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Why statistics does not give us causality

June 25, 2019 Leave a comment

from Lars Syll

If contributions made by statisticians to the understanding of causation are to be taken over with advantage in any specific field of inquiry, then what is crucial is that the right relationship should exist between statistical and subject-matter concerns …

introduction-to-statistical-inferenceWhere the ultimate aim of research is not prediction per se but rather causal explanation, an idea of causation that is expressed in terms of predictive power — as, for example, ‘Granger’ causation — is likely to be found wanting. Causal explanations cannot be arrived at through statistical methodology alone: a subject-matter input is also required in the form of background knowledge and, crucially, theory …

Likewise, the idea of causation as consequential manipulation is apt to research that can be undertaken primarily through experimental methods and, especially to ‘practical science’ where the central concern is indeed with ‘the consequences of performing particular acts’. The development of this idea in the context of medical and agricultural research is as understandable as the development of that of causation as robust dependence within applied econometrics. However, the extension of the manipulative approach into sociology would not appear promising, other than in rather special circumstances … The more fundamental difficulty is that, under the — highly anthropocentric — principle of ‘no causation without manipulation’, the recognition that can be given to the action of individuals as having causal force is in fact peculiarly limited.

John H. Goldthorpe

Causality in social sciences — and economics — can never solely be a question of statistical inference.  Read more…

A culture on the edge of failure

June 24, 2019 3 comments

from Ken Zimmerman

Most cultures in human history have failed. The consequences of cultural collapse are almost always catastrophic. Culture defines our existence and makes us who we are. Without culture we have no past and no future.

As all the products of the people of a society–material and non-material, culture is a complement to society, interacting people living in the same territory who share a common culture. Impossible to have one without the other (unless you want to call archaeological remains and historical records “culture” or “society”). People in society create culture; culture shapes the way people interact and understand the world around them. Culture determines what we know–the sum of all the angles in a triangle; what a screw driver is used for; how to use a computer to find out where Peloponnesians are… Culture also determines what we don’t know–how to catch a fish by hand; how to build a dugout canoe and navigate the South Seas without chart or compass. Culture determines what we want to be–lawyer; dairy farmer; computer programmer; doctor; shaman; pearl diver. Culture does this by providing the only options people can or will see at a time and place in history. In simple terms, culture makes human lives possible. When a culture no longer does this, when it impedes the continued being of a society, then the culture has failed. A culture such as Dr. Goodwin describes is on the edge of failure. Based on past cultural failures, this is not good news. Uncertainty, fear, and degradation generally follow. Is there any way to stop this?  https://rwer.wordpress.com/2019/06/21/necessary-changes-in-economic-theory/

Economics is an ideology

June 24, 2019 7 comments

from Ikonoclast

Economics is not a science and it cannot be a science. It is an ideology. The policy applications of an ideology may be “science-informed”, or not, as the cases might be, but the discipline itself, economics of any ideological persuasion, is not a science.

Economics properly considered is really political economy. The term “political economy” carries two connotations: one meaning “national economy” and the other literally meaning economics is always political. The attempt to hive off economics from political economy and pretend that economics is not political but somehow an objective discipline has been a grotesque failure academically, socially and we see now environmentally. In turn, a political economy theory, an ideology if you will, always returns and must return to moral philosophy to argue its legitimacy, be those arguments good or bad according to the tenets adopted for judgement. Read more…

User guides to models

June 22, 2019 4 comments

from Lars Syll

user-guides-5

In Dani Rodrik’s Economics Rules it is argud that ‘the multiplicity of models is economics’ strength,’ and that a science that has a different model for everything is non-problematic, since

economic models are cases that come with explicit user’s guides — teaching notes on how to apply them. That’s because they are transparent about their critical assumptions and behavioral mechanisms.

Hmm …

That really is at odds with yours truly’s experience from studying and teaching mainstream economic models during four decades. Read more…

D-Econ: Diversifying and decolonising economics

June 21, 2019 2 comments

Our Mission

“Just wander into any economics or finance conference and the anecdotal evidence is overwhelming — women and minorities are few and far between.”

Business Insider, September 13th, 2017

We are a network of economists that aim to promote inclusiveness in economics, both in terms of academic content and in its institutional structures. We are working to promote an economics field free of discrimination, including sexism, racism, and discrimination based on approach and geography. This involves promoting inclusive practices at sites that determine what legitimate knowledge is, such as conferences, workshops, journals, editorial boards, boards of economics organisations, syllabi, economics departments, and classrooms.
We take a holistic approach, as our mission involves three related, yet distinct, goals. These are:

Read more…

Necessary changes in economic theory

June 21, 2019 8 comments

from Neva Goodwin

Ecology teaches that everything is connected to everything else. Economics teaches that the market is a – some say the – great connector. Its specialty is to connect demand (what people want) to supply (what people produce), via prices.

There are, of course, known problems in the use of prices as a society’s key connector. For one thing, those with more money have more of what is sometimes called “effective demand”; they can send louder, more effective signals to suppliers to produce the goods and services they want. Those with very little money can hardly get their needs and wants noticed. Aside from this translation of unequal purchasing power into unequal impact, the other most notable problem with markets as connectors is the presence of externalities, when something that matters simply is not picked up in market signals.

Ecologists sometimes complain that economists dismiss such important issues as “just” externalities – implying that these issues are regarded as unworthy of consideration. Good economists do not do this: Read more…

A fine line – descriptive or normative science?

June 20, 2019 8 comments

from Joachim H. Spangenberg and Lia Polotzek  

Next to the inability to describe long-term developments and to take into account the structural uncertainty of complex systems, there is a more fundamental problem regarding current economic modelling manifesting itself in IAM/DSGE models. It consists of the fact that economic models are presented as being purely descriptive, while they actually carry quite some normative baggage. This becomes particularly relevant as the function of economics in society changed from depicting and explaining the reality of the economic system to serving as a tool to facilitate political decision making processes.

Through the rise of the rational choice paradigm and economics’ development into a science of choice, it has become vague whether its approach to decisions is more of a descriptive or of a normative character. Usually, in neoclassical economics, expected utility theory is claimed to be used as a purely descriptive theory. Yet this claim is false as the idea of rational choice in conjunction with utilitarian assumptions is inherently tied to a specific concept of welfare and its normative assumptions (Muthoo, 1999). These circumstances have made it almost impossible for economists to draw a precise line between a descriptive and a normative approach, although few are aware of this challenge. This is dangerous as it disguises the outcomes of economic models as purely rational, whereas in fact they contain a plethora of underlying normative assumptions representing a specific world view (Spangenberg, 2016). Read more…

My philosophy of economics

June 18, 2019 22 comments

from Lars Syll

A critique yours truly sometimes encounters is that as long as I cannot come up with some own alternative to the failing mainstream theory, I shouldn’t expect people to pay attention.

This is, however, to totally and utterly misunderstand the role of philosophy and methodology of economics!

As John Locke wrote in An Essay Concerning Human Understanding:

19557-004-21162361The Commonwealth of Learning is not at this time without Master-Builders, whose mighty Designs, in advancing the Sciences, will leave lasting Monuments to the Admiration of Posterity; But every one​e must not hope to be a Boyle, or a Sydenham; and in an Age that produces such Masters, as the Great-Huygenius, and the incomparable Mr. Newton, with some other of that Strain; ’tis Ambition enough to be employed as an Under-Labourer in clearing Ground a little, and removing some of the Rubbish, that lies in the way to Knowledge.

That’s what philosophy and methodology can contribute to economics — clearing obstacles to science by clarifying limits and consequences of choosing specific modelling strategies, assumptions, and ontologies. Read more…

Two stories: household income in the US and the UK

June 18, 2019 Leave a comment

Mainstream economics — a case of explanatory disaster

June 17, 2019 24 comments

from Lars Syll

To achieve explanatory success, a theory should, minimally, satisfy two criteria: it should have determinate implications for behavior, and the implied behavior should be what we actually observe. These are necessary conditions, not sufficient ones. Rational-choice theory often fails on both counts. The theory may be indeterminate, and people may be irrational. e201ada1b6In what was perhaps the first sustained criticism of the theory, Keynes emphasized indeterminacy, notably because of the pervasive presence of uncertainty. His criticism applied especially to cases where agents have to form expectations about the behavior of other agents or about the development of the economy in the long run. In the wake of the current economic crisis, this objection has returned to the forefront. Before the crisis, going back to the 1970s, the main objections to the theory were based on pervasive irrational behavior. Experimental psychology and behavioral economics have uncovered many mechanisms that cause people to deviate from the behavior that rational-choice theory prescribes.

Disregarding some more technical sources of indeterminacy, the most basic one is embarrassingly simple: how can one impute to the social agents the capacity to make the calculations that occupy many pages of mathematical appendixes in the leading journals of economics and political science and that can be acquired only through years of professional training? …

I believe that much work in economics and political science that is inspired by rational-choice theory is devoid of any explanatory, aesthetic or mathematical interest, which means that it has no value at all. I cannot make a quantitative assessment of the proportion of work in leading journals that fall in this category, but I am confident that it represents waste on a staggering scale.

Jon Elster

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. Read more…

Human work

June 16, 2019 9 comments

from Ken Zimmerman

Human work/employment/work relations are complex. In terms of muscular or nervous effort there is no distinction between agreeable and irksome activities, or between those undertaken for pleasure and those undertaken for pay. In many instances severe physical labor, combined with hardship and exposure are undertaken for pleasure by tourists, who even hire and pay guides, for example mountain climbing. Similarly, athletic sports, though often arduous are both professions and undertaken for recreation. A multitude of occupations ordinarily pursued for gain (compensation)–woodworking, gardening, painting, acting—are also pursued by many persons for the satisfaction involved with performing them. However, the greater part of the activity which humans pursue in attaining a living does not give pleasure. The chief reason seems to be that activity, in order to be effective toward attaining a living, must be steady, unvaried, and long-continued; and it must be, in an important sense, not free. The characteristic of most activities that are sources of pleasure in themselves is the element of freshness or novelty, and the absence of compulsion.

A portion of humans may find pleasurable the work they are obliged to perform. But research indicates that most work today is performed for the compensation it brings, and for no other reason. Read more…

Methodological arrogance

June 16, 2019 4 comments

from Lars Syll

arroganceSo what do I mean by methodological arrogance? I mean an attitude that invokes micro-foundations as a methodological principle — philosophical reductionism in Popper’s terminology — while dismissing non-microfounded macromodels as unscientific. To be sure, the progress of science may enable us to reformulate (and perhaps improve) explanations of certain higher-level phenomena by expressing those relationships in terms of lower-level concepts. That is what Popper calls scientific reduction. But scientific reduction is very different from rejecting, on methodological principle, any explanation not expressed in terms of more basic concepts.

And whenever macrotheory seems inconsistent with microtheory, the inconsistency poses a problem to be solved. Solving the problem will advance our understanding. But simply to reject the macrotheory on methodological principle without evidence that the microfounded theory gives a better explanation of the observed phenomena than the non-microfounded macrotheory … is arrogant. Microfoundations for macroeconomics should result from progress in economic theory, not from a dubious methodological precept.

David Glasner

For more on microfoundations and the dangers of methodological arrogance, read yours truly’s RWER-paper Micro versus Macro .

Atmospheric CO2 concentration year 1 to 2018

June 15, 2019 19 comments

The richest 1% alone emit more carbon than the poorest half of the planet.

June 14, 2019 8 comments

. . .  everything indicates more and more clearly that the resolution of the climate challenge can not be achieved without a powerful movement of compression of social inequalities, at all levels. With the current scale of inequalities, the march towards energetic sobriety will remain wishful thinking. Firstly because carbon emissions are highly concentrated among the richest. Globally, the richest 10% are responsible for almost half of the emissions, and the richest 1% alone emit more carbon than the poorest half of the planet. The drastic reduction of the purchasing power of the richest would therefore as such have a substantial impact on the reduction of emissions at the global level.

Moreover, it is hard to see how the middle and lower classes of rich and emerging countries would accept to change their way of life (which is nevertheless indispensable) if they are not given proof that the better-off are put to use. 

Thomas Piketty

new issue of Economic Thought

June 14, 2019 Leave a comment

Cherry-picking economic models

June 14, 2019 2 comments

from Lars Syll

How would you react if a renowned physicist, say, ​Richard Feynman, was telling you that sometimes force is proportional to acceleration and at other times it is proportional to acceleration squared?

abbI guess you would be unimpressed. But actually, what most mainstream economists do amounts to the same strange thing when it comes to theory development and model modification.

In mainstream economic theory,​ preferences are standardly expressed in the form of a utility function. But although the expected utility theory has been known for a long time to be both theoretically and descriptively inadequate, mainstream economists all over the world gladly continue to use it, as though its deficiencies were unknown or unheard of.

What most mainstream economists try to do in face of the obvious theoretical and behavioural inadequacies of the expected utility theory, is to marginally mend it. But that cannot be the right attitude when facing scientific anomalies. When models are plainly wrong, you’d better replace them! Instead of mending the broken pieces it would be much better to concentrate on developing descriptively accurate models of choice under uncertainty. Read more…

Two ways to approach sustainability

June 13, 2019 7 comments

from Ken Zimmerman

Ecosocialists aren’t even a political party, much less a political force in most of the western world. And certainly not in the top polluting nations in the world – China, Russia, India, and the USA. These four nations along with the EU hold the future of humans safely living on planet earth, of perhaps not living at all on that planet.

There are two ways to approach changing this situation – from people’s direct-action groups to local and then national governments. This is going on in the EU right now. Secondly, by seizing national governments and moving eco-ethical-justice policies outward from the national government. There is an effort to do this in the US during the 2020 elections. This approach involves an intermediate education process to bring churches, educational institutions, local governments, business, manufacturing, and finance into the work of redesigning all these areas in terms of eco-ethics-justice. I can’t see an advantage of one over the other. The path chosen would reflect the existing cultural situation in each nation and region. Mass changes in laws will be required, as will the assurance of effective and consistent enforcement procedures and personnel. Whichever route is chosen, a means must be worked out early in the process to make these changes cross- and multi-cultural, so they are implemented smoothly and consistently across the entire world. Read more…

Ayn Rand — a perverted psychopath

June 12, 2019 24 comments

from Lars Syll

Read more…

Donald Trump’s capricious tariffs open the door to corruption

June 12, 2019 5 comments

from Dean Baker

Donald Trump has repeatedly proclaimed his love for tariffs, even dubbing himself “Tariff Man.” While Trump clearly does not understand how tariffs work, some of the discussion in the media has been off target as well. It’s worth trying to get the basic story straight.

First, it has been widely pointed out that Trump is wrong in thinking that China or other targeted countries are paying tariffs to the U.S. Treasury. To make it simple, a tariff is a tax on imports.

It can be thought of as being like a tax on cigarettes or alcohol. The buyer is the one who most immediately pays the tax on Chinese or other targeted imports. However, the tax will generally not be borne entirely by the consumer.

The seller  in this case, producers in the countries subject to the tax  will typically lower their price to maintain their market share. So, some of the burden of the tariff will be borne by China or other targeted countries. (An important exception is a financial transactions tax, where the financial industry will bear almost the entire burden of the tax.)

It is also important to point out that part of this burden is likely to come through fluctuations in currency prices, an issue that has been almost completely ignored in media reports on tariffs. The classic economics story is that if the U.S. puts a tariff on Chinese or other imports, the value of the dollar will rise relative to the Chinese yuan and other currencies.  Read more…

What happened to the public economy in economics?

June 12, 2019 4 comments

from June Sekera

More than a century ago, the effective operation of the public economy was a significant, active concern of economists. With the insurgence of market-centrism and rational choice economics, however, government was devalued, its role circumscribed and seen from a perspective of “market failure.” As Backhouse (2005) has shown, the transformation in economic thinking in the latter half of the 20th century led to a “radical shift” in worldview regarding the role of the state. The very idea of a valid, valuable public non-market has almost disappeared from sight.

In 18th and 19th century Germany, Kameralwissenschaft (“Cameralism”) represented a form of public economics. Backhouse (2002, p. 166), describes this school as the era’s “science of economic administration,” which had three components: public finance, economics, and public policy. The “Historical School” of economics emerged in later 19th century Germany and viewed government positively as a system for promoting social well-being (Bogart, 1939; Shionoya, 2005). It stopped short, however, of explaining the operational or production aspects of the system. During the late 19th and early 20th centuries, economists wrestled with the question of how the “public economy” operates. Read more…