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Economists saving the world …

January 17, 2020 3 comments

from Lars Syll

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Unrealistic mental models 6

January 17, 2020 1 comment

from Asad Zaman

In the previous post (Three Types of Models 5), we discussed three types of models. The first type is based purely on patterns in observations, and does not attempt to go beyond what can be seen. This is an “observational” or Baconian model. The second type attempt to look through the surface and discover the hidden structures of reality which generate the observations we see. The best approach to this type of models has been developed by Roy Bhaskar, so we can call it a critical realist model or a Bhaskarian model. The third type of model creates depth and structures in our minds which create the patterns we see in the observations. The question whether our mental structures match reality is considered irrelevant. These may be called Kantian, or mental models.  The models of modern Economics are largely Kantian, while Econometric models are largely Baconian. The key defect of both of these approaches is that they GIVE UP on the idea of finding the truth. Max Weber’s ideas about methodology played an important role in this abandonment of the search for truth, but it would take us too far away from our current concerns to discuss this in any detail. Briefly, Weber thought that heterogeneity of human motives made “explanation” of social realities via “truth” impossibly complex. Instead, he argued that we should settle for a weaker concept based on “ideal-types” – deliberately over-simplified models of behavior which create a match to observed aggregated patterns of outcomes. We now discuss the disastrous consequences of this abandonment of truth in greater detail.

There is a famous article of Milton Friedman on methodology in economic theory, which recommends the abandonment of truth: read more

Still in the danger zone

January 17, 2020 2 comments

from Shimshon Bichler and Jonathan Nitzan

Read more…

Does it — really — take a model to beat a model?

January 16, 2020 16 comments

from Lars Syll

A critique yours truly sometimes encounters is that as long as I cannot come up with some own alternative model to the failing mainstream models, 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 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…

In half a century what have we done with that knowledge?

January 16, 2020 3 comments

from Edward Fullbrook

A version of this graph appeared in yesterday’s Guardian.  I have a vivid memory from almost exactly half a century ago that relates to it.  It was February 1970 and snowing.  It was rural Wisconsin in the States and I was riding in a car with a woman who was the mother of six and a well-known peace activist but with no connection to science or environmentalism.  We were coming from Frank Lloyd Wright’s estate Taliesin where I lived, and as we neared Madison and got caught in a traffic jam, my friend said, “That man in the car in front of us is one of the scientists who says we are increasing the Earth’s temperature.”

As the decades passed, my friend’s words became a milestone for me because they mark a point when the fact that the world’s economy was heating up the Earth had already become common everyday conversational knowledge.  But now look again at that graph.  What have we done with that knowledge?

What inequality?!

January 14, 2020 9 comments

from David Ruccio

Economic inequality in the United States and around the world is now so obscene, and has convinced more and more people to do something about it, that the business press has initiated a campaign to deny its very existence.

They and the folks they represent are losing the battle of public opinion. And they’ve decided to do something about it.

First up was the Economist, the “newspaper” of record for liberal capitalism [ht: sk], claiming that new research undermines the pillars of the seemingly universal belief that “inequality has risen in the rich world.” Yes, as I have documented from the very beginning on this blog (e.g., herehere, and here), there are plenty of mainstream economists who have attempted to prove that inequality isn’t really a problem—either because it doesn’t really exist or, if it does, it’s not something we can or should do much about. And so the Economist managed to find pieces of research that call into question some of the key pillars of the inequality argument—that the gap between the top 1 percent and everyone else is growing, the middle-class is shrinking, capital is gaining at the expense of labor, and wealth inequality is soaring. Read more…

Where’s the Barefoot Revolution in economics?

January 13, 2020 15 comments

from Blair Fix

Yesterday I was reminded of what got me interested in economics. I’ll preface this by saying that I make my living as a substitute teacher in Toronto. It’s not glamorous, but it pays the bills. It gives me time to do research from outside academia.

When I’m in high school classrooms, I always browse the posters on the wall. It’s funny what you see. You find things (both good and bad) that you’d never see in institutions of ‘higher learning’. It’s a daily source of amusement for me.

Yesterday, while browsing the posters on a classroom wall, I came across a copy of the ‘Barefoot Economics Manifesto’. I was delighted to rediscover this document, and surprised that it was sitting quietly in an otherwise normal classroom.

If you don’t know, the ‘Barefoot Economics Manifesto’ was a clarion call to reject neoclassical economics. I’m not sure when it was first published, but it seems to have come from Adbusters. (I can’t find the original document. If you know more about it, leave a comment.)

The manifesto goes by several names. Some call it the The True Cost Economics Manifesto. Others call it the Kick It Over Manifesto. Regardless of what you call it, here’s what the manifesto says: Read more…

Is economics — really — predictable?

January 13, 2020 11 comments

from Lars Syll

oskarAs Oskar Morgenstern noted already back in his 1928 classic Wirtschaftsprognose: Eine Untersuchung ihrer Voraussetzungen und Möglichkeiten, economic predictions and forecasts amount to little more than intelligent guessing.

Making forecasts and predictions obviously isn’t a trivial or costless activity, so why then go on with it?

The problems that economists encounter when trying to predict the future really underlines how important it is for social sciences to incorporate Keynes’s far-reaching and incisive analysis of induction and evidential weight in his seminal A Treatise on Probability (1921).  Read more…

Petition and statement on violence at Jawaharlal Nehru University

January 12, 2020 Leave a comment

To sign on to this letter, please click here.

We are shocked and horrified to learn of the terrible attack on the Jawaharlal Nehru University on the evening on 5 January 202, by a group of armed goons who targeted a peaceful gathering of teachers and students. We note that this terrible event comes in the wake of a prolonged struggle by the students against a fee hike that would force nearly half of them to abandon their studies, and after an even longer series of protests by the faculty and students of JNU against the many arbitrary and illegal actions of the JNU Vice Chancellor over nearly three years. We are extremely concerned at the apparent failure of the Delhi Police (which is directly under the Home Ministry) to identify the perpetrators despite much photographic and video evidence, to register the complaints made by faculty and students about the attack, and the malicious attempt to pin the blame for the attack on some of the victims.

It is clear to us that a Vice Chancellor who exposes his faculty and students to such terror and who is guilty of many other actions undermining the academic and other functioning of the University, cannot remain in office. As academics from universities across the world, we join those who demand that the JNU Vice Chancellor should be removes forthwith, as he has lost all national and international legitimacy.

Signatories:   Read more…

Three types of models – 5

January 11, 2020 24 comments

from Asad Zaman

It is important to understand that there are three type of models, corresponding the following diagram. The simplest type of model is a pattern in the data that we observe. A second type of model is a “mental model”. This is a structure we create in our own minds, in order to understand the patterns that we see in the observations. The third type of model is a structure of the hidden real world, which generates the patterns that we see. Some examples will be helpful in clarifying these ideas about the typology of models.

3Models

Empirical Models: The simplest kind of model consists of a pattern that we see in the observations. For example, read more

How to teach econometrics

January 10, 2020 3 comments

from Lars Syll

aWhen-I-tell-people-I-study-econometrics-1280x721Professor Swann (2019) seems implicitly to be endorsing the traditional theorem/proof style for teaching econometrics but with a few more theorems to be memorized. This style of teaching prepares students to join the monks in Asymptopia, a small pristine mountain village, where the monks read the tomes, worship the god of Consistency, and pray all day for the coming of the Revelation, when the estimates with an infinite sample will be revealed. Dirty limited real data sets with unknown properties are not allowed in Asymptopia, only hypothetical data with known properties. Not far away in the mountains is the village of Euphoria where celibate priests compose essays regarding human sexuality. Down on the plains is the very large city of Real Data, where applied economists torture dirty data until the data confess, providing the right signs and big t-values. Although Real Data is infinitely far from Asymptopia, these applied econometricians are fond of supporting the “Scientific” character of their work with quotations from the spiritual essays of the Monks of Asymptopia.

Ed Leamer

How international corporations could be taxed, and why the US is working to prevent it

January 10, 2020 5 comments

from Norbert Häring

The OECD and the EU want to change international tax principles to curb tax evasion. The United States is opposed to the plans as they would affect its internet companies and other US multinationals.

The US has stepped up its fight against taxes on digital corporations. Shortly after President Donald Trump’s threat of special tariffs on French goods, US Treasury Secretary Steven Mnuchin asked all countries in early December to abandon similar plans for taxes that would hit US internet corporations in particular. In a letter to the industrialized country organization OECD, Mnuchin stated that an agreement should instead be reached at the OECD level. At the same time, however, he warned of changes to the taxation right, which this same OECD has been planning to introduce. These could damage established pillars of the international tax system, he wrote.

The US is thus questioning the OECD’s plan to curb rampant tax avoidance by international corporations and also low-tax competition by national governments. To this end, the OECD wants to change long established principles of international taxation rights, if possible by 2020. Read more…

Growth of Income Inequality: US vs. Europe

January 9, 2020 2 comments

What went wrong with economics?

January 9, 2020 40 comments

from Lars Syll

To be ‘analytical’ is something most people find recommendable. The word ‘analytical’ has a positive connotation. Scientists think deeper than most other people because they use ‘analytical’ methods. In dictionaries, ‘analysis’ is usually defined as having to do with “breaking something down.”

anBut that’s not the whole picture. As used in science, analysis usually means something more specific. It means to separate a problem into its constituent elements so to reduce complex — and often complicated — wholes into smaller (simpler) and more manageable parts. You take the whole and break it down (decompose) into its separate parts. Looking at the parts separately one at a time you are supposed to gain a better understanding of how these parts operate and work. Built on that more or less ‘atomistic’ knowledge you are then supposed to be able to predict and explain the behaviour of the complex and complicated whole.

In economics, that means you take the economic system and divide it into its separate parts, analyse these parts one at a time, and then after analysing the parts separately, you put the pieces together. Read more…

Errors of empiricism 4

January 8, 2020 Leave a comment

from Asad Zaman

Empiricism holds that observations are all that we have. We cannot penetrate through the observations to the hidden reality which generates these observations. Here is a picture which illustrates the empiricist view of the world:

ObservableReality

The wild and complex reality generates signals which we observe using our five senses. The aspects of reality which we can observe are the only things that we can know about reality. The true nature of hidden reality, as it really is, independent of our observations, is unknown and can never be known to us. Influential philosopher Kant calls it the “thing-in-itself”. Noumena is the wild reality, and Phenomena is what we can perceive/observe about the reality. Quote from Encyclopedia Britannica:  read more

The randomistas revolution

January 8, 2020 Leave a comment

from Lars Syll

RandomistasIn his history of experimental social science — Randomistas: How radical researchers are changing our world (Yale University Press, 2018) — Andrew Leigh gives an introduction to the RCT (randomized controlled trial) method for conducting experiments in medicine, psychology, development economics, and policy evaluation. Although it mentions there are critiques that can be waged against it, the author does not let that shadow his overwhelmingly enthusiastic view on RCT.

Among mainstream economists, this uncritical attitude towards RCTs has become standard. Nowadays many mainstream economists maintain that ‘imaginative empirical methods’ — such as natural experiments, field experiments, lab experiments, RCTs — can help us to answer questions concerning the external validity of economic models. In their view, they are more or less tests of ‘an underlying economic model’ and enable economists to make the right selection from the ever-expanding ‘collection of potentially applicable models.’

When looked at carefully, however, there are in fact few real reasons to share this optimism on the alleged ’empirical turn’ in economics. Read more…

2019 was “one of the strongest in the history of financial markets.” What does that mean?

January 8, 2020 9 comments

from Edward Fullbrook

Here is a passage from an article that appeared last week in The Guardian.

With one day of trading to go, 2019 is on course to be one of the strongest in the history of financial markets after shares around the world racked up record after record in another barnstorming year.

On Wall Street the Dow Jones industrial average has gone up almost 25% having reached record highs day after day, while the broader S&P500 is up 30% and the tech-heavy Nasdaq has grown 40% in value. The FTSE100 in London is close to its record high, as is the Dax30 in Germany. In the Asia Pacific, the Nikkei is up 15% while Australia’s ASX200 is still close to its highest ever point (reached in November).

But none of these countries, with the exception of the US, are in particularly good shape. Instead their stock markets are being sustained by ultra-low borrowing costs led by the US Federal Reserve.

This latest round of rate cutting has turned many of the assumptions about economics on their head to create a bad-news-is-good-news paradigm for markets.

Martin Farrer, The Guardian

Do these huge increases in the market-values of stocks mean that the riches of the world, including assets and income, have increased hugely in 2019?  That depends on what kind of metrical structure market-value has. Read more…

The productivity of bullshit jobs

January 7, 2020 12 comments

from Blair Fix

I recently read David Graeber’s book Bullshit Jobs: A Theory. If you’re not familiar, David Graeber is the anthropologist who wrote Debt: The First 5000 Years, a seminal book on the history of money and credit.

In Bullshit Jobs, Graeber takes aim at pointless work. Graeber describes a bullshit job as:

a form of paid employment that is so completely pointless, unnecessary, or pernicious that even the employee cannot justify its existence even though, as part of the conditions of employment, the employee feels obliged to pretend that this is not the case.

Bullshit Jobs is based largely around testimonials from people who feel that they have bullshit jobs. The testimonials are often hilarious and sometimes touching. I recommend reading the book for the testimonials alone. Graeber’s theory is icing on the cake.

One of the things that amused me in the book was the testimonial from Warren, a substitute teacher:

Warren: I work as a substitute teacher in a public school district in Connecticut. My job just involves taking attendance and making sure the students stay on task with whatever individual work they have. Teachers rarely if ever actually leave instructions for teaching. I don’t mind the job, however, since it allows me lots of free time for reading and studying Chinese, and I occasionally have interesting conversations with students. Perhaps my job could be eliminated in some way, but for now I’m quite happy.

This amused me because I currently work as a substitute teacher in a public school district in Toronto. Yes, I’m a PhD graduate who earns a living substitute teaching. Like Warren, I enjoy the job for the free time it affords. I have lots of time to do research (and write this blog).

For his part, Graeber isn’t sure that substitute teaching is a bullshit job (by his definition). If it is, it’s one of the best ones: Read more…

Free college and pay-by-the-mile auto insurance

January 7, 2020 6 comments

from Dean Baker

Recently, Washington Post columnist Catherine Rampell reported on the negative reactions of college presidents to the idea of free public college. The context was a media dinner with a dozen college presidents, most of whom were leading non-flagship public schools, according to Rampell.

The presidents were asked if they thought it was likely that the government would adopt free college along the lines proposed by presidential candidates Senators Bernie Sanders and Elizabeth Warren. Rampell reports that no one raised their hand. When asked whether they thought free college was a good idea, again, no one raised their hand.

The negative response to the proposal of free college from a group of college presidents, assumed to be authorities on the issue, was presented as evidence that it is a policy without merit. But my experience on a completely difference issue — the case of pay-by-the-mile auto insurance – offers an alternative perspective. Read more…

‘New Keynesianism’ — the art of making relevance irrelevant

January 7, 2020 3 comments

from Lars Syll

kThere really is something about the way macroeconomists construct their models nowadays that obviously doesn’t sit right.

Empirical evidence still only plays a minor role in mainstream economic theory, where models largely function as a substitute for empirical evidence. One might have hoped that humbled by the manifest failure of its theoretical pretences during the latest economic-financial crises, the one-sided, almost religious, insistence on axiomatic-deductivist modeling as the only scientific activity worthy of pursuing in economics would give way to methodological pluralism based on ontological considerations rather than formalistic tractability. That has, so far, not happened.

Fortunately — when you’ve got tired of the kind of macroeconomic apologetics produced by ‘New Keynesian’ macroeconomists and other DSGE modellers — there still are some real Keynesian macroeconomists to read. One of them — Axel Leijonhufvud — writes: Read more…