Gary Becker — making nonsense out of economic science

February 3, 2019 8 comments

from Lars Syll

1399387137298The econometrician Henri Theil once said “models are to be used but not to be believed.” I use the rational actor model for thinking about marginal changes but Gary Becker really believed the model. Once, at a dinner with Becker, I remarked that extreme punishment could lead to so much poverty and hatred that it could create blowback. Becker was having none of it. For every example that I raised of blowback, he responded with a demand for yet more punishment …

Alex Tabarrok

The alarm that sets off in my brain when reading Becker is that ‘rational actor models,’ rather than being helpful for understanding real-world economic issues, sounds more like an ill-advised plaidoyerfor voluntarily taking on a methodological straight-jacket of unsubstantiated and known to be false assumptions.  Read more…

Punching the clock

February 2, 2019 8 comments

Economics and reality

February 1, 2019 63 comments

from Lars Syll

Modern’ economics has become increasingly irrelevant to the understanding of the real world. In his seminal book Economics and Reality(1997), Tony Lawson traced this irrelevance to the failure of economists to match their deductive-axiomatic methods with their subject

It is — sad to say — as relevant today as it was twenty years ago.

It is still a fact that within mainstream economics internal validity is everything and external validity nothing. Why anyone should be interested in that kind of theories and models is beyond imagination. As long as mainstream economists do not come up with any export-licenses for their theories and models to the real world in which we live, they really should not be surprised if people say that this is not science, but autism!

Studying mathematics and logic is interesting and fun. It sharpens the mind. In pure mathematics and logic, we do not have to worry about external validity. But economics is not pure mathematics or logic. It’s about society. The real world.

Economics and Reality was a great inspiration to yours truly twenty years ago. It still is.

Most read RWER papers

January 31, 2019 Leave a comment

Economic internetization

January 29, 2019 3 comments

from Constantine Passaris and the current issue of RWER

I have coined the word internetization for the purpose of circumventing the drawbacks of the concept of globalization. These drawbacks commence with the fact that globalization is not a new concept. The international outreach between nations has taken place since time immemorial. Furthermore, globalization does not reflect the contemporary digital empowerment of civil society and the electronic facility for modern financial transactions.

In effect, internetization denotes a combination of two contemporary features. These are global outreach and electronic connectivity. There is no denying that internetization has had a significant impact on the new global economy and the scope and substance of economic governance. The electronic prefix that is appearing before an increasing number of our daily interactions such as e-commerce, e-mail, e-learning, e-banking, e-travel, e-democracy and e-government is a tangible expression of the pervasive influence of the information technology and communications revolution (Passaris, 2014A).

Increasingly, internetization has become a driving force in the business strategy pursued by corporations in the 21st century. Internetization embraces the transformative powers of the world-wide-web and the electronic information high way and serves as a catalyst for the evolving dynamics of interconnectivity in the new global economy. Furthermore, internetization captures the pervasive influence of technological change and electronic innovations on the global economic landscape as well as on all aspects of human endeavour for our civil society (Passaris, 2017).

Internetization has also impacted upon economic governance by facilitating public scrutiny of government documents, enhancing the accessibility of data and generally promoting the electronic connectivity between civil society and government.  Read more…

Why science is not a game of chance

January 29, 2019 Leave a comment

from Lars Syll

cohenIf human scientists could be supposed to play a system of analogous games of chance … the evidential support available for successful scientific hypotheses could be measured by a Pascalian probability-function … But unfortunately the analogy breaks down at several points. The number of co-ordinate alternative outcomes​ that are possible in any one trial of the issue investigated may be infinite, indeterminate, or at least unknowable … And even more importantly, the trial outcomes may not be independent of one another … In short, science is not a game of chance with Nature, and we can grade enumerative induction by an indifference-type Pascalian probability only when we are generalizing about outcomes over a selected finite set of trials in a supposedly genuine game of chance.

Yes, low unemployment does raise wages

January 28, 2019 Leave a comment

from Dean Baker

In the fall of 2013, Jared Bernstein and I wrote a book called Getting Back to Full Employment: A Better Bargain for Working People. The main point of the book was that low unemployment rates disproportionately benefited those who are most disadvantaged in the labor market. For this reason, we argued for using macroeconomic policy to get the unemployment rate as low as possible, until inflation became a clear problem.

At that time, the unemployment rate was still close to 7.0 percent. It was coming down from its Great Recession peak of 10.0 percent, but there were many economists, including some at the Federal Reserve Board, who argued that it should not be allowed to fall below a range between of 5.0–5.5 percent because lower rates of unemployment could trigger spiraling inflation. Our argument challenged that view.

We felt the evidence that unemployment rates this high should pose any sort of floor for macroeconomic policy were weak. Given the enormous gains from allowing the unemployment rate to fall further, we argued the Fed should take the small risk of accelerating inflation, and allow the unemployment to continue to decline.

Thankfully, Janet Yellen, who was then Fed chair, agreed with this position. (It helped that our friends with the Fed Up Coalition were also pushing hard in this direction.) Her replacement, Jerome Powell, seems to be following the same path, more or less.

Anyhow, we have now seen the unemployment rate fall below 4.0 percent, getting as low as 3.7 percent last fall, with impressive results.  Read more…

Critical rationalism

January 27, 2019 17 comments

from Lars Syll

critical-rationalist-project-history-philosophy_3For realists, the name of the scientific game is explaining phenomena, not just saving them. Realists typically invoke ‘inference to the best explanation’ [IBE] …

What exactly is the inference in IBE, what are the premises, and what the conclusion?

The intellectual ancestor of IBE is Peirce’s abduction:

The surprising fact, C, is observed.
But if A were true, C would be a matter of course.
Hence, … A is true.

Here the second premise is a fancy way of saying “A explains C”. Notice that the explanatory hypothesis A figures in this second premise as well as in the conclusion. The argument as a whole does not generate the explanans out of the explanandum. Rather, it seeks to justify the explanatory hypothesis …

Abduction is deductively invalid … [but] there is a way to rescue abduction and IBE … What results, with the missing premise spelled out, is:  Read more…

The Great Recession

January 27, 2019 3 comments

from Constantine Passaris and the current issue of the RWER

The Great Recession commenced during the second decade of the new millennium. It was triggered by the global financial crisis of 2008 and developed in its aftermath. I believe the Great Recession is an important economic governance milepost. To my way of thinking the Great Recession is the defining economic event that revealed the fault lines in economic governance and the dysfunctional nature of our economic policy tool kit for the 21st century. In effect, our inherited economic governance model had developed structural deficiencies and public policy shortcomings (Passaris, 2015B).

Furthermore, the Great Recession was a tangible acknowledgement that the economic governance landscape was no longer an effective mechanism for delivering the desired outcomes for the new economy. Indeed, it served as a wakeup call that the economic policies that were effective in the old economy of the 20th century are no longer potent for the new economy of the 21st century.

This new term, the Great Recession, is an informative play on words on the Great Depression. The Great Depression lasted for about a decade during the 1930s. It was a period of protracted economic downturn, high inflation, soaring unemployment, stagnant income levels and a decline in total output. Read more…

Perils of exchange rate miss-alignment

January 26, 2019 5 comments

from Asad Zaman

As I have only recently come to realize, stabilizing the exchange rate at the wrong level can have massively harmful effects. One can trace major economic tragedies to such attempts. The British attempt to go back to the gold standard after post WW1 failed because they set the level too high (as Keynes pointed out). This attempt set of a sequence of events which had far reaching consequences. A similar story is told about Pakistan in “The Rupee is falling; let it crash”. Linked article shows that overvaluation of Pak Rupee de-linked the Pakistan and Indian Economies, which may the economic root of current political hostilities. Current problems of the European Union are a more advanced version of the same problem, where the rate of exchange between European countries cannot be re-aligned according to the gaps between their imports and exports. This is a subject worth exploring further, and if readers have more pointers/articles, I would appreciate learning more about it. The article below deals with the Dutch Disease in Pakistan.  read more

Financial and business cycles in the United States

January 25, 2019 3 comments

source: https://hackernoon.com/predator-prey-economics-2b2c0272d472

How monetary union is sacrificed on the altar of competitiveness

January 25, 2019 4 comments

from Norbert Häring

European Economic & Monetary Union (EMU) is in permanent crisis. The economic strengths of the participating nations are drifting apart instead of converging. This creates great frustration among the governments of countries being left behind and fierce disputes between them and Brussels and governments of core countries.

The currency union was based on the premise that the economic structures and levels of prosperity among the members of the union would converge. The poorer countries would catch up. That didn’t happen. On the contrary. Philipp Heimberger from the Vienna Institute for International Economic Studies (WIIW) warned in his analysis of October 2018:

“The most significant long-term risk of disintegration for the euro area is the existing polarisation in the production structures of ‘core’ countries and southern ‘periphery’ countries.”

While the German economy grew by 27 percent and the Austrian by as much as 33 percent between the beginning of monetary union in 1999 and 2017, Italy’s grew by a modest six percent and Portugal’s by 12 percent.  In Greece, gross domestic product in 2017, adjusted for inflation, was at the same level as 19 years earlier. While the share of German industry in value-added remained almost stable at a high level, it fell sharply in the periphery countries.  Read more…

Is money — really — neutral in the long run?

January 25, 2019 35 comments

from Lars Syll

Paul Krugman has repeatedly over the years argued that we should continue to use neoclassical hobby horses like IS-LM and Aggregate Supply-Aggregate Demand models. Here’s one example:

So why do AS-AD? … We do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility. Or to put it differently, you do want somehow to make clear the notion (which even fairly Keynesian guys like me share) that money is neutral in the long run.

I doubt that Keynes would have been impressed by having his theory being characterized by catchwords like “tendency to return to full employment” and “money is neutral in the long run.”

alfa

One of Keynes’s central tenets — in clear contradistinction to the beliefs of mainstream economists — is that there is no strong automatic tendency for economies to move toward full employment levels in monetary economies.  Read more…

Distribution and redistribution of wealth in USA

January 24, 2019 2 comments

The harder they fall

January 24, 2019 2 comments

from Shimshon Bichler and Jonathan Nitzan

Like most of those subjected to the capitalist mode of power, Toro Molina, the protagonist of Budd Schulberg’s novel The Harder They Fall (1947), knows nothing about the larger scheme of things. Lured to the U.S. on a promise to ‘financialize’ his huge muscles, the Argentine-villager-turned-U.S.-boxing-champion will see none of the yield on his ‘human capital’. His promoters will take it all. They will ‘fix’ his battles into a winning streak to capitalize his victories as he fights his way to the West Coast – and then leverage his serialized losses as he makes his way back to the East. The harder he falls, the higher they rise.

  1.  From boom to doom

Until a few months ago, the stock market narrative in the United States could have been summarized by the popular acronym BTFD – or ‘buy the fucking dip’. Analysts and strategists, emboldened by the world’s synchronized recovery, Trump’s pro-business policies and ample liquidity, predicted that equities would continue rising and recommended that investors take advantage of any temporary eakness to augment their stock holdings in anticipation of further upside.

But the atmosphere of boom has since given way to doom and gloom. With equity markets having entered ‘correction’ territory, many observers, including some of the world’s richest investors, now warn of a coming crash and a protracted ‘bear market’.

  1. EPS: the stylized facts

Figure 1 sets this shifting sentiment in a long-term context. The chart, which begins in the early 1970s, shows the annual growth rates of U.S. and global earnings per share (EPS), smoothed as 12-month trailing averages, (in this piece, we use the terms ‘earnings’ and ‘profits’ interchangeably).  Read more…

Billionaires – 2000 to 2017

January 23, 2019 8 comments

No one said rich people were very sharp: Davos tries to combat populism

January 22, 2019 7 comments

from Dean Baker

Let’s see, cattle ranchers are against vegetarianism, coal companies are against restricting CO2 emissions, and the Davos crew is trying to combat populism, according to The Washington Post. It is kind of amazing that the rich people at Davos would not understand how absurd this is.

Yeah, we get that rich people don’t like the idea of movements that would leave them much less rich, but is it helpful to their cause to tell us that they are devoting their rich people’s conference to combating them? The real incredible aspect of Davos is that so many political leaders and news organizations would go to a meeting that is quite explicitly about rich people trying to set an agenda for the world.

It is important to remember, the World Economic Forum is not some sort of international organization like the United Nations, the OECD, or even the International Monetary Fund. It is a for-profit organization that makes money by entertaining extremely rich people. The real outrage of the story is that top political leaders, academics, and new outlets feel obligated to entertain them.

Beyond probabilism

January 22, 2019 4 comments

from Lars Syll

“Getting philosophical” is not about articulating rarified concepts divorced from statistical practice. It is to provide tools to avoid obfuscating the terms and issues being bandied about …

mayoDo I hear a protest? “There is nothing philosophical about our criticism of statistical significance tests (someone might say). The problem is that a small P-value is invariably, and erroneously, interpreted as giving a small probability to the null hypothesis.” Really? P-values are not intended to be used this way; presupposing they ought to be so interpreted grows out of a specific conception of the role of probability in statistical inference. That conception is philosophical. Methods characterized through the lens of over-simple epistemological orthodoxies are methods misapplied and mischaracterized. This may lead one to lie, however unwittingly, about the nature and goals of statistical inference, when what we want is to tell what’s true about them …

One does not have evidence for a claim if nothing has been done to rule out ways the claim may be false. If data x agree with a claim C but the method used is practically guaranteed to find such agreement, and had little or no capability of finding flaws with C even if they exist, then we have bad evidence, no test …   Read more…

USA racial wealth divide

January 21, 2019 Leave a comment

Source: Dreams Deferred, Institute for Policy Studies

A hundred years ago

January 21, 2019 13 comments

from Lars Syll

The treaty includes no provisions for the economic rehabilitation of Europe — nothing to make the defeated Central Empires into good neighbours, nothing to stabilize the new states of Europe …

41pkcwxw8il._sx314_bo1,204,203,200_The Council of Four paid no attention to these issues … Reparation was their main excursion into the economic field, and they settled it as a problem of theology, of politics, of electoral chicane, from every point of view except that of the economic future of the states whose destiny they were handling …

The danger confronting us, therefore, is the rapid depression of the standard of life of the European populations to a point which will mean actual starvation for some … And these in their distress may overturn the remnants of organization, and submerge civilization itself in their attempts to satisfy desperately the overwhelming needs of the individual …

In a very short time, therefore, Germany will not be in a position to give bread and work to her numerous millions of inhabitants, who are prevented from earning their livelihood by navigation and trade … “We do not know, and indeed we doubt,” the Report concludes, “whether the delegates of the Allied and Associated Powers realize the inevitable consequences which will take place … Those who sign this treaty will sign the death sentence of many millions of German men, women, and children.”