Archive for the ‘The Economics Profession’ Category

How evidence is treated in macroeconomics

August 21, 2015 8 comments

from Lars Syll

“New Keynesian” macroeconomist Simon Wren-Lewis has a post up on his blog, discussing how evidence is treated in modern macroeconomics (emphasis added):

quote-Oscar-Wilde-consistency-is-the-last-refuge-of-the-58It is hard to get academic macroeconomists trained since the 1980s to address this question, because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems. But DSGE models as a guide for policy are also fatally flawed because they are too simple. The unique property that DSGE models have is internal consistency. Take a DSGE model, and alter a few equations so that they fit the data much better, and you have what could be called a structural econometric model. It is internally inconsistent, but because it fits the data better it may be a better guide for policy.

Being able to model a credible world, a world that somehow could be considered real or similar to the real world, is not the same as investigating the real world. Read more…

Economics as storytelling: McCloskey again

August 20, 2015 9 comments

from Peter Radford

This is not new to most of you of course. You are already steeped in McCloskey’s Rhetoric. Or you ought to be. After all economists are simply telling stories about the economy. Sometimes we are taken in. Sometimes we are not.

Unfortunately McCloskey herself gets a little too caught up in her stories. As in her explanation as to how she can be both a feminist and a free market economist: Read more…

General equilibrium theory — a gross misallocation of intellectual resources and time

August 19, 2015 21 comments

from Lars Syll

General equilibrium is fundamental to economics on a more normative level as well. A story about Adam Smith, the invisible hand, and the merits of markets pervades introductory textbooks, classroom teaching, and contemporary political discourse.getbourse The intellectual foundation of this story rests on general equilibrium, not on the latest mathematical excursions. If the foundation of everyone’s favourite economics story is now known to be unsound — and according to some, uninteresting as well — then the profession owes the world a bit of an explanation.

Frank Ackerman

Almost a century and a half after Léon Walras founded general equilibrium theory, economists still have not been able to show that markets lead economies to equilibria.

We do know that — under very restrictive assumptions — equilibria do exist, are unique and are Pareto-efficient.

But after reading Frank Ackerman’s article — or Franklin M. Fisher’s The stability of general equilibrium – what do we know and why is it important? — one has to ask oneself — what good does that do? Read more…

Noah Smith thinks p-values work. Read my lips — they don’t!

August 18, 2015 3 comments

from Lars Syll

Noah Smith has a post up trying to defend p-values and traditional statistical significance testing against the increasing attacks launched against it:

fisher-smokingSuddenly, everyone is getting really upset about p-values and statistical significance testing. The backlash has reached such a frenzy that some psych journals are starting to ban significance testing. Though there are some well-known problems with p-values and significance testing, this backlash doesn’t pass the smell test. When a technique has been in wide use for decades, it’s certain that LOTS of smart scientists have had a chance to think carefully about it. The fact that we’re only now getting the backlash means that the cause is something other than the inherent uselessness of the methodology.

Hmm …

That doesn’t sound very convincing.

Maybe we should apply yet another smell test …  Read more…

Some Issues Re-visited

August 14, 2015 10 comments

from Peter Radford


It seems that some people misunderstood my comments regarding neoclassical economics.

Allow me to reiterate and, perhaps, clarify.

I want to say that I regard neoclassical economics as a triumph. A wonderful achievement. Brilliant.

Please read the fine print: that brilliance has nothing to do with relevance, reality, or any other such yardstick.

All I am saying is that within its own confines, with regard to its own rules, and with respect to the limits placed upon it by its multitude of excellent practitioners, neoclassical economics has been an extraordinary success.

Further, and more to the point, I am saying that the number of instances of economies we find within the space of all possible economies described by neoclassical economics is tiny. So tiny we are unlikely ever to experience one. Read more…

Chicago economics –only for Gods and idiots

August 13, 2015 1 comment

from Lars Syll

If I ask myself what I could legitimately assume a person to have rational expectations about, the technical answer would be, beat2I think, about the realization of a stationary stochastic process, such as the outcome of the toss of a coin or anything that can be modeled as the outcome of a random process that is stationary. I don’t think that the economic implications of the outbreak of World war II were regarded by most people as the realization of a stationary stochastic process. In that case, the concept of rational expectations does not make any sense. Similarly, the major innovations cannot be thought of as the outcome of a random process. In that case the probability calculus does not apply.

Robert Solow

‘Modern’ macroeconomic theories are as a rule founded on the assumption of  rational expectations — where the world evolves in accordance with fully predetermined models where uncertainty has been reduced to stochastic risk describable by some probabilistic distribution. Read more…

Economics departments — breeding generation after generation of idiot savants

August 11, 2015 11 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 eighteen years ago.


It is still a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond my 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!

Studying mathematics and logics is interesting and fun. It sharpens the mind. In pure mathematics and logics we do not have to worry about external validity. But economics is not pure mathematics or logics. It’s about society. The real world. Forgetting that, economics is really in dire straits. Read more…

Macroeconomic ad hocery

August 8, 2015 4 comments

from Lars Syll

Robert Lucas is well-known for condemning everything that isn’t microfounded rational expectations macroeconomics as “ad hoc” theorizing.  adhoc

But instead of rather unsubstantiated recapitulations, it would be refreshing and helpful  if the Chicago übereconomist — for a change — endeavoured to clarify just what he means by “ad hoc.”

The standard meaning — OED — of the term is “for this particular purpose.” But in the hands of New Classical–Real Business Cycles–New Keynesians it seems to be used more to convey the view that modeling with realist and relevant assumptions is somehow equivalent to basing models on “specifics” rather than the “fundamentals” of individual intertemporal optimization and rational expectations.

Read more…

Some Issues

August 8, 2015 8 comments

from Peter Radford


I have finally arrived at the point where I can give orthodox simple economics its due. It is a triumph. A system of thought well conceived, brilliantly executed, coherent, consistent, and pretty much complete. Bravo. I love it.

As long as we are trying to examine economies consisting of one or two prescient households, a couple of firms of exquisite accounting excellence, one or two products that are easily substituted for one another, as long as there is no uncertainty, no relevant time, and as long as these various actors can calculate everything at warp speed, we know everything we need to know about economics. The game is over.

As I say: well done everyone.

These unbelievably simple little economies, I assume, must exist somewhere. And wherever they do we can explain them easily.

Where they don’t is another matter.

Orthodox economics is simple economics. Simple.

Second: Read more…

RBC theory — willfully silly obscurantism

August 3, 2015 Leave a comment

from Lars Syll

Lucas and his school … went even further down the equilibrium rabbit hole, notably with real business cycle theory. And here is where the kind of willful obscurantism Romer is after became the norm. I wrote last year about the remarkable failure of RBC theorists ever to offer an intuitive explanation of how their models work, which I at least hinted was willful:

“But the RBC theorists never seem to go there; it’s right into calibration and statistical moments, with never a break for intuition. And because they never do the simple version, they don’t realize (or at any rate don’t admit to themselves) how fundamentally silly the whole thing sounds, how much it’s at odds with lived experience.”

Paul Krugman

Yours truly, of course, totally agrees with Paul on Lucas’ rabbit hole freshwater school.

And so does Truman F. Bewley: Read more…

The microfoundationalist cyborg dream

August 1, 2015 2 comments

from Lars Syll 

blog_robot_overlordsAre macro-economists doomed to always “fight the last war”? Are they doomed to always be explaining the last problem we had, even as a completely different problem is building on the horizon? Well, maybe. But I think the hope is that microfoundations might prevent this. If you can really figure out some timeless rules that describe the behavior of consumers, firms, financial markets, governments, etc., then you might be able to predict problems before they happen. So far, that dream has not been realized. But maybe the current round of “financial friction macro” will produce something more timeless. I hope so.

Noah Smith

So there we have it! This is nothing but the age-old machine dream of neoclassical economics — an epistemologically founded cyborg dream that disregards the fundamental ontological fact that economies and societies are open — not closed — systems. 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,” they do only hold under ceteris paribus conditions and are a fortiori of limited value for understanding, explaining or predicting real economic systems. Or as the always eminently quotable Keynes wrote in Treatise on Probability(1921): Read more…

On the poverty of microfoundationalist fantasies

July 31, 2015 3 comments

from Lars Syll

The microfoundationalist’s fantasy has a powerful hold on macroeconomists. They recognize that an agent-by-agent reconstruction of the economy is not feasible, but they argue that it is something that we could do “in principle,” and that the in-principle claim warrants a particular theoretical strategy. The strategy is to start with the analysis of a single agent and to build up through ever more complex analyses to a whole economy …

The implicit argument in favor of representative-agent models as empirically relevant to aggregate economic data runs something like this: a representative-agent model is not itself an acceptable representation of the whole economy … but it is a first step in a program which step by step will inevitably bring the model closer to the agent-by-agent microeconomic model of the whole economy … I call this argument eschatological justification: it is the claim that there is a plausible in-principle game plan for a reductionist program and that the conclusions of early stages of that program are epistemically warranted by the presumed, but undemonstrated, success of the future implementation of the program in the fullness of time …

Read more…

What the Export-Import Bank debate tells us about economists

July 30, 2015 2 comments

from Dean Baker

In the recent debate on trade policy most reputable economists argued for fast track trade authority and the approval of Trans-Pacific Partnership (TPP), which is likely to be the first trade deal to be covered by the new fast-track rules. Their argument was simple; the reduction of tariffs and other trade barriers will increase efficiency and economic growth. This is the standard argument for free trade.

Given the general view within the economics profession that TPP is good policy, it is striking that so few economists have been outspoken in opposition to the reauthorization of the Export-Import Bank. The reason is that the whole point of the Export-Import Bank is to have the government subsidize selected companies by giving them access to credit at below market interest rates. This is 180 degrees at odds with free trade. It means the government is allocating credit rather than markets. It would be expected to lead to the same type of economic distortions as tariffs and quotas.

The arguments put forward in support of the Ex-Im Bank should have been especially painful to economists since they are exactly the same arguments made in support of protectionist trade measures. For example, proponents of the Ex-Im Bank routinely talked about the number of jobs supported by the bank’s loans, implying that all of these jobs would somehow disappear without subsidized loans from the Ex-Im Bank. Read more…

Why Real Business Cycle models can’t be taken seriously

July 28, 2015 3 comments

from Lars Syll

tobin_2049712cThey try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they find objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

James Tobin

Real Business Cycle theory basically says that economic cycles are caused by technology-induced changes in productivity. It says that employment goes up or down because people choose to work more when productivity is high and less when it’s low. This is of course nothing but pure nonsense — and how on earth those guys that promoted this theory (Thomas Sargent et consortes) could be awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is really beyond comprehension. Read more…

Death of a Great Australian: Hugh Stretton 1924–2015

July 27, 2015 3 comments

from Steve Keen

The great poly­math and human­i­tar­ian Hugh Stret­ton died this week­end. I can do no bet­ter than to repro­duce another great Australian’s trib­ute to him.

The fol­low­ing is from Geoff Har­court.

Hugh died last Sat­ur­day at the age of 91 after a long ill­ness. I had known him since 1958 when I first came to Ade­laide where he was the much-admired Pro­fes­sor of His­tory. In later years we became firm friends, though I con­tin­ued to regard him with awe and admi­ra­tion. He was a giant intel­lect, eas­ily Australia’s most deep and pro­gres­sive thinker, and a remark­ably kind and humane man who lived up to his ideals in many prac­ti­cal ways.

Hav­ing estab­lished an excel­lent His­tory depart­ment, he resigned from his chair so that he could write. The first prod­uct of this new phase was The Polit­i­cal Sci­ences, pub­lished by Rout­ledge in 1969, and named in the Times Lit­er­ary Sup­ple­ment as a work of ‘near genius’. It con­tains a most pro­found analy­sis of the insep­a­ra­bil­ity of analy­sis and ide­ol­ogy in the social sci­ences. He pub­lished pri­vately his ground-breaking book, Ideas for Aus­tralian Cities in 1970, which then became a best­seller. Hous­ing and Gov­ern­ment, his Boyer Lec­tures, were pub­lished in 1974. His Cam­bridge Uni­ver­sity Press book, Cap­i­tal­ism, Social­ism and the Envi­ron­ment, (1976), was so far ahead of its time that it has not received the atten­tion it should have. His vol­umes of essays analyse vital social, polit­i­cal and eco­nomic issues in Aus­tralian soci­ety. His ‘anti-Samuelson’ eco­nom­ics text­book, Eco­nom­ics: A New Intro­duc­tion (1999), presents to stu­dents a viable alter­na­tive to main­stream economics.

Most of all, he was a lov­ing and lov­able per­son, always extra­or­di­nar­ily gen­er­ous and sup­port­ive to his many friends and admir­ers (over­lap­ping sets), and lov­ingly sup­port­ive and proud of his chil­dren. He and Pat had many years of deep love and sup­port for one another. I doubt that we shall see his like again.

Geoff Har­court Pro­fes­sor Emer­i­tus G C Har­court School of Eco­nom­ics, UNSW Busi­ness School

Read more…

On rational expectations and playing games of whack-a-mole (wonkish)

July 27, 2015 7 comments

Read more…

The Keynes-Ramsey-Savage debate on probability

July 22, 2015 5 comments

from Lars Syll

Neoclassical economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules, axiomatized by Ramsey (1931) and Savage (1954) – that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately – via some “Dutch book” or “money pump”argument – susceptible to being ruined by some clever “bookie”.

calvin-math-atheist3-2Bayesianism reduces questions of rationality to questions of internal consistency (coherence) of beliefs, but – even granted this questionable reductionism – do rational agents really have to be Bayesian? As I have been arguing elsewhere (e. g. here, here and here) there is no strong warrant for believing so.

In many of the situations that are relevant to economics one could argue that there is simply not enough of adequate and relevant information to ground beliefs of a probabilistic kind, and that in those situations it is not really possible, in any relevant way, to represent an individual’s beliefs in a single probability measure.  Read more…

Nonsense economics

July 20, 2015 Leave a comment

from Lars Syll

It is, perhaps, not uninteresting to point to some of the economic implications which are included in “perfect foresight”. It will immediately be recognized that this assumption could never lie at the basis of the theory of equilibrium, and they who attribute this to such authors as Walras and Pareto, who are included as representatives of equilibrium theory, are in error. ln the first place, strange to say, it happens that even material assertions can be made about such an economy on the basis of the assumption of perfect foresight.morgensternThey are fundamentally of the negative type. For example, no lotteries or gambling will exist, for who would play if it were well-established where the profit went? Telephone, telegraph, newspapers, bills, posters, etc. would, likewise, be superfluous, obviously; but, also, the very important industries, based on them, with all their affiliated industries, would be absent. Only packages and letters implying documentary evidence would need to be delivered by post, for to whom would letters be written? The tale need not be carried further, for it is obvious how little considered are the “fundamental assumptions” so frequently employed in theoretical economics, where really a matter of nonsense is at issue.

Oskar Morgenstern

Read more…

Teaching economic growth: notes on the current financial-led accumulation regime

July 16, 2015 2 comments

from Maria Alejandra Madi and WEA Pedagogy Blog

Deregulated finance has been associated to great transformations in the models of economic growth.  As Bello (2006) warned, in the 1980s, Reaganism and structural adjustment were not successful attempts to overcome the post-war accumulation crisis. One decade later, the Clinton administration embraced globalization as an American strategy. First, this strategy aimed to accelerate the integration of production and markets by transnational corporations. Secondly, it aimed to create a multilateral system of global governance centered on the World Trade Organization, the International Monetary Fund and the World Bank. In this scenario, global liquidity, stimulated by the evolution of the American monetary policy since the early 1990s, favored the expansion of private capital flows and deepened the interconnections between national financial systems (Chesnais, 1998).

Accordingly Stockhammer (2009), the notion of a “finance dominated” accumulation regime highlights that the current global financial set up has decisively shaped a pattern of accumulation where different growth models could be identified. While some countries have presented a consumption-driven growth model fueled by credit, generally followed by current account deficits, other countries have shown an export-driven growth model, mainly characterized by modest consumption growth and large current account surpluses.

In spite of the coexistence of different growth models, the financial-led accumulation regime has presented some distinctive features:  Read more…

Memoirs from beyond the tomb

July 16, 2015 1 comment

from Peter Radford

Right at the end of his book called “Memoirs from Beyond the Tomb” Chateaubriand gives us a remarkable insight into our current troubles. I wonder whether we will solve them or whether we will simply write an addendum to his book.

He asks, for instance:

“Is it possible for a political system to subsist, in which some individuals have so many millions a year while other individuals are dying of hunger, when religion is no longer there with its other-worldly hopes to explain the sacrifice?”

A little later, with respect to the spread of education downward in society, he goes on :

“The excessive disproportion of conditions and fortunes was endurable as long as it remained concealed; but as soon as this disproportion was generally perceived, the old order received its death-blow. Recompose the aristocratic fictions if you can; try to convince the poor man, once he has learnt to read and ceased to believe, once he has become as well informed as yourself, try to convince him that he must submit to every sort of privation, while his neighbor possesses a thousand times what he needs: as a last resource you will have to kill him.”

Chateaubriand, as we know, lived through a great transition in society.  Read more…


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