Best advice to an aspiring economist — don’t be an economist

from Lars Syll

And still, amidst all this tumult, many economists are disinclined to rethink the foundations of their field. It reminds me of the closing joke in Woody Allen’s film Annie Hall. A guy has a crazy brother who thinks he is a chicken.  The doctor asks, ‘Why don’t you turn him in?’ The guy replies, ‘I would, but I need the eggs.’ ”

Why is the free-market discourse so perdurable despite so many social, ecological, and political realities that call its logic and categories of thought into question?  Because the whole field, despite its flaws, is functional enough and entrenched. It needs the eggs — the certitude of quantitative analysis aping the hard sciences, the credentialed expertise always in demand by powerful institutions, the prestige that comes with proximity to power.

But behind these factors, there is a new world a-bornin’ that economics needs to engage with and understand. There are brilliant economic thinkers like Kate Raworth, inventor of “doughnut economics” framework; the writings of degrowth economist Jason Hickel and the late anthropologist David Graeber; the thinkers associated with the web journal Real World Economics; and a number of student associations clamoring for new economic paradigms and pedagogy. Beyond reading the right things, I find that it helps a lot to hang out with the right crowd, listen to serious new voices, and bring one’s full humanity to the questions of the moment.

Economists of all ages – but especially younger ones who have the suppleness and imagination to grow – need to pay attention to these outsider voices. There is a new world that is fast-overtaking us, and it needs to be seen and explained on its own terms.

David Bollier / Evonomics

A science that doesn’t self-reflect on its own history and asks important methodological and science-theoretical questions about the own activity, is a science in dire straits.

Good news about Covid-19 vaccines and vaccinations

Covid 19 vaccinations are going well. Quite a number of vaccines have been approved. And these are being used. At the time of writing close to 100 million ‘jabs’ have already been provided, not just of the Moderna and Pfizer vaccine but also of the Sputnic, AstraZeneca and Sinovac vaccines. And the pace is quickening, for instance in countries like Brazil and Morocco (which uses AstraZeneca and Sinopharm vaccines in its 3.000 vaccination centres).

It’s time to tax the Wall Street casino!

from Lars Syll

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism — which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.

These tendencies are a scarcely avoidable outcome of our having successfully organised “liquid” investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges … The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States.

The GameStop game and financial transactions taxes

from Dean Baker

The Wall Street crew is furious over the masses at Robinhood and Reddit ruining their games with their mass buying of GameStop, which wiped out the short position of a big hedge fund. The Robinhood/Reddit masses are touting this as a victory over Wall Street. The Wall Street insiders are decrying this effort to turn the market into a casino. It’s worth sorting this one out a bit and answering the question everyone is asking (or should be), would a financial transactions tax fix this problem.

First of all, much has been made of the fact that the hedge fund Melvin Capital was shorting GameStop, as though there is something illicit about shorting a company’s stock. This one requires some closing thinking. In principle, a major purpose of the stock market (we will come back to this) is to assess the true value of a company based on the information that investors collectively bring to the market.

Often this leads people to buy stock with the idea that the price will rise. However, an analysis can also lead investors to conclude that a stock is over-valued. In that case, if they are correct, they will make money by shorting the stock.

Game stop 2: What are stock markets for?

from Peter Radford

The sudden attention being given to the gyrations of Game Stop stock prices has caused all sorts of hand wringing within the hallowed walls of high finance.  In typical fashion the people who like to carry on their trading and associated activities beyond the public gaze are all a twitter because a bunch of apparently crazy outsiders are not adhering to the sedate rules of the game.  This produces truly odd results.  Normally virulently anti-government voices are suddenly calling for SEC investigations and even regulation to prevent outsiders spoiling things.  Some are swooning over the event as a demonstration of the awful greed and selfishness that has overtaken even average Americans — rather than just Wall Street denizens.

How dare average people become as greedy as Wall Street bankers!  The horror of it all.  Whatever next?

Then, naturally, there are the libertarians who use the chaos as a reason to argue against any further government intervention in the economy.  In their view the entire disruption is a result of people having too much money to play with.  Which must be the government’s fault.  So the answer, obviously, is to make sure that only a few people people have too much money to play with.  That the select few who have spare cash happen to be the clients of Wall Street banks and other houses of high financial wisdom is not something we peons should concern ourselves with.  For goodness sake, can’t the regular people just stick with their little 401K retirement plans and be satisfied?  Leave the fun of gambling and money making to the grown ups.

More seriously, the current episode helps explode the mystique of the stock market and Wall Street more generally.

Quick thoughts on the minimum wage

from Dean Baker

President Biden’s proposal to raise the minimum wage to $15 an hour by 2025 is prompting a backlash from the usual suspects. As we hear the cries about how this will be the end of the world for small businesses and lead to massive unemployment, especially for young workers, minorities, and the less-educated, there are a few points worth keeping in mind.

While $15 an hour is a large increase from the current $7.25 an hour. This is because we’ve allowed so much time to pass since the last minimum wage hike. The 12 years since the last increase in the minimum wage is the longest period without a hike since the federal minimum wage was first established in 1938. Few workers are now earning the national minimum wage, both because of market conditions and because many states and cities now have considerably higher minimum wages.

If the minimum wage had just kept pace with prices since its peak value in 1968 it would be over $12 an hour today and around $13.50 by 2025.

Mainstream economics — a waste of time on a staggering scale

from Lars Syll

Though an enthusiast of reason, I believe that rational choice theory has failed abysmally, and it saddens me that this failure has brought discredit upon the very enterprise of serious theorizing in the field of social study …

Rational choice theory is far too ambitious. In fact, it claims to explain everything social in terms of just three assumptions that would hold for all individuals in all social groups and in every historical period. But a Theory of Everything does not explain anything in particular … And being unable to account for differences among individuals and for the variety of social interactions, systems, processes, and institutions, the theory is bound to be unrealistic, i. e., false …

The reader may feel that my criticism is excessive: that I am throwing the baby out along with the bath water. My reaction is that there is no baby … It died long ago from mathematical anemia, from deficiency in the enzymes required to digest the simplest social facts, and from lack of exposure to the sound and light and fury of the social weather.

Most mainstream economists want to explain social phenomena, structures and patterns, based on the assumption that the agents are acting in an optimizing — rational — way to satisfy given, stable and well-defined goals.

The New York Times has not heard about China’s vaccines (or Russia or India’s)

from Dean Baker

It is more than a bit bizarre that the New York Times can run a major piece about the lack of access of developing countries to Covid vaccines and never once mention the vaccines developed by China, Russia, or India. The piece is very useful in highlighting the fact that the United States and Europe have secured the vast majority of the 2021 production of the vaccines developed by western drug companies, leaving relatively few doses for the developing world. As a result, developing countries may continue to be afflicted by the pandemic well into 2022, with enormous human and economic costs.

That is an important story that needs to be told, but another aspect of this picture is that China, Russia, and India are making vaccines available to many countries in the developing world. China is the leader, with two vaccines that have been approved in at least one country for emergency use. Indonesia, the Philippines, Brazil, and Mexico are some of the countries that are already receiving one of the Chinese vaccines. The country has made broader commitments to provide the vaccine to poor countries in Sub-Saharan Africa but has not yet made large amounts available.

Similarly, Russia and India have both developed vaccines that they have pledged to share with other countries. Neither has completed Phase 3 trials yet, although they are already being used in Russia, India, and elsewhere under an emergency use authorization.

All three countries have been reluctant to share data from clinical trials, which makes it impossible to know how effective they are in preventing the spread of the pandemic and the risks of side-effects. Nonetheless, if developing countries are unable to get access to the vaccines developed by western drug companies, it is likely that they will turn to the vaccines developed by these three countries. This is a very important part of the reality for developing countries and it is striking that the NYT piece never mentioned the prospect of them turning to China, Russia, and India for vaccines.

The Keynes-Ramsey-Savage debate on probability

from Lars Syll

Mainstream 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.

Say you have come to learn (based on own experience and tons of data) that the probability of you becoming unemployed in Sweden is 10 %. Having moved to another country (where you have no own experience and no data) you have no information on unemployment and a fortiori nothing to help you construct any probability estimate on. A Bayesian would, however, argue that you would have to assign probabilities to the mutually exclusive alternative outcomes and that these have to add up to 1, if you are rational. That is, in this case – and based on symmetry – a rational individual would have to assign probability 10% to becoming unemployed and 90% of becoming employed.

A reminder from Berlin

from Peter Radford

Sorting out my old bookshelves I came across an old Isaiah Berlin Essay “The Pursuit of the Ideal”.  At the risk of being boring here is a very long extract, he begins the essay this way:

“There are, in my view, two factors that, above all others, have shaped human history in this century.  One is the development of the natural sciences and technology, certainly the greatest success story of our time — to this, great and mounting attention has been paid from all quarters.  The other, without doubt, consists in the great ideological storms that have altered the lives of virtually all mankind: the Russian Revolution and its aftermath — totalitarian tyrannies of both right and left and the explosions of nationalism, racism, and, in places, of religious bigotry, which, interestingly enough, not one among the most perceptive social thinkers of the nineteenth century had ever predicted.

When our descendants, in two or three centuries’ time (if mankind survives until then), come to look at our age, it is these two phenomena that will, I think, be held to be the outstanding characteristics of our century, the most demanding of explanation and analysis.  But it is as well to realize that these great movements began with ideas in people’s heads: ideas about what relations between men have been, are, might be and should be; and to realize how they came to be transformed in the name of a vision of some supreme goal in the minds of the leaders, above all the prophets with armies at their backs.  Such ideas are the substance of ethics …”

Yes indeed.

The substance of ethics.

The ideas that have dominated the minds and actions of our leaders over these past few decades, those that produced the day-to-day world we live in, those that resulted in the inequality and inequity of our modern western societies, those that created a giant rift in society between the mass and the few, and those that now need urgent reconsideration and change, those ideas are in sore need of an ethical reckoning.

High on the list of those ideas are those that came to dominate economics starting in the mid-twentieth century.

On the difference between econometrics and data science

from Lars Syll

Causality in social sciences can never solely be a question of statistical inference. Causality entails more than predictability, and to really in depth explain social phenomena require theory. The analysis of variation can never in itself reveal how these variations are brought about. First when we are able to tie actions, processes or structures to the statistical relations detected, can we say that we are getting at relevant explanations of causation.

Most facts have many different, possible, alternative explanations, but we want to find the best of all contrastive (since all real explanation takes place relative to a set of alternatives) explanations. So which is the best explanation? Many scientists, influenced by statistical reasoning, think that the likeliest explanation is the best explanation. But the likelihood of x is not in itself a strong argument for thinking it explains y. I would rather argue that what makes one explanation better than another are things like aiming for and finding powerful, deep, causal, features and mechanisms that we have warranted and justified reasons to believe in. Statistical — especially the variety based on a Bayesian epistemology — reasoning generally has no room for these kinds of explanatory considerations. The only thing that matters is the probabilistic relation between evidence and hypothesis. That is also one of the main reasons I find abduction — inference to the best explanation — a better description and account of what constitute actual scientific reasoning and inferences.

Marilyn & the Goats: A new solution to an old problem

from Asad Zaman

Introduction: In a previous lecture, we gave a New Definition of Probability. In this lecture, we will show how this definition enables us to resolve the massive amount of controversy which surrounds an apparently simple probability puzzle, known as the Monty-Hall problem. The book The Power of Logical Thinking, quotes cognitive psychologist Massimo Piattelli Palmarini: “No other statistical puzzle comes so close to fooling all the people all the time [and] even Nobel physicists systematically give the wrong answer, and that they insist on it, and they are ready to berate in print those who propose the right answer.” Before proceeding to discuss this problem, we review the key features of our new definition:

1. Probability is a feature of external reality, not an aspect of our ignorance/knowledge.
2. Probability exists PRIOR to occurrence of random event.
3. Probability is EXTINGUISHED after event occurs.  Read more

Lessons from the Moonshot for fixing global problems

from Jayati Ghosh

The World Health Organization appointed economist Mariana Mazzucato to head its Council on the Economics of Health for All in 2020. She is one of the architects of the biggest international research-funding scheme in the world, Horizon Europe, which launched this month. Her book Mission Economy is a timely and optimistic vision of how to fix the world’s “wicked problems” through directed public and private investment.

In two brilliant and accessible books published over the past decade, Mazzucato has established herself as a pre-eminent thinker, debunking myths about how markets function and offering options for more equitable economies. In 2013’s The Entrepreneurial State, she demolished the perception of governments as bureaucratic, corrupt and unwieldy when compared with the supposedly dynamic, nimble and innovative private sector. All that makes a smartphone ‘smart’ was the result of government-funded research, she pointed out; private agents invest in new areas only after governments have made the risky long-term investments. In 2017’s The Value of Everything, Mazzucato challenged how we consider benefit. Corporations trading financial instruments, data, food or oil might present themselves as value creators but, in reality, many are extractors destroyers, even of true value.

Trump crazy and intellectual crazy

from Dean Baker

– the ways in which the economy has been structured to redistribute income upward

It’s hard not to be appalled and scared by the reality denial of Donald Trump’s followers. Their willingness to insist an election was stolen, with no evidence whatsoever, is difficult to understand for those of who like to think that people respond to facts and logic.

I don’t have any easy answers to get these people to start thinking clearly, but I will point out that it is not just ignorant and/or crazed Trumpers who have trouble dealing with reality. Many of our leading intellectuals and our major media outlets have similar difficulty dealing with reality when it doesn’t fit their conceptions of the world.

In particular, I am referring to my standard complaint about the unwillingness to acknowledge the ways in which the economy has been structured to redistribute income upward. I will focus on the two simplest routes, which are often described as “technology” and “globalization.”

The Technology and Inequality Lie

Sorry to get harsh on this, but after what we saw on January 6th, I am not in a mood for being polite. I realize that it is very convenient for people who are doing relatively well in the current economy to believe that it is just a result of the way that technology happened to develop. In this story, it just happened to turn out that the progress in areas like software, artificial intelligence, and biotechnology have made advanced skills in science and math more valuable and less-skilled physical labor less valuable.

This line is repeated endlessly in media outlets and academic circles with zero reflection.

Leontief’s devastating critique of econom(etr)ics

from Lars Syll

Much of current academic teaching and research has been criticized for its lack of relevance, that is, of immediate practical impact … I submit that the consistently indifferent performance in practical applications is in fact a symptom of a fundamental imbalance in the present state of our discipline. The weak and all too slowly growing empirical foundation clearly cannot support the proliferating superstructure of pure, or should I say, speculative economic theory …

Uncritical enthusiasm for mathematical formulation tends often to conceal the ephemeral substantive content of the argument behind the formidable front of algebraic signs … In the presentation of a new model, attention nowadays is usually centered on a step-by-step derivation of its formal properties. But if the author — or at least the referee who recommended the manuscript for publication — is technically competent, such mathematical manipulations, however long and intricate, can even without further checking be accepted as correct. Nevertheless, they are usually spelled out at great length. By the time it comes to interpretation of the substantive conclusions, the assumptions on which the model has been based are easily forgotten. But it is precisely the empirical validity of these assumptions on which the usefulness of the entire exercise depends.

What is really needed, in most cases, is a very difficult and seldom very neat assessment and verification of these assumptions in terms of observed facts. Here mathematics cannot help and because of this, the interest and enthusiasm of the model builder suddenly begins to flag: “If you do not like my set of assumptions, give me another and I will gladly make you another model; have your pick.” …

But shouldn’t this harsh judgment be suspended in the face of the impressive volume of econometric work? The answer is decidedly no. This work can be in general characterized as an attempt to compensate for the glaring weakness of the data base available to us by the widest possible use of more and more sophisticated statistical techniques. Alongside the mounting pile of elaborate theoretical models we see a fast-growing stock of equally intricate statistical tools. These are intended to stretch to the limit the meager supply of facts … Like the economic models they are supposed to implement, the validity of these statistical tools depends itself on the acceptance of certain convenient assumptions pertaining to stochastic properties of the phenomena which the particular models are intended to explain; assumptions that can be seldom verified.

Wassily Leontief

A salient feature of modern mainstream economics is the idea of science advancing through the use of “successive approximations” whereby ‘small-world’ models become more and more relevant and applicable to the ‘large world’ in which we live. Is this really a feasible methodology? Yours truly thinks not.

Even in the face of coup attempt, NYT continues propaganda for upward redistribution through trade

from Dean Baker

I have repeatedly raised the point that media accounts routinely use the term “free trade” when they can more accurately say simply “trade” or trade policy. It is amazing to me that this practice continues.

We saw it yet again in a NYT article on how many Republicans continue to be faithful to Trump even after last week’s coup attempt. The article told readers:

“Anthony Sabatini, a Florida state representative, described Ms. Cheney and other Republicans who voted for impeachment as ‘artifacts,’ saying they were out of step in a party that has embraced a more populist platform opposed to foreign interventions and skeptical of free trade.”

As I have pointed out endlessly, we do not have a policy of “free trade.” We do not allow foreign trained professionals, such as doctors and dentists, to freely practice in the United States. Our trade policy has been focused on reducing barriers to trade in manufactured goods, while leaving in place the barriers that protect the most highly paid professionals.

This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This has the predicted and actual effect of lowering the pay of manufacturing workers in the United States. Since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, the loss of good-paying jobs in manufacturing has put downward pressure on the pay of non-college educated workers more generally. This distributional impact has nothing to do with “free trade,” it is due to a policy of selective protectionism.

In the same vein, much of our trade policy has been focused on making our patent and copyright protections longer and stronger and imposing these rules on our trading partners. These protections are 180 degrees at odds with free trade, they are government granted monopolies. They also have the effect of redistributing income upward, to drug and software companies and people with skills in the relevant fields. Very few dishwashers and custodians benefit from patent rents or royalties from copyrights.

It would be helpful if the NYT and other media outlets could stop trying to pretend that the upward redistribution from globalization was some sort of natural process involving free trade. That is a Trumpian lie and it would be good if the media stopped repeating it.

Memo to self

from Peter Radford

This is short:

I have been accused recently of mis-using the word “coup” when I discuss the events of January 6th.  Worse, I have been called ignorant.

Here is what the dictionary says:

Coup = a sudden, violent, and illegal seizure of power from a government.

Perhaps my critics would feel safer with “insurrection” which seems to be the preferred word in the media.

Here is what the dictionary says:

Insurrection = a violent uprising against an authority or government.

The subtlety of the difference between the two words seems to revolve around the first being seizure of power, whilst the second is an uprising against those in power.  Beyond that they are both a reference to violence and an attempt to unseat, or change government.  Presumably a failed coup implies that power was not wrested from the government despite the attempt.

Let’s review January 6th:

Prepare for a surge in global inequality

from C.P. Chandrasekhar and Jayati Ghosh

The United States prepares for moving out of the Trump era with the incoming President promising more rounds of stimulus spending to revive an economy ravaged by Covid-19. Other members of the Organisation of Economic Cooperation and Development, a predominantly rich nation’s club, have also been generous with their spending and signalled that they are willing to keep their wallets open to spend more if necessary. The evidence clearly is that the Covid-crisis has upended the fiscal conservatism that has been the hallmark of the neoliberal era since the 1980s.

However, not all nations seem to display this ability to depart from the prevailing orthodoxy. Where this weakness is most visible is the developing world, where governments, with very few exceptions, have not been loosening their purse strings to deal with the health emergency, throw out a safety net to protect devastated citizens, and stall and reverse the recession to restore livelihoods and normal economic activity.

Estimates from the World Bank in the January 2021 edition of its flagship Global Economic Prospects (GEP) report point to stark differences across countries at different levels of development in the level of fiscal support governments have provided in the wake of the Covid-shock (Chart 1).

Fooled by randomness

from Lars Syll

A non-trivial part of teaching statistics to social science students is made up of learning them to perform significance testing. A problem yours truly has noticed repeatedly over the years, however, is that no matter how careful you try to be in explicating what the probabilities generated by these statistical tests — p-values — really are, still most students misinterpret them.

A couple of years ago I gave a statistics course for the Swedish National Research School in History, and at the exam I asked the students to explain how one should correctly interpret p-values. Although the correct definition is p(data|null hypothesis), a majority of the students either misinterpreted the p-value as being the likelihood of a sampling error (which of course is wrong, since the very computation of the p-value is based on the assumption that sampling errors are what causes the sample statistics not coinciding with the null hypothesis) or that the p-value is the probability of the null hypothesis being true, given the data (which of course also is wrong, since it is p(null hypothesis|data) rather than the correct p(data|null hypothesis)).

Corporate reckoning

from Peter Radford

The aftermath of a coup attempt is one of those moments when a nation gets a really serious insight into its values.  Do, for instance, its politicians rally around some higher set of principles, or do they slide quickly back into the day-to-day argy-bargy of political positioning and infighting?

Ours are perilously close to the latter.  And this after their own place of work was invaded and trashed while they hid and cowered in sundry hiding places.  Profiles in courage are few and far between right now within our politics class.

The reason is obvious: one of major political parties is complicit in the ruin of democracy and in the rise of a far right version of populism based on white supremacy, nativism, and grievances of various sorts.  Perhaps this was the inevitable consequence of forty years of false doctrine and anti-social agitation during which the very word government became reviled and scorned by those swept along by that doctrine.  Perhaps it was the inevitable consequence of the highly planned and disciplined attack on democracy orchestrated by the panoply of right wing think tanks and media outlets established during the late 1970s for the specific purpose of ruining the ability of the middle class to protect itself from our oligarchs and big corporate interests.  Or, perhaps, it was