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.”
Yours truly, of course, totally agrees with Paul on Lucas’ rabbit hole freshwater school.
from Lars Syll
Are 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.
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…
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 …
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…
from Lars Syll
They 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.
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…
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
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”.
Bayesianism 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…
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.They 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.
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…
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…
from David Ruccio
Pope Francis’s recent references to money as the “dung of the devil” (or, alternatively, the “devil’s dung“) brought to mind lots of different references (from the etymology of dung in terms of different classes of workers to Freud’s tale of the devil whose gifts of money turn to excrement upon his leaving). Read more…
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…
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
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…
from Lars Syll
In 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…
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…
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.
In 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…
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…
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 …