailing economies

June 6, 2015 3 comments

from Lars Syll 

How was it possible, it has to be asked, for the basic Keynesian insights and analyses to be so badly lost in the making of European economic policies that imposed austerity? Some of the dominant figures in the financial world have had a long-standing scepticism of the economic relations on which Keynes focused which is being emended only now, with reality checks being made in observations of the penalty of the neglect of Keynesian relations …

Read more…

Ditch ‘ceteris paribus’!

June 4, 2015 12 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. The 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 necessary for the deductivist machinery to work — as e. g. IS-LM and DSGE models — simply don’t hold.
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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. Read more…

Categories: methodology

Loanable funds

June 2, 2015 2 comments

from Lars Syll

Economic models that integrate banking with macroeconomics are clearly of the greatest practical relevance at the present time. The currently dominant intermediation of loanable funds (ILF) model views banks as barter institutions that intermediate deposits of pre-existing real loanable funds between depositors and borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds, and ILF-type institutions do not exist. Instead, banks create new funds in the act of lending, through matching loan and deposit entries, both in the name of the same customer, on their balance sheets. The financing through money creation (FMC) model reflects this, and therefore views banks as fundamentally monetary institutions. The FMC model also recognises that, in the real world, there is no deposit multiplier mechanism that imposes quantitative constraints on banks’ ability to create money in this fashion. The main constraint is banks’ expectations concerning their profitability and solvency.

Zoltan Jakab & Michael Kumhof 

In the traditional loanable funds theory — as presented in mainstream macroeconomics textbooks   Read more…

Natural Liberty or Democracy?

June 1, 2015 5 comments

from Peter Radford

There seems to be a lot of angst as to why standard macroeconomics ignores the government in its analysis. Or, rather, that when the government slips into the picture it is almost invariably in the form of an evil presence mucking up the sweet operation of market magic and thus stalling us all on our way to the happy place economists love to call equilibrium.

This is quite simple to answer: economists of the standard ilk are opposed to democracy.

Why?

Because, since its very inception, modern economics in most its forms has been the study of the private economy. Listen to Quesnay: Read more…

A beautiful idea?

from David Ruccio

What most of my students know about  and game theory (at least before sitting through my two or three lectures on the topic or taking an entire course in game theory) they derived from the film, A Beautiful Mind, and the stupid example used to illustrate game theory in the film (of a blond woman walking into a bar).

As Kenneth Chang explains, the episode in the film is not an example of a Nash equilibrium. Read more…

Consistency and validity is not enough!

May 23, 2015 6 comments

from Lars Syll

Neoclassical economic theory today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these “analogue-economy models” rather than engineering things happening in real economies.

Formalistic deductive “Glasperlenspiel” can be very impressive and seductive. But 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. As Julian Reiss writes:  Read more…

Categories: methodology

Paul Romer is ‘busy’ …

May 21, 2015 12 comments

from Lars Syll

About math: I have an undergraduate degree in physics. I’ve seen clear evidence that math can facilitate scientific progress toward the truth.

If you think that math is worthless or dangerous, I’m sure that there are people who will be happy to discuss this with you. I’m not interested. I’m busy.  too-busy-people-workplace-ecard-someecards

About truth and science: My fundamental premise is that there is an objective notion of truth and that science can help us make progress toward truth.

If you do not accept this premise, I’m sure that there are people who would be happy to debate it with you. I’m not interested. I’m busy.

Paul Romer

Hmm …  Read more…

Modelling consistency and real world non-coherence in mainstream economics

May 20, 2015 6 comments

from Lars Syll

9781138851023

In those cases where economists do focus on questions of market or competitive equilibrium etc., the formulators of the models in question are often careful to stress that their theorising has little connection with the real world anyway and should not be used to draw conclusions about the latter, whether in terms of efficiency or for policy or whatever.

In truth in those cases where mainstream assumptions and categories are couched in terms of economic systems as a whole they are mainly designed to achieve consistency at the level of modelling rather than coherence with the world in which we live.

This concern for a notion of consistency in modelling practice is true for example of the recently fashionable rational expectations hypothesis, originally formulated by John Muth (1961), and widely employed by those that do focus on system level outcomes. The hypothesis proposes that predictions attributed to agents (being theorised about) are treated as being essentially the same as (consistent with)  those generated by the economic model within which the same agents are theorised. As such the proposal is clearly no more than a technique for (consistency in) modelling, albeit a bizarre one. Significantly any assertion that the expectations held (and so model in which they are imposed) are essentially correct, is a step that is additional to assuming rational expectations.

Read more…

The fetishism of mathematics

from David Ruccio

I am tempted, in response to Paul Romer, to paraphrase the Old Moor: “The use of mathematics in economics appears, at first sight, a very trivial thing, and easily understood. Its analysis shows that it is, in reality, a very queer thing, abounding in metaphysical subtleties and theological niceties.”

The last time I had the occasion to comment on Romer’s work was in reaction to the neoclassical colonialism of his proposal for “charter cities” in poor countries. Now, in a desperate bid to save the last vestiges of so-called endogenous growth theory, Romer has gone on the attack against what he calls “mathiness” in contemporary growth theory.

What is mathiness? Read more…

Paul Romer on math masquerading as science

May 19, 2015 3 comments

from Lars Syll

I have a new paper in the Papers and Proceedings Volume of the AER that is out in print and on the AER website …

Paul_RomerThe point of the paper is that if we want economics to be a science, we have to recognize that it is not ok for macroeconomists to hole up in separate camps, one that supports its version of the geocentric model of the solar system and another that supports the heliocentric model …

The usual way to protect a scientific discussion from the factionalism of academic politics is to exclude people who opt out of the norms of science. The challenge lies in knowing how to identify them.

From my paper:

“The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.”

Read more…

Changing our development paradigms

May 19, 2015 2 comments

from Asad Zaman  (reposted from the WEA Pedagogical Blog)

Growing up in British India, my father learnt that Great Powers had certain special characteristics. For global influence, they had to have sea power which required indented coastlines and natural harbours, coal mines for energy, extensive telegraph cables for communications. Furthermore, they had to have a cold climate to make them hardy, and be isolated from the mainland so as to have natural defences against potential rivals and enemies. In light of these criteria, it would be obvious even to a child, that the UK was the sole and unrivalled leader of the world. Read more…

Liberty to do what?

May 18, 2015 2 comments

from Peter Radford

Continuing my peon to Judt: he reminds us of Condorcet’s fear:

“Liberty will be no more, in the eyes of an avid nation, than the necessary condition for the security of financial operations.”

No kidding.

How many times do we come across, in this avid nation of ours, some foolish comment that our social policies must not restrict commerce? How many times do we hear some politician arguing that we must become more business friendly? We scarcely can move an inch without tripping over someone cajoling us with fears that limitations on liberty are actually limitations on prosperity. As if prosperous was purely an arithmetic reference and had no qualitative content.

This is Condorcet’s fear alive and well. We seem to have reduced liberty to some small prop for the making of profit. Liberty is simply, in this ghostly shadow of what it once was, a veil behind which profits can be amassed without reference to the fabric of society as whole. And certainly without reference to any larger interest than that of the individual, or individuals, engaged in making that profit. Read more…

Piketty and the non-applicability of neoclassical economics

May 17, 2015 5 comments

from Lars Syll

economic-mythIn yours truly’s On the use and misuse of theories and models in economics the author of Capital in the Twenty-First Century is criticized for not being prepared to fully take the consequences of marginal productivity theory — and the alleged close connection between productivity and remuneration postulated in mainstream income distribution theory — over and over again being disconfirmed both by history and, as shown already by Sraffa in the 1920s and in the Cambridge capital controversy in the 1960s, also from a theoretical point of view: Read more…

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