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The connection between cause and probability

October 22, 2018 1 comment

from Lars Syll

huntCauses can increase the probability​ of their effects; but they need not. And for the other way around: an increase in probability can be due to a causal connection; but lots of other things can be responsible as well …

The connection between causes and probabilities is like the connection between a disease and one of its symptoms: The disease can cause the symptom, but it need not; and the same symptom can result from a great many different diseases …

If you see a probabilistic dependence and are inclined to infer a causal connection from it, think hard about all the other possible reasons that that dependence might occur and eliminate them one by one. And when you are all done, remember — your conclusion is no more certain than your confidence that you really have eliminated all​ the possible alternatives.

Causality in social sciences — and economics — can never solely be a question of statistical inference. Causality entails more than predictability, and to really in-depth explain social phenomena require theory. Analysis of variation — the foundation of all econometrics — 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.  Read more…

Hype and facts on free trade

October 21, 2018 1 comment

from C. P. Chandrasekhar

Voices questioning the claim that nations and the majority of their people stand to gain from global trade are growing louder. The one difference now is that the leading protagonist of protectionism is not a developing country, but global hegemon United States under Donald Trump. Free trade benefits big corporations with production facilities abroad, Trump argues, while harming those looking for a decent livelihood working in America. With time Trump has made clear that his words are not mere rhetoric, matching them with tariffs that have frightened European and North American allies and US corporations, besides troubling the likes of China and Japan. A nation that pushed for freer trade is now building economic walls along its borders. This turn in policy at the metropolitan core not only undermines the case for free trade among other nations, but revives arguments usually advanced by developing countries. The benefits of trade under capitalism, they hold, tend to be distributed unequally among nations. They sometimes fail to mention that at the national level as well the gains are asymmetrically distributed, favouring the more powerful.   Read more…

The connection between cause and probability

October 20, 2018 9 comments

from Lars Syll

huntCauses can increase the probability​ of their effects; but they need not. And for the other way around: an increase in probability can be due to a causal connection; but lots of other things can be responsible as well …

The connection between causes and probabilities is like the connection between a disease and one of its symptoms: The disease can cause the symptom, but it need not; and the same symptom can result from a great many different diseases …

If you see a probabilistic dependence and are inclined to infer a causal connection from it, think hard about all the other possible reasons that that dependence might occur and eliminate them one by one. And when you are all done, remember — your conclusion is no more certain than your confidence that you really have eliminated all​ the possible alternatives.

Causality in social sciences — and economics — can never solely be a question of statistical inference. Causality entails more than predictability, and to really in-depth explain social phenomena require theory. Analysis of variation — the foundation of all econometrics — 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.  Read more…

Corporations continued

October 19, 2018 5 comments

from Peter Radford

The key to understanding corporations is to separate the economics from everything else.  We need to do this because the economics, as expressed in various theories of the firm, are usually entirely idealized and bear no resemblance to reality.  Economists, as usual, love to theorize about things that don’t exist but which they wished did exist.

But that may just be me being dismissively judgmental.

Corporations, far from being products of the free market, are actually franchises of the state.  They are sub-contracted jurisdictions.

To be a corporation is to possess a charter from the state.  That charter brings privileges not available to non-corporations. The most notable privilege is that the corporation is recognized as a distinct legal entity separate from any “natural” person who may be associated with it.  And because the corporation is brought into existence prior to it being populated or animated by any natural person, it is not owned by any of them.  It is unowned.  In this sense it is akin to a nation state, the church, most universities, and, at least here in the US, most towns,  It would be odd to describe any of those bodies as being owned by the people who animate them.  Yet we routinely talk of firms being owned by stockholders. It is this misattribution of ownership that leads most economists astray in their theorizing.

The advantages that the privileges of being a corporation bring have long been recognized.  The ancient Romans set up corporations for business purposes for exactly the same reasons we do nowadays:  it makes the joint ownership and management of property for short term business purposes much more efficient than alternatives such as the traditional partnership.   Read more…

Too much of ‘we controlled for’

October 18, 2018 1 comment

from Lars Syll

The gender pay gap is a fact that, sad to say, to a non-negligible extent is the result of discrimination. And even though many women are not deliberately discriminated against, but rather self-select into lower-wage jobs, this in no way magically explains away the discrimination gap. As decades of socialization research has shown, women may be ‘structural’ victims of impersonal social mechanisms that in different ways aggrieve them. Wage discrimination is unacceptable. Wage discrimination is a shame.

You see it all the time in studies. “We controlled for…” And then the list starts. The longer the better. Income. Age. Race. Religion. Height. Hair color. Sexual preference. Crossfit attendance. Love of parents. Coke or Pepsi. The more things you can control for, the stronger your study is — or, at least, the stronger your study seems. Controls give the feeling of specificity, of precision. But sometimes, you can control for too much. Sometimes you end up controlling for the thing you’re trying to measure …

paperAn example is research around the gender wage gap, which tries to control for so many things that it ends up controlling for the thing it’s trying to measure. As my colleague Matt Yglesias wrote:

“The commonly cited statistic that American women suffer from a 23 percent wage gap through which they make just 77 cents for every dollar a man earns is much too simplistic. On the other hand, the frequently heard conservative counterargument that we should subject this raw wage gap to a massive list of statistical controls until it nearly vanishes is an enormous oversimplification in the opposite direction. After all, for many purposes gender is itself a standard demographic control to add to studies — and when you control for gender the wage gap disappears entirely!” …   Read more…

The 2008 Economic Crisis Ten Years On

October 17, 2018 1 comment

a WEA online conference
15th October to 30th November, 2018

Discussion Forum Sessions
Visit the Discussion Forum

 

I. The Financialisation of the Economy

  1. Carmelo Ferlito, “The Malaysian Property Boom and Bust Cycle: History Repeating?”
  2. Jake Jennings, “The Crisis and the Asset Driven Household”
  3. Pushpangadan Mangari, “Impact of Financialization: View from India”
  4. Teodoro Dario Togati, “Financialization and the ‘New Normal’. At the Root of the Aggregate Demand Problem Undermining New Capitalism”
  5. Gianni Vaggi, “Financial Mercantilism and Developing Countries”

II. Investment, Employment and Working Conditions

  1. Maria Alejandra Madi, “Pension Funds: Key Issues after the Global Crisis”
  2. Zeeshan, Geetilaxmi Mohapatra, and A K Giri, “Rural Nonfarm Enterprises Diversification, Farm Income and Consumption Expenditure in Different Agroecological Zones of India: Evidence from Longitudinal Farm Households”
  3. Edoardo Pizzoli, “The Green Economy: a Technological Option against
    Economic Crisis?”
  4. Azzurra Rinaldi, ”Female Entrepreneurs, the Crisis and Access to Credit: the Italian Case”
  5. Cameron M. Weber, “Some Observations on the Structure of the Labor
    Market after the Great Recession”

III. Social, Economic and Political Imbalances

  1. Guglielmo Forges Davanzati, “The Monetary Theory of Production and the Modern Money Theory: A Critical Assessment” 
    Guglielmo Forges Davanzati, “Income Inequalities, Public Debt and Social Cohesion: A Postkeynesian-Institutional Approach”
  2. Arturo Hermann, “The Economic Imbalances of our Time and the
    Perspective of Circular Economy”
  3. Davide Gualerzi, “Stagnation in A Historical Perspective”
  4. Laurence A. Krause, “Marx on Credit, Agency Problems, and Crises”
  5. Rodrigo Pérez Artica, “The impact of excess capacity over the investment falloff”

IV. Institutional Challenges and Alternatives

  1. Jesper Jespersen, “The European Monetary Union Failed because of
    Misunderstood Macroeconomics”
  2. Laszlo Kulin, “Alternative institutional frameworks at national and
    supranational level”
  3. Mogens Ove Madsen, “Institutional Challenges and Alternatives: Revision of Fiscal Rules in the EU”
  4. Constantine E. Passaris, “The Transformational Role of The Great
    Recession for Economic Governance”

Visit the Discussion Forum

Conference leaders: Arturo Hermann & Maria Alejandra Madi

Goosing the corporate goose (2 graphs)

October 17, 2018 1 comment

from David Ruccio

No, the stock market is not predictable. And no one knows the exact causes of last week’s carnage on Wall Street—with the Dow down 4.2 percent, the S&P 4.1 percent and the Nasdaq 3.7 percent, representing their worst weekly performances since March.

But the precipitous fall in all major indices, which many analysts blamed at least in part on the earnings blackout period, did serve to highlight one of the factors that has been driving the bull market: corporations purchasing their own stock.

As Matt Phillips explained,

When companies have more cash than they believe they can use productively, they typically return it to shareholders either with cash payments—known as dividends—or by repurchasing shares in the market. Buybacks raise demand, putting upward pressure on share prices.

Such repurchases have boomed this year as the strong economy—and steep cuts in corporate tax rates—have left American companies flush with profits. Companies including Apple, Cisco Systems and Amgen have returned billions in cash to shareholders by buying back shares. Apple is responsible for the largest sum, spending nearly $64 billion on buybacks in the 12 months ending in June 2018, the last period for which full data is available, according to data from S&P Dow Jones Indices.

Read more…

new issue of WEA Commentaries

October 16, 2018 Leave a comment

WEA Commentaries

Volume 8, Issue No. 4  Download the issue as a PDF
In this issue

               Please support the WEA by paying a membership fee
                                   or making a small donation.

Brazil

October 16, 2018 1 comment

The neoliberal policies of resilience

from  Maria Alejandra Madi

Economic conditions are constantly changing. Today, our generation is confronted with the outcomes of contemporary globalization that is a broader, complex, and multifaceted process characterized by new markets, new actors and new rules. Indeed, globalization has produced many changes in our economy, society, culture, and politics. As a result, deep pressures to conform to new standards of behavior, such as efficiency and competitive performance, have forced individuals and communities not only to rethink values and practices but also to rebalance tradition and change.

In the scenario of globalized markets, individuals and communities face many challenges to be resilient because of the changes in markets, wealth and power. Throughout the last forty years, most governments around the world supported the long-run process of neo-liberal reforms that turned out to be characterized by the financialisation of the capitalist economy. By negatively influencing labor and working conditions, it rendered increasingly difficult to reach (or even approach) the level of full employment. In this setting, changes in corporate ownership, through waves of mergers and acquisitions, created new business models where companies, while highly powerful and concentrated, turned out to be simply bundles of financial assets and liabilities to be traded (Madi, 2017).   Read more…

Does using models really make economics a science?​

October 14, 2018 12 comments

from Lars Syll

The model has more and more become the message in modern mainstream economics. Formal models are said to help achieve ‘clarity’ and ‘consistency.’ Dani Rodrik — just to take one prominent example — even​ says, in his Economics Rules, that “models make economics a science.”

bbEconomics is more than any other social science model-oriented. There are many reasons for this — the history of the discipline, having ideals coming from the natural sciences (especially physics), the search for universality (explaining as much as possible with as little as possible), rigour, precision, etc.

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 procedure is analytical. The whole is broken down into its constituent parts so as to be able to explain (reduce) the aggregate (macro) as the result of interaction of its parts (micro).

Modern mainstream economists ground their models on a set of core assumptions — basically describing the agents as ‘rational’ actors — and a set of auxiliary assumptions. Together they make up the base model of all mainstream economic models. Based on these two sets of assumptions, they try to explain and predict both individual (micro) and — most importantly — social phenomena (macro).  Read more…

Edward Prescott, Finn Kydland and the flooding of Fukushima

October 12, 2018 7 comments

How did this ever pass the peer-review procedure… In an article in the Journal of Political Economy Edward Prescott and Finn Kydland argue in favor of (undemocratic) rules instead of (democratic) economic policies. One of the methods they use to push their idea is the using examples. One particular famous one is the one about floodplains. But the example is wrong. Government policies are not as benevolent, rational and effective as Prescott and Kydland think they are. And people are not as rational. Here’s the example:

Prescott

This is not what happens. Read more…

The necessity and difficulty of shifting our economic paradigms

October 12, 2018 22 comments

from Asad Zaman and the current issue of the RWER

In the wake of the Global Financial Crisis, the failure of economic theories, and of economists, to provide any warnings, analysis, or remedies, became glaringly obvious to all. The Queen of England went to the London School of Economics to ask “Why did no one see it coming?”. The US Congress constituted a committee to investigate why “economics, a field that aspires to be a science … (but) … generally accepted economic models inclined the Nation’s policy makers to dismiss the notion that a crisis was possible.” General discontent with economics has been captured in books too numerous to list; as a small sample chosen at random, consider Steve Keen’s Debunking Economics: The Naked Emperor of the Social Sciences, Joe Earle, Cahal Moran and Zach Ward-Perkins: The Econocracy: The Perils of Leaving Economics to the Experts, and Phillip Pilkington: The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory.

g economists have expressed serious dis-satisfaction with the profession as a whole.  John Cassidy’s article “After the Blowup …” in The New Yorker describes his interviews with apostates from the Chicago creed. Krugman wrote that the “Profession as a whole went astray because they mistook the beauty of mathematics for truth.” David Romer wrote that economists’ “dismissal of fact goes …(so)… far beyond post-modern irony” that it should be called “post-real”. He wrote that the profession has been moving backwards, losing precious insights gained. Olivier Blanchard, Chief Economist at IMF writes that DSGE models make “assumptions profoundly at odds with what we know about consumers and firms”. This is just a small sampler; we can easily find many other similar statements from leading economists, and practitioners intimately involved with finance and central banks on a global level[1]Read more…

Paul Romer’s critique of ‘post-real’ economics

October 12, 2018 8 comments

from Lars Syll

 blah_blahIn practice, what math does is let macro-economists locate the FWUTVs [facts with unknown truth values] farther away from the discussion of identification … Relying on a micro-foundation lets an author say, “Assume A, assume B, …  blah blah blah … And so we have proven that P is true. Then the model is identified.” …

Distributional assumptions about error terms are a good place to bury things because hardly anyone pays attention to them. Moreover, if a critic does see that this is the identifying assumption, how can she win an argument about the true expected value the level of aether? If the author can make up an imaginary variable, “because I say so” seems like a pretty convincing answer to any question about its properties.

Paul Romer

Yes, indeed, modern mainstream economics — and especially its mathematical-statistical operationalization in the form of econometrics — fails miserably over and over again. One reason why it does, is Read more…

Who “owns” a corporation?

October 11, 2018 10 comments

from Peter Radford

I have become quite a fan of David Ciepley this summer.  He, amongst many I am sure, is blazing a trail through the morass of corporate law and providing new insights into the role and status of the animal we know as the “corporation”.

Anyone with an interest in the role business plays in the economy needs to understand what Ciepley is saying.

In one talk he gave, at MacGill University, the introductory remarks by his host were illumination in themselves.  The occasion was a presentation and interdisciplinary discussion about the corporation and its role in shaping the social landscape.  The host rattled off the university departments and working groups involved in the discussion in his welcoming remarks.  There was no mention of economics.  The omission tells us all we need to know.  Economics cannot engage, easily with other disciplines in discussions about the organization of business because it cannot recognize the reality associated with said organization.  This is not to say that somewhere in the great archipelago known as economics there isn’t some little island of thought about institutions — at one time that island was much more significant — but nowadays the need to crush everything into an anti-social market driven explanation makes the odds of communication with such distant shores very difficult if not impossible.

Which is a shame because I think the key to understanding the contemporary economy requires a solid knowledge of modern business theory, that theory is, after all, simply an expression of neoclassical thought. Read more…

At last – Paul Romer got his ‘Nobel prize’​

October 11, 2018 17 comments

from Lars Syll

Among Swedish economists, Paul Romer has for many years been the favourite candidate for receiving the ‘Nobel Prize’ in economics. This year the prediction turned out right. Romer got the prize (together with William Nordhaus).

The ‘Nobel prize’ in economics has almost exclusively gone to mainstream economists, and most often to Chicago economists. So how refreshing it is that we for once have a winner who has been brave enough to openly criticize the ‘post-real’ things that emanate from the Chicago ivory tower!

Adam Smith once wrote that a really good explanation is “practically seamless.”

Is there any such theory within one of the most important fields of social sciences — economic growth?

Paul Romer‘s theory presented in Endogenous Technological Change (1990) – where knowledge is made the most important driving force of growth – is probably as close as we get.

Knowledge – or ideas – are according to Romer the locomotive of growth. But as Allyn Young, Piero Sraffa and others had shown already in the 1920s, knowledge is also something that has to do with increasing returns to scale and therefore not really compatible with neoclassical economics with its emphasis on decreasing returns to scale.

Increasing returns generated by nonrivalry between ideas is simply not compatible with pure competition and the simplistic invisible hand dogma. That is probably also the reason why neoclassical economists have been so reluctant to embrace the theory whole-heartedly.  Read more…

Stiglitz vs. Summers

October 10, 2018 33 comments

from David Ruccio

Two giants of mainstream economics—Joseph Stiglitz and Lawrence Summers—have been engaged in an acrimonious, titanic battle in recent weeks. The question is, what’s it all about? And, even more important, what’s at stake in this debate?

At first glance, the intense, even personal back-and-forth between Stiglitz and Summers seems a bit odd. Both economists are firmly in the liberal wing of mainstream economics and politics—as against, for example, Gene Epstein (an Austrian economist, who accuses Stiglitz of regularly siding with left-wing populists like Hugo Chávez) or John Taylor (a committed supply-sider, who has long been suspicious of “demand-side discretionary stimulus packages”). Both Stiglitz and Summers have pointed out the limitations of monetary policy, especially in the midst of deep economic recessions, and have favored relatively large fiscal-policy interventions, a hallmark of mainstream liberal economic policy.

One might be tempted to see it as merely a clash of outsized egos, which of course is not at all rare among mainstream economists. Their exaggerated sense of self-importance and intellectual arrogance are legion. Neither Stiglitz nor Summers has ever been accused of being a shrinking-violet when it comes to debates in the many academic and policy-related positions they’ve held.* And there’s certainly a degree of personal animus behind the current debate. Apparently, Summers [ht: bn] successfully lobbied in 2000 for Stiglitz’s removal from the World Bank, reportedly as a condition of the reappointment of Jim Wolfensohn as President of the World Bank. And, in 2013, Stiglitz came out strongly in favor of Janet Yellen, over Summers, for head of the Federal Reserve.**

That’s certainly part of the story. And the personal attacks and evident animosity from both sides have attracted a great deal attention of onlookers. But I think much more is at stake.   Read more…

Chicago economics — utterly and completely wrong

October 9, 2018 7 comments

from Lars Syll

Savings-and-InvestmentsEvery dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions.

John Cochrane

The problem with this view is, of course, that it is utterly and completely wrong!

What Cochrane is reiterating here is nothing but Say’s law, basically saying that savings are equal to investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. As some of my Swedish forerunners — Gunnar Myrdal and Erik Lindahl — stressed more than 80 years ago, it’s really a question of ex-ante and ex-post adjustments. And as further stressed by a famous English economist about the same time, what happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!  Read more…

No one told Greg Mankiw about the Great Recession

October 8, 2018 1 comment

from Dean Baker

We all know how difficult it is for elite economists at places like Harvard to get information about the economy, so perhaps we should excuse him for this little mess up. Of course if he had heard of the Great Recession he would not be writing a piece in the New York Times telling us that trade deficits really don’t matter:

“Nations run trade deficits when their spending on consumption and investment, both private and public, exceeds the value of goods and services they produce. If you really want to reduce a trade deficit, the way to do it is to bring down spending relative to production, not to demonize trading partners around the world.”

If Mankiw had heard about the Great Recession he would have known that countries often face shortfalls in demand, meaning that we have unemployment because there is not enough demand (i.e. spending on consumption and investment). In this context, if we reduce domestic spending, as Mankiw advocates, it may reduce the trade deficit somewhat, but it will also lead to a further reduction in demand and loss of jobs.  Read more…

New Keynesian nonsense ‘proofs’

October 7, 2018 8 comments

from Lars Syll

New Keynesians use mathematics to ‘prove’ some very odd stuff … Take, for example, a paper by Campbell Leith and Simon Wren-Lewis entitled Electoral Uncertainty and the Deficit Bias in a New Keynesian Economy. The thrust of the paper is that our particular form of party-based democracy naturally leads to ‘deficit bias’ … The authors identify the root problem to be one of ‘heterogeneity’ — the fact that different political parties will have different views about how to run the country. Let’s look at a snippet from the paper to see how they use maths to support this earth-shattering discovery:

Read more…