from Geoff Davies
Debates about whether economics is or can ever be a science appear frequently on this site, such as making economics a relevant science. Perhaps more in the subsequent comments than in the articles themselves, there are some recurring confusions and misconceptions, such as whether mathematics should be involved, about what the role of mathematics might be, about “prediction” as a necessary part of a science, about the role of assumptions and approximations, about whether any study involving people can ever be a science and, fundamentally, about what science really is.
I have commented in passing on this topic before, for example here, but in this comment I’d like to offer a more focussed discussion.
My day job has been studying the Earth, using physics. This has taught me some distinctions between science and not-science, and it has led me to expand my view of what science might encompass. Here are a few points.
The Earth is rather messy (though not as messy as people), so one has to learn to sift carefully through many observations, that are often confusing, to find a nugget of insight.
The deep interior of the Earth, my subject, is remote from direct observation, so one infers what might be down there, from indirect observations made at the Earth’s surface. This led me to realise that all observations, in any field, are interpreted through such inference. The notion of a “fact” becomes slippery. So I talk about observations, not facts.
One cannot experiment with the Earth, one can only observe the effects of “natural experiments”. The goal is always to figure out how the Earth got to its present condition.
It is also a historical science, so one has to be careful what one means by prediction from a theory, and perhaps to use a different expression: deducing the implications of a theory.
Good science does not have to involve complicated mathematics or high precision. The precision required of measurements or calculations depends on the context. Sometimes a very rough measurement or estimate can yield a crucial insight, whereas other times an elaborate and high-precision measurement or calculation might be called for. The mathematics involved might be simple, or highly sophisticated, or even just logical relationships: before, after, bigger than, smaller than.
Science can be presented as a two-stage process: Read more…
from Maria Alejandra Madi at the WEA Pedagogy Blog
The recent Great Financial crisis has restated the menace of deep depressions among the current economic challenges while the livelihoods turned out to be subordinated to speculation, financial instability and the bailout of domestic financial systems. Looking backward, in the context of the 1930 Great Depression, John Maynard Keynes pointed out that the evolution of capital markets increases the risk of speculation and instability since these markets are mostly based upon conventions whose precariousness affects the rhythm of investment and increases pressures on the political sphere.
Keynes called attention to the fact that the capitalist system has endogenous mechanisms capable of destabilizing the levels of spending, income and employment. read more
from Edward Fullbrook
An invitation to speak at next year’s ASSA annual conference in Boston has reminded me of attending the same event in Boston twenty years ago and of a short article I wrote about it (“No Reality, Please. We’re Economists”, The Times Higher Education Supplement, March 25, 1994). The observations I made then seem no less pertinent today. Here is a draft of that article.
The American Dream and the Boston Economics Party
When at this year’s American Economic Association meetings a speaker used the word conscience, embarrassment fluttered through the hall. “The c-word” is taboo among economists. Its effect on our notion of “rationality”, which admits only isolated self-interest, is like a lighted match in a gas tank.
The unfortunate speaker (he was later publicly admonished for his impropriety) was one of 7200 economists from over 50 countries gathered in Boston for a three-day bash of reading and listening to learned papers. Astonishingly, this global event for “the queen of the social sciences”, addressed scarcely a word to the world’s mounting economic ills. Read more…
from Lars Syll
If at some time my skeleton should come to be used by a teacher of osteology to illustrate his lectures, will his students seek to infer my capacities for thinking, feeling, and deciding from a study of my bones? If they do, and any report of their proceedings should reach the Elysian Fields, I shall be much distressed, for they will be using a model which entirely ignores the greater number of relevant variables, and all of the important ones. Yet this is what ‘rational expectations’ does to economics.
G. L. S. Shackle
Since I have already put forward a rather detailed theoretical-methodological critique of the rational expectations hypothesis in Rational expectations – a fallacious foundation for macroeconomics in a non-ergodic world (real-world economics review, issue 62, 2012), I will limit myself here to elaborate on a couple of the rather unwarranted allegations that defenders of rational expectations put forward in their attempts at rescuing the rational expectations hypothesis from the critique. Read more…
from Thomas Palley
Larry Summers (HERE) and Paul Krugman (HERE) have recently identified the phenomenon of stagnation. Given that they are giants in today’s economic policy conversation, their views have naturally received enormous attention. That attention is very welcome because the issue is so important. However, there is also a danger that their dominance risks crowding out other explanations of stagnation, thereby short-circuiting debate.
Krugman has long emphasized the liquidity trap – zero lower bound to interest rates which supposedly prevents spending from reaching a level sufficient for full employment. Summers has added to this story by saying we have been in the throes of stagnation for a long while, but that has been obscured by years of serial asset price bubbles.
That is a good start to the conversation, but there are other views that dig deeper regarding the causes of stagnation. Read more…
from Lars Syll
To understand real world “non-routine” decisions and unforeseeable changes in behaviour, ergodic probability distributions are of no avail. In a world full of genuine uncertainty — where real historical time rules the roost — the probabilities that ruled the past are not necessarily those that will rule the future.
When we cannot accept that the observations, along the time-series available to us, are independent … we have, in strict logic, no more than one observation, all of the separate items having to be taken together. For the analysis of that the probability calculus is useless; it does not apply … I am bold enough to conclude, from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed … We should always ask ourselves, before we apply them, whether they are appropriate to the problem in hand. Very often they are not … The probability calculus is no excuse for forgetfulness. Read more…
from Peter Radford
A recent correspondent asks whether medicine could act as a template for the importation of ethical standards into economics. On balance I don’t think it can. Here’s why:
Medicine consists of a practical part that faces outward towards its customers. We call those customers patients. From the earliest times medicine has adopted the credo ‘first do no harm’ which forms the ethical bedrock for all subsequent standards. This is relatively easy to do since ‘doing harm’ is quite quickly identified. Even then such an ethical background failed to stop the development and implementation of some outrageous and harmful medical techniques. In the modern era the ‘doing no harm’ ethic has allowed the creation of a number of rules that govern doctor activity and provide a measure of protection to patients. Those rules are enforced by various governing bodies that not only establish and monitor the rules, but also govern the very process that allows someone to call themselves a doctor in the first place. This governance structure gives practical medicine a coherence and shape that are identifiable by the public, and ensures that the profession recognizes it relationship with society at large. Read more…
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.
Noah Smith (emphasis added)
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. Read more…
from Lars Syll
As yours truly has reported repeatedly lately, university students all over Europe are increasingly beginning to question if the kind of economics they are taught — mainstream neoclassical economics — really is of any value. Some have even started to question if economics really is a science. Two Nobel laureates in economics — Robert Shiller and Paul Krugman — have responded.
This is Robert Shiller‘s view:
Critics of “economic sciences” sometimes refer to the development of a “pseudoscience” of economics, arguing that it uses the trappings of science, like dense mathematics, but only for show. For example, in his 2004 book Fooled by Randomness, Nassim Nicholas Taleb said of economic sciences: “You can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment” …
My belief is that economics is somewhat more vulnerable than the physical sciences to models whose validity will never be clear, because the necessity for approximation is much stronger than in the physical sciences, especially given that the models describe people rather than magnetic resonances or fundamental particles. People can just change their minds and behave completely differently. They even have neuroses and identity problems, complex phenomena that the field of behavioral economics is finding relevant to understanding economic outcomes.
from Peter Radford
You would have thought that, after all this time, economics would change. Or be changing. Or even be hinting at the possibility of changing. However, while there are a few encouraging signs, there is precious little sign of said motion inside the citadels that dominate the discipline. We still have a profession stuck in a most unprofessional rut, pursuing thinking that reflects not the world around it, but itself.
So, let me say it again: economists are, by and large, more interested in economics than in economies. They spend much more time on trying to display mathematical virtuosity than in trying to get to grips with the world around them. Even those who give the real world space to intrude into their thinking wrap it up in strange and unrepresentative ways.
Let me make this plain to those of you who follow the sport from a distance: most economists make their reputations nowadays by being steeped in the latest mathematics and by being capable of producing supremely logical, tightly wound models that conform to the discipline’s rules and to what the discipline thinks of as important. The relevance of an actual economy – for example the US between 2007 and now – is not considered if it does not allow the wizardry to be displayed. Read more…
from Dean Baker
Economists are not very good at economics. We know this because we had a huge housing bubble that collapsed, which almost none of them saw. The pre-crash projections from the Congressional Budget Office imply that this downturn has already cost us more than $7.6 trillion, or $25,000 per person. This could have been prevented if we had economists in policy positions who understood how the economy worked.
But even if economists aren’t very good at dealing with the economy, they still can provide value to society. In particular they can be a great source of entertainment. That’s how we should view the story that robots will take all of our jobs and leave most of the population unemployed.
This story has become a popular theme lately among Washington policy types. There are important people from across the political spectrum running around town wringing their hands over the prospect that the economy may not provide jobs for large segments of the labor force.
The first aspect of this story that should impress people is that many of the same people have been wringing their hands about the exact opposite problem, most likely without even knowing it. Read more…
A point is reached … when a continuously modified hypothesis becomes difficult to entertain seriously.”
from Peter Radford
I came across this whilst reading Sharon McGrayne’s history of Bayesian theory, its a quote attributed to the statistician Jerome Cornfield:
“A point is reached … when a continuously modified hypothesis becomes difficult to entertain seriously.”
For much of economics.
Looking back over the history of the development of economic theory, more precisely theories since we have such an abundance of them, we cannot but be struck by one constancy: that they are all updated regularly. This updating is not to replace them because they have proven to be incorrect, but to modify them sufficiently to prolong their life despite the evidence. It is, apparently, intellectually cheaper to tinker than to replace.
This is especially true of the array of ideas that loosely can be called neoclassical theory. It is a mishmash of ideas that are known to be false or highly questionable or utterly divorced from reality, yet are still used as a basis for thinking and modeling economies. It is an archeologists dream. Read more…
from Lars Syll
In econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come in to the picture.
The assumption of imaginary “superpopulations” is one of the many dubious assumptions used in modern econometrics, and as Clint Ballinger has highlighted, this is a particularly questionable rabbit pulling assumption: Read more…
from Steve Keen
This paper will be published in a forthcoming book on the crisis edited by Malliaris, Shaw and Shefrin. In what follows, I derive a corrected formula for the role of the change in debt in aggregate demand, which is that ex-post aggregate demand equals ex-ante income plus the circulation of new debt, where the latter term is the velocity of money times the ex-post creation of new debt.
Literally no-one disputes that the financial sector was the cause of the post-2007 economic crisis: disputation instead centers on the causal mechanisms. I follow Fisher (Fisher 1933) and Minsky (Minsky 1980) in assigning key roles to the growth and contraction of aggregate private debt (Keen 1995; Keen 2000), but this perspective is rejected by New Keynesian economists on the a priori basis that private debts are “pure redistributions” that “should have no significant macro-economic effects” (Bernanke 2000p. 24), and as a corollary to the oft-repeated truism that “one person’s debt is another person’s asset” (Krugman 2012c, p. 43).
My analysis also follows the Post Keynesian tradition of Read more…
from Lars Syll
Commenting on experiments — showing time-preferences-switching framing effects — performed by experimental economist David Eil, Noah Smith writes:
Now, here’s the thing…it gets worse … I’ve heard whispers that a number of researchers have done experiments in which choices can be re-framed in order to obtain the dreaded negative time preferences, where people actually care more about the future than the present! Negative time preferences would cause most of our economic models to explode, and if these preferences can be created with simple re-framing, then it bodes ill for the entire project of trying to model individuals’ choices over time.
This matters a lot for finance research. One of the big questions facing finance researchers is why asset prices bounce around so much. Read more…
Below is an excerpt from a theRealNews.com interview today with Heiner Flassbeck
JAY: Now, we’ve talked a bit about this before, and I know this issue of exchange rates is quite complicated. There’s many factors involved. But one of the main factors, it seems to me, if I’m understanding it correctly, is interest rates are so low in the United States because the Fed is making sure they stay as low as possible, but to a large extent because there’s so little real demand in the United States, wages are so stagnant and so low, that they’re doing everything they can to kind of keep, you know, as much as they can, boosting the economy with cheap credit. And then this has global consequences, not just American domestic consequences. Do I have it right?
FLASSBECK: Yeah, that’s one thing, that’s one factor that’s very important. But, as I said before, it’s not only the U.S. We have zero interest rates in Japan. When the U.S. still had higher interest rate, the hedge funds went through Japan, borrowed money in Japan, and carried it to Brazil and other countries. So it’s always–there’s always a low interest rate country. Or it was done through Switzerland. So it’s not important how it is done. Read more…
from Maria Alejandra Madi and the WEA Pedagogy Blog
In 2001 French economics students petitioned their professors for a more realistic and pluralist teaching of economics. Since then, several books have been written on how to teach pluralist economics, including John Groenewegen’s Teaching Pluralism in Economics (Edward Elgar, 2007); Edward Fullbrook’s Pluralist Economics (Zed, 2009) and Jack Reardon’s Handbook of Pluralist Economics Education (Routledge, 2009). A new journal exclusively devoted to discussing how to implement pluralism in the classroom – the International Journal of Pluralism and Economics Education – was founded by Jack Reardon. And several global organizations- the World Economic Association, the Association of Heterodox Economics, besides the International Confederation of Associations for Pluralism in Economics, for example – have emphasized the need for changes in economics curriculum.
Considering this background, this blog welcomes all the attempts that emphasize the need for further changes in teaching economics.
The 2014 new title New Developments In Economic Education, edited by Franklin G. Mixon and Richard J. Cebula, offers the opportunity of reflecting on strategies for effectively and efficiently teaching economics at both undergraduate and post-graduate levels. Among the suggestions . . . read more
from Lars Syll
Blogger Noah Smith recently did an informal survey to find out if financial firms actually use the “dynamic stochastic general equilibrium” models that encapsulate the dominant thinking about how the economy works. The result? Some do pay a little attention, because they want to predict the actions of central banks that use the models. In their investing, however, very few Wall Street firms find the DSGE models useful …
This should come as no surprise to anyone who has looked closely at the models. Can an economy of hundreds of millions of individuals and tens of thousands of different firms be distilled into just one household and one firm, which rationally optimize their risk-adjusted discounted expected returns over an infinite future? There is no empirical support for the idea. Indeed, research suggests that the models perform very poorly …
Why does the profession want so desperately to hang on to the models? Read more…
from Dean Baker
In a remarkable departure from earlier versions of Larry Summers, the former Treasury secretary, Harvard president and top Obama economics adviser has recently been sounding the alarm about “secular stagnation” — a prolonged period of time in which the economy operates below its potential level of output. This discovery may provoke choruses of “duh” from the tens of millions of workers who for years have had the opportunity to live with secular stagnation in the form of unemployment, underemployment or stagnant wages.
But even if Summers’ discovery is not news to most people, it is a huge development nonetheless. Summers is one of the world’s most prominent economists. In the mainstream of the profession it has long been a matter of virtual absolute faith that the economy will tend to sustain full employment levels of output. Any departures from full employment will be quickly corrected by the self-adjusting market, ideally with a helping push from a reduction in interest rates by central banks.
This view seems less credible in the wake of the recession that began more than six years ago. By the estimates of the Congressional Budget Office the economy is still operating at a level of output that is more than six percent below potential GDP, corresponding to a loss in output on the order of $1 trillion a year. The economy is still down more than 8 million jobs from its trend growth path. And the jobs report released on Friday certainly doesn’t raise hopes we will be closing this gap any time soon. Read more…
from Peter Radford
Be very wary of anyone who claims that their wealth is the result of great skill. Or even hard work. Luck had to play a part. Usually a very significant part. And dumb luck ought not be the basis upon which we build intelligent, caring, or stable societies.
Be wary, also, of arguments against popular policies that include references to envy or jealousy. Being opposed to plutocracy does not necessarily imply either. Those arguments are old and have been used to undermine the moral authority of populism since democracy first reared its ugly head and disrupted the ease with which our leaders could syphon off wealth for their own enjoyment.
The two go hand in hand.
Populists will be accused of devaluing hard work and skill, and of stirring up the evil sentiment of envy that is presumed to lie close to the surface in the squalid and uneducated minds of the masses. By being both an advocate of sloth and jealousy a populist is easily and summarily dismissed as being irrelevant to policy discussions and properly ignored by serious analysts everywhere,
Where being serious means combining allegiance to the economic status quo with a suitable level of puritanical moral self-abuse. Read more…