On statistics and causality

from Lars Syll

Ironically, the need for a theory of causation began to surface at the same time that statistics came into being … This was a critical moment in the history of science. The opportunity to equip causal questions with a language of their own came very close to being realized but was squandered. In the following years, these questions were declared unscientific and went underground. Despite heroic efforts by the geneticist Sewall Wright (1889-1988), causal vocabulary was virtually prohibited for more than half a century. And when you prohibit speech, you prohibit thought and stifle principles, methods, and tools.

Readers do not have to be scientists to witness this prohibition. In Statistics 101, every student learns to chant, “Correlation is not causation.” With good reason! The rooster’s crow is highly correlated with the sunrise; yet it does not cause the sunrise.

Unfortunately, statistics has fetishized this commonsense observation. It tells us that correlation is not causation, but it does not tell us what causation is. In vain will you search the index of a statistics textbook for an entry on “cause.” Students are not allowed to say that X is the cause of Y — only that X and Y are “related” or “associated.”

Statistical reasoning certainly seems paradoxical to most people.

Take for example the well-known Simpson’s paradox.

The semiconductor bill and the Moderna billionaires

from Dean Baker

It’s pretty funny that we continually debate the causes of inequality when we routinely pass bills that redistribute income upward. The semiconductor bill about to be approved by Congress is the latest episode in this absurd charade.

To be clear, the bill does some good things. It has funding both to subsidize manufacturing capacity for semiconductors in the United States and also for further research in developing better chips in the future. Both of these are positive developments even if the benefits of the former are overstated.

It was common in the pandemic days to tout the supply chain problems as evidence that we needed more manufacturing in the United States in a variety of areas. However, that story ignored several factors.

First, the pandemic knocked out many factories in the United States also, it wasn’t just factories in Thailand and China that closed. Second, some of the problems were associated with shortages of truck drivers and other transportation workers and facilities. We need to transport goods made in the United States also, most people can’t just drive to the local furniture factory to pick up a new living room sofa.

Most importantly, the complaints about foreign sourcing ignores the fact that we saw a massive increase in goods imports, as there was a huge pandemic-induced shift in consumption from services to goods. Real imports of goods increased by more than $270 billion from the fourth quarter of 2019 to the second quarter of 2021.

Book Review by Jayati Ghosh : The journey to greater equality

from Jayati Ghosh

Economic inequalities have increased substantially across the world in the past three decades and have deepened during the COVID-19 pandemic. Thomas Piketty and his colleagues at the World Inequality Lab at the Paris School of Economics (PSE), France, have been at the forefront of tracking these changes, providing extremely useful analyses based on careful aggregation of national data on income and wealth inequality from a multitude of sources. They have shown that globally, inequality is now as entrenched as it was during the first part of the 20th century.

Despite this sobering assessment, A Brief History of Equality by Piketty, who is Professor at the École des Hautes Études en Sciences Sociales and the PSE, is, in many ways, an optimistic account of long-term trends in inequality and a possible blueprint for future egalitarian transformation. For a short book, it is also remarkably comprehensive, even encyclopaedic, displaying Piketty’s trademark ability to provide a long historical sweep along with an awareness of sociopolitical complexities in the determination of economic trends. The book distils some of the most important ideas eg, on the causes of trends in inequality in different periods and proposals eg, more progressive taxation and public welfare spending of his earlier influential volumes Capital in the Twenty-First Century and Capital and Ideology into concise and accessible language. 

Heckman on where causality resides

from Lars Syll

I make two main points that are firmly anchored in the econometric tradition. The first is that causality is a property of a model of hypotheticals. A fully articulated model of the phenomena being studied precisely defines hypothetical or counterfactual states. A definition of causality drops out of a fully articulated model as an automatic by-product. A model is a set of possible counterfactual worlds constructed under some rules. The rules may be the laws of physics, the consequences of utility maximization, or the rules governing social interactions, to take only three of many possible examples. A model is in the mind. As a consequence, causality is in the mind.

James Heckman

So, according to this ‘Nobel prize’ winning econometrician, “causality is in the mind.” But is that a tenable view? Yours truly thinks not. If one as an economist or social scientist would subscribe to that view there would be pretty little reason to be interested in questions of causality at all.  And it sure doesn’t suffice just to say that all science is predicated on assumptions. To most of us, models are seen as ‘vehicles’ or ‘instruments’ by which we represent causal processes and structures that exist and operate in the real world. As we all know, models often do not succeed in representing or explaining these processes and structures, but if we didn’t consider them as anything but figments of our minds, well then maybe we ought to reconsider why we should be in the science business at all …

What is really going on?

Yanis Varoufakis

. . . what is really going on? My answer: A half-century long power play, led by corporations, Wall Street, governments and central banks, has gone badly wrong. As a result, the West’s authorities now face an impossible choice: Push conglomerates and even states into cascading bankruptcies, or allow inflation to go unchecked.

For 50 years, the US economy has sustained the net exports of Europe, Japan, South Korea, then China and other emerging economies, while the lion’s share of those foreigners’ profits rushed to Wall Street in search of higher returns. On the back of this tsunami of capital heading for America, the financiers were building pyramids of private money, such as options and derivatives, to fund the corporations building up a global labyrinth of ports, ships, warehouses, storage yards, and road and rail transport. When the crash of 2008 burned down these pyramids, the whole financialised labyrinth of global just-in-time supply chains was imperiled.

To save not just the bankers but also the labyrinth itself, central bankers stepped in to replace the financiers’ pyramids with public money. Meanwhile, governments were cutting public expenditure, jobs, and services. It was nothing short of lavish socialism for capital and harsh austerity for labour. Wages shrunk, and prices and profits were stagnant, but the price of assets purchased by the rich (and thus their wealth) skyrocketed. Thus, investment (relative to available cash) dropped to an all-time low, capacity shrunk, market power boomed, and capitalists became both richer and more reliant on central-bank money than ever.

It was a new power game. The traditional struggle between capital and labour to increase their respective shares of total income through mark-ups and wage increases continued but was no longer the source of most new wealth. After 2008, universal austerity yielded low investment (money demand), which, combined with plentiful central-bank liquidity (money supply), kept the price of money (interest rates) close to zero. With productive capacity (even new housing) on the wane, good jobs scarce, and wages stagnant, wealth triumphed in equity and real-estate markets, which had decoupled from the real economy.

Then came the pandemic, which changed one big thing: Western governments were forced to channel some of the new rivers of central-bank money to the locked-down masses within economies that, over the decades, had depleted their capacity to produce stuff and were now facing busted supply chains to boot. As the locked-down multitudes spent some of their furlough money on scarce imports, prices began to rise. Corporations with great paper wealth responded by exploiting their immense market power, yielded by their shrunken productive capacity, to push prices through the roof.

After two decades of a central-bank-supported bonanza of soaring asset prices and rising corporate debt, a little price inflation was all it took to end the power game that shaped the post-2008 world in the image of a revived ruling class. So, what happens now?

Probably nothing good. To stabilise the economy, the authorities first need to end the exorbitant power bestowed upon the very few by a political process of paper wealth and cheap debt creation. But the few will not surrender power without a struggle, even if it means going down in flames with society in tow.

Yanis Varoufakis

Structuring the economy to give money to the rich is inflationary

from Dean Baker

I just read this NYT column by Bryan Stryker, on how Democrats can win back the working class. I have no idea how its proposals poll, but as an economic matter, they will do little to help the working class.

The big problem with Stryker’s argument is that it assumes that the working class will somehow benefit from having more manufacturing jobs. This would have been true 20-years-ago when noncollege educated workers in manufacturing enjoyed a substantial pay premium over workers employed in other sectors. It is no longer true today.

Due to our trade deals (especially Clinton’s), which cost millions of manufacturing jobs, the sector no longer offers any substantial pay premium over employment in other sectors. At the most basic level, the average hourly earnings of production and nonsupervisory workers in manufacturing is now less than 92.0 percent of the average for the private sector as a whole.[1]

Much of the deterioration in the quality of manufacturing jobs is associated with the decline of unions in the sector. In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had largely disappeared, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole.

Mainstream economics — the triumph of ideology over science

from Lars Syll

Research shows not only that individuals sometimes act differently than standard economic theories predict, but that they do so regularly, systematically, and in ways that can be understood and interpreted through alternative hypotheses, competing with those utilised by orthodox economists.

To most market participants — and, indeed, ordinary observers — this does not seem like big news … In fact, this irrationality is no news to the economics profession either. John Maynard Keynes long ago described the stock market as based not on rational individuals struggling to uncover market fundamentals, but as a beauty contest in which the winner is the one who guesses best what the judges will say …

Adam Smith’s invisible hand — the idea that free markets lead to efficiency as if guided by unseen forces — is invisible, at least in part, because it is not there …

For more than 20 years, economists were enthralled by so-called “rational expectations” models which assumed that all participants have the same (if not perfect) information and act perfectly rationally, that markets are perfectly efficient, that unemployment never exists (except when caused by greedy unions or government minimum wages), and where there is never any credit rationing.

That such models prevailed, especially in America’s graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science. Unfortunately, students of these graduate programmes now act as policymakers in many countries, and are trying to implement programmes based on the ideas that have come to be called market fundamentalism … Good science recognises its limitations, but the prophets of rational expectations have usually shown no such modesty.

Joseph Stiglitz

The rational expectations hypothesis — one of the cornerstones of mainstream economics — presupposes, basically for reasons of consistency, that agents have complete knowledge of all relevant probability distribution functions. And

Governor Newsom does drugs, or at least insulin

from Dean Baker

California’s Governor, Gavin Newsom, announced plans last week for the state to set up its own manufacturing facility to produce low-cost insulin for California residents. This is a great idea.

Insulin is an old drug that can be produced as a cheap generic, which is the case almost everywhere else in the world. A monthly supply of insulin in Canada costs $12, in Germany $11, and in Italy $10. In the United States, it costs on average around $100, and in many cases, people are paying several hundred dollars a month for their insulin. This is a tremendous burden on people, especially when they are retired or unable to work because of their medical condition.

The reason that drug companies can get away with charging high prices for an old drug is that they have made modifications, for which they hold patent monopolies. While these modifications may be of limited value, they allow the companies to charge patent monopoly prices, if they can convince doctors to prescribe the modified versions for their patients.

Newsom’s proposal will mean that there is a large supply of low-cost generic insulin available. If patients still want to get the latest patent-protected versions (many modifications to insulin are already off-patent), they could still be looking at very high prices, but presumably most people in need of insulin will get the generic version.

Towards a ‘periodic table of prices’

I do not have ‘physics envy‘. I do not want economics to look too much like physics. But I do have chemistry envy. I want economics to have something like the magnificent periodic table of elements, for prices. Input prices, output prices, mark up prices, shadow prices, market prices, administered prices, government prices, expenditure prices, asset prices, monopoly prices, monopsony prices – all of these and many more neatly ordered in a relatively simple table. Somebody still has to write the book about it but there sure are elements available. One can think of the work on prices by Frederic Lee. Or about the work of Gyun Cheol Gu, who provides us with this extremely useful overview of ideas about pricing (PK means: Post Keynesian):

The ’empirical revolution’ in economics — some critical perspectives

from Lars Syll

Most research in economics nowadays involves empirical work … It is therefore odd to find a great deal of economic reasoning still starting from “standard theory”. Whilst it does generate predictions that can be tested empirically, it does not have an empirical foundation, but rather is based on a story about universal human nature … It remains true that the traditional models retain a central place, and accumulating evidence does not tend to lead to the abandonment of a conventional starting point, even when the two are in conflict …

The link from evidence into theory is similarly not always pursued in behavioural and experimental economics. One approach is to study human behaviour as a departure from homo economicus, explicitly to retain traditional theory as the starting point, and then to modify the analysis by incorporating important biases that deviate from this ideal … This involves two stages: the traditional assumptions of rationality, perfect information, etc., and then a correction. In terms of causal mechanism, neither of these represents an actually occurring process: the first stage is derived from axioms not observed behaviour and the second is a correction of the resulting error.

Michael Joffe

Although discounting empirical evidence cannot be the right way to solve economic issues, there are still, in my opinion, a couple of weighty reasons why we perhaps shouldn’t be too excited about the so-called ’empirical revolution’ in economics.

Economics is always ‘political economics’

from Peter Söderbaum

Mainstream neoclassical economics is attacked by many and from different angles or vantage points. Neither the defendants nor the critics can claim value-neutrality. “Values are always with us” (Myrdal 1978) and economics is always ‘political economics’. The neoclassical attempt to construct a ‘pure’ economics has failed. Neoclassical theory may still survive as a theory that is specific in scientific and ideological terms and useful for some purposes. But this survival has to be accompanied by the admission that neoclassical theory is built on assumptions that are specific in terms of ethics and ideology and that alternatives to these assumptions exist. The future of neoclassical theory is therefore not only a matter of its usefulness to solve economic problems in some sense but also has to do with the ideological preferences of scholars who have become accustomed to neoclassical theory and of other actors in society who may exploit neoclassical theory for their own purposes. Vested interests are involved and in neoclassical language one may argue that even when the conceptual weaknesses are demonstrated and understood there may still be a considerable ‘demand’ for neoclassical theory.

The vision of one logically closed economic theory for all purposes has to be abandoned in favour of an idea that different theories are useful for different purposes and that attempts to reduce these different theories to one single Master theory are no longer meaningful. In a democracy, the continued existence of competing and complementary theories, reflecting different ideological points of view is a necessity and is even positive for the development of economics as a discipline. Monopoly for one theory is not conducive to new thinking and creativity. ‘Competition’ may sometimes be good for individuals and for society at large, to once more use a neoclassical vocabulary.

One often hears actors argue in ways suggesting that Western societies are democracies by definition. But even if these societies perform well in some respects it is equally true that all ‘democracies’ can be strengthened. The existence of monopoly for neoclassical theory at Departments of Economics all over the world exemplifies an element of ‘dictatorship’ that cannot be accepted and has to be replaced by competition and pluralism.

Click to access Soderbaum43.pdf

The magnitude of the required reductions

from Ted Trainer

It is not commonly understood how large the reductions would have to be to enable a society that is globally sustainable and just. The World Wildlife Foundation’s Footprint measure (2018) estimates the average Australian per capita use of productive land at 6–8 ha. Thus, if the 9–10 billion people expected to be on earth by 2050 were to live as Australians do now, up to 80 billion ha of productive land would be needed. But there are only about 12 billion ha of productive land on the planet. If one third of it is set aside for nature then each Australian would be living in a way that would require about 10 times as much productive land as all people could ever have. Some other measures taking into account factors such as materials consumption (Wiedmann et al., 2015) indicate higher multiples.

To this must be added the implications of growth. If the Australian GDP rises by 3% pa and by 2050 all 9–10 billion people rise to the “living standards” Australians would then have, each year the global economy would be producing and consuming about 18 times as much as it does now. Yet the present amounts are unsustainable; the WWF estimates that the global footprint is now 70% higher than the planet could sustain. This indicates that the 2050 global resource and ecological impact would be in the region of 30 times a sustainable level.

Weekend read – Danger signals from the crypto casino

from C. P. Chandrasekhar

The meltdown in May 2022 in the cryptocurrency world, in which the values of digital coins plunged and rendered some near-worthless, is a wake-up call. It once again shows that cryptocurrencies are nothing but a bunch of insubstantial, digital ‘bits’ created by speculators as ‘coins’ for speculation. Over the years since 2009, when the first bitcoin was minted, privately generated cryptocurrencies have failed to live up to the claim that they offer an alternative to government-backed and regulated fiat currencies. They are hardly used as media of exchange in routine economic transactions. They mainly serve as virtual instruments on which speculators, with money to lose and the time and inclination to gamble, place costly bets. And consequently their ‘value’ is volatile.

For example, the value of a single bitcoin rose from a low of less than $30,000 on 20 July 2021 to a high of more than $67,000 in the middle of August 2021 and fell to less than $30,000 in late-May 2022. Yet the promise of high returns in short periods of time is appealing to the speculative instincts of ordinary, poorly-informed citizens. A recent survey by the European Central Bank found that as many as one in 10 EU households “may own cryptoassets”, and a survey by the Federal Reserve revealed that 12 per cent of US adults held cryptocurrencies in 2021. With such penetration what happens in the cryptoworld affects the decisions of those who are embedded in the regular economy. Those who fear that the growing popularity of an asset so fickle could destabilise the rest of the economy are calling for it to be banned or severely regulated.

Yet, there is no shortage of digital currency enthusiasts.

Threats to substantive relevance of natural experiments

from Lars Syll

External validity poses a challenge for most kinds of research designs, of course. In true experiments in the social sciences, the study group is not usually a random sample from some underlying population. Often, the study group consists instead of a convenience sample, that is, a group of units that have been “drawn” through some nonrandom process from an underlying population. In other studies, one cannot even readily claim that the study group has been drawn from any well-defined population. In either case, one cannot confidently project estimated causal effects to a broader population, or attach estimates of sampling error to those projections. In most true experiments, in other words, causal inferences are drawn conditional on the study group—the particular set of units assigned to treatment and control groups. While randomization to treatment and control groups generally ensures that estimators of effects for the study group are unbiased (barring differential attrition or other threats to internal validity), whether these effects generalize to other populations is often an open question.

Thad Dunning

Yours truly’s view is that nowadays many social scientists 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 models used in social sciences. In their view, they are more or less tests of ‘an underlying model’ that enable them to make the right selection from the ever-expanding ‘collection of potentially applicable models.’ When looked at carefully, however, there are in fact not that many convincing reasons to share this optimism.

COVID and the broken global order

from C. P. Chandrasekhar

When the COVID pandemic affected every one of the world’s nations, the way forward seemed obvious, even if difficult to traverse. Given the rapid spread of the disease and its severity that overwhelmed long neglected health systems, and the cost to lives and livelihoods that shutdowns of economic and social activity implied, quick access to drugs and vaccines to manage the pandemic were crucial. Fortunately, government support for biotech research, in general, and research on new generation vaccines, in particular, had advanced science to some degree. Many developed country governments and some developing country governments were willing to outlay large sums to accelerate further research on and pre-order potential production of any promising drugs and vaccines, ignoring the risks of possible failure.

As a result, laboratories and companies were able to design, test and launch vaccines and drugs in record time, to reduce the spread and severity of the disease, even if not to prevent it. That done, the task was one of ramping up production and deploying the vaccines and drugs to manage the disease. This should have been seen as urgent, because the persistence of the disease led to mutation of the virus, allowing for breakthrough infections and new waves of the pandemic. In such circumstances, any restriction of access to the technology underlying the drugs would limit production, make distribution unequal and prolong the pandemic.

Unfortunately, despite the essential contribution of public funds to research and development and marketing support, the prevalent global intellectual property regime that gives the patent holder control over the technology did indeed restrict access to it and limit global production.

real-world economics review issue no. 100

real-world economics review

issue no. 100

download whole issue

Introduction to RWER issue 100          3

Real Science Is Pluralist           issue no. 5 – 2001
Edward Fullbrook         5

Is There Anything Worth Keeping in Standard Microeconomics?          issue no. 12 – 2002
Bernard Guerrien          11

How Reality Ate Itself: Orthodoxy, Economy & Trust          issue no. 18 – 2003
Jamie Morgan          14

What is Neoclassical Economics?         issue no. 6 – 2006
Christian Arnsperger and Yanis Varoufakis          20

A financial crisis on top of the ecological crisis: Ending the monopoly of neoclassical economics         issue no. 49 – 2009
Peter Söderbaum          30

U.S. “quantitative easing” is fracturing the Global Economy          issue no. 55 – 2010
Michael Hudson          41

Capitalism and the destruction of life on Earth: Six theses on saving the
humans          issue no. – 64
Richard Smith          53

Secular stagnation and endogenous money          issue no. 66 – 2014
Steve Keen          81

Piketty and the resurgence of patrimonial capitalism          issue no. 69 – 2014
Jayati Ghosh          92

Capital and capital: the second most fundamental confusion          issue no. 69 – 2014
Edward Fullbrook          99

Deductivism – the fundamental flaw of mainstream economics          issue no. 74 – 2016
Lars Pålsson Syll          112

Radical paradigm shifts          issue no. 85 – 2018
Asad Zaman          134

Growthism: its ecological, economic and ethical limits          issue no. 87 – 2019
Herman Daly          139

Producing ecological economy          issue no. 87 – 2019
Katharine N. Farrell          154

Economism and the Econocene: a coevolutionary interpretation          issue no. 87 – 2019
Richard B. Norgaard          164

Inequality challenge in pursued economies          issue no. 92 – 2021
Richard C. Koo          184

What is economics? A policy discipline for the real world          issue no. 96 – 2021
James K. Galbraith          208

Consumerism and the denial of values in economics         issue no. 96 – 2021
Neva Goodwin          224

Of Copernican revolutions – and the suddenly-marginal marginal mind at the dawn of the Anthropocene          issue no. 96 – 2021
Richard Parker          242

Postscript: RWER is for everyone and no one
Jamie Morgan          264

Board of Editors, past contributors, submissions, etc.          26

Please click here to support this journal and the WEA

Inflation: should we take away the soup bowl?

The graph below has been constructed by economists of the European Central Bank. It’s based on national accounts data. It shows that present day inflation is profit driven, not wage driven. Money flows to profits, not wages. What does this mean for monetary, fiscal and income policy, taking some other aspects of inflation into consideration? Quite a lot.

Economics as ideology

from Lars Syll

Although I never believed it when I was young and held scholars in great respect, it does seem to be the case that ideology plays a large role in economics. How else to explain Chicago’s acceptance of not only general equilibrium but a particularly simplified version of it as ‘true’ or as a good enough approximation to the truth? Or how to explain the belief that the only correct models are linear and that the von Neuman prices are those to which actual prices converge pretty smartly? This belief unites Chicago and the Classicals; both think that the ‘long-run’ is the appropriate period in which to carry out analysis. There is no empirical or theoretical proof of the correctness of this. But both camps want to make an ideological point. To my mind that is a pity since clearly it reduces the credibility of the subject and its practitioners.                   Frank Hahn

People are not spending down their savings II

from Dean Baker

Last month I wrote a piece where I managed to mangle a very simple point. While the reported saving rate had fallen in April, it was actually due to people paying more capital gains taxes, not the result of households spending down savings.

The issue here is straightforward. Saving is defined as the portion of disposable income that is not consumed. Savings can fall either because either consumption has increased, or disposable income has fallen.

We are not seeing especially rapid consumption growth in 2022 (real consumption actually fell in May), rather we are seeing weak growth in disposable income, which is defined as personal income, minus tax payments. The story here is not that personal income growth has been weak, but rather that tax payments have soared.

The May data show taxes being paid at an annual rate of $3,123.4 billion (NIPA Table 2.1, Line 26). This is up by 41.6 percent, from the $2,205.1 billion paid in taxes in 2019.

This big jump in tax payments cannot be explained by an increase in tax rates. There have been no major increases in taxes since 2019. Rather, the jump in taxes almost certainly reflects large capital gains tax payments that people are making on stock they have sold in the last year. The huge runup in the stock market means that many people would have substantial amounts of taxable gains.

Maternal mortality in US compared to . . .