Thinking about Thinking 3

January 6, 2020 1 comment

from Asad  Zaman

When we think about epistemology (theory of knowledge), then we are doing meta-thinking. That is, we are thinking about thoughts people have, which they think is “knowledge”.  Because there are many many wrong ideas, and very few right ideas, we must learn to think critically. Unless we do so, our thoughts will be captured by the enormous amounts of fake news which circulates on social media these days. Thinking about thinking, or Meta-Thought, is very different from the standard education which students receive. Instead of asking about the “models” in use, and assessing adequacy or failure of their “assumptions”, at the meta-level we ask how economists began to use these models instead of others, what kind of thoughts are promoted by such models, and what kinds of thoughts are blocked, because the models are incapable of expressing such ideas. This kind of higher-level thinking is completely missing from conventional textbooks.

To highlight the differences, we consider as an illustrative example, how Martin Osborne begins his textbook on game theory, and explains what game theory is about:  read more 

India is failing her young women even in terms of work

January 6, 2020 2 comments

from C. P. Chandrasekhar and Jayati Ghosh

Anyone who has been following the upsurge of protests across the country in the wake of the CAA-NRC moves of the government would have been impressed and inspired by the role played by young women. They have been forthright and fearless in articulating their concerns and demands, even in the face of overt repression by the state, and there is no doubt that they provide much hope for the future of the country.

These young women have already displayed much courage and resilience—but unfortunately these qualities are likely to become even more necessary, because in addition to Indian politics and society failing them, the economy also deals them a terrible hand. Many of the multidimensional problems Indian women have to deal with (like violence, lack of autonomy, lack of assets, restricted mobility) are interlinked, but the very poor employment generation and the associated lack of productive income opportunities has become an underlying context that particularly affects young women. Read more…

Chicago economics — garbage in, gospel out

January 4, 2020 2 comments

from Lars Syll

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

John Cochrane

And the tiny little problem? It’s utterly and completely wrong!

What Cochrane is reiterating here is nothing but Say’s law, basically saying that savings are equal to investments and that if the state increases investments, then private investments have to come down (‘crowding out’). Read more…

Models and Realities 2

January 3, 2020 Leave a comment

from Asad Zaman

Foundations for modern social sciences were laid in the early twentieth century, and were strongly influenced by logical positivism. The central idea of positivism is that science is true and valid because it deals (principally) with observables, while religion is false and invalid because it deals (principally) with unobservables. For a detailed discussion, see “Logical Positivism and Islamic Economics“.   Later, logical positivism had a spectacular collapse. It became clear to philosophers of science that the idea that we can base science purely on observables was seriously mistaken. Even those who were very strong proponents of positivism admitted that the philosophy was wrong. Strangely, this did not lead to rebuilding of the foundations for the social sciences. Especially in economics, the wrong philosophies about nature of human knowledge, which translate into bad theoretical models, continue to be used.  read more

Beyond GDP

January 2, 2020 24 comments

from David Ruccio

The idea that GDP numbers don’t tell us a great deal about what is really going on in the world is becoming increasingly widespread.


David Leonhardt, in reflecting the emerging view, has argued that GDP doesn’t “track the well-being of most Americans.”

Now, we’d expect that someone like socialist Democratic candidate Bernie Sanders would question the extent to which the low unemployment numbers, associated with economic growth, hardly tells the whole story about the condition of the American working-class.

Unemployment is low but wages are terribly low in this country. And many people are struggling to get the health care they need to take care of their basic needs.

But even centrist candidates Joe Biden and Pete Buttigieg are making the case that the headline numbers, such as Gross Domestic Product and stock indices, hide the fact “that a very different reality exists for many Americans who have not seen much improvement in their own bottom lines.”

Read more…

Some limitations of the experimental approach

January 2, 2020 11 comments

from Lars Syll

Without question, the experimental approach has produced genuine insights … All the same, there are serious limitations to a strategy centered on experimental design:

EAugFIhXkAAabHX1. Good experimental design results in internal validity, where measurements actually measure the things they’re supposed to and confounding influences are suppressed. External validity, the extent to which results can be generalized to a wider array of situations beyond the confines of the experiment is a different matter. There are two specific aspects of experimentalism that raise questions on this front, the tendency for experiments to be small, local and time-bound …

2. The strategy of experimental design virtually requires a reductionist, small-bore approach to social change. A more sweeping, structural approach to poverty and inequality introduces too many variables and defeats experimental control. Thus, without any explicit ideological justification, we end up with incremental reformism when the entire social configuration may be the true culprit …

Using experimental methods to incorporate more learning in program administration should be standard practice; perhaps some day it will be. But the big problems in poverty and oppression are too complex and encompassing to be reduced to experimental bits, and there is no substitute for theoretical analysis and a willingness to take chances with large-scale collective action.

Peter Dorman

‘Ideally controlled experiments’ tell us with certainty what causes what effects — but only given the right ‘closures.’ Read more…

Unemployment: the concept and its measurement

January 2, 2020 2 comments

Fred employment

Two days ago I posted ‘The macro economic graph of the decade‘. The comments were highly interesting and may be summarized as: “what does ‘headline’ unemployment measure anyway”. About this:

  1. Headline of ‘U-3’ unemployment only captures a part of labor slack and is designed to capture only part of total slack. It can however be supplemented with other unemployment measurements which are designed to measure additional slack, like underemployed workers or discouraged workers.
  2. But there are reasons to assume that it systematically underestimates what it tries to measure.

Read more…

The Macro economic graph of the decade

December 31, 2019 4 comments


Source: eurostat.

What did the last decade teach us about (macro-)economics? The graph above is clear:

* ‘Drunk driving’ financial crises do happen and cast a long shadow. Read more…

Mistaken methodologies of science 1

December 30, 2019 4 comments

from Asad Zaman

The problem at the heart of modern economics is buried in the logical positivist methodological foundations created in the early twentieth century by Lionel Robbins. Substantive debates over the content actually strengthen the illusion of validity of these methods, and hence are counterproductive. As Solow said about Sargent and Lucas, you do not debate cavalry tactics at Austerlitz with a madman who thinks he is Napoleon Bonaparte, feeding his lunacy.  Modern Macro Models are based assumptions representing flights of fancy so far beyond the pale of reason that Romer calls them “post-real”.  But the problem does not lie in the assumptions – it lies deeper, in the methodology that allows us to nonchalantly make and discuss crazy assumptions. The license for this folly was given by Friedman: “Truly important and significant hypotheses will be found to have “assumptions” that are wildly inaccurate descriptive representations of reality”; see Friedman’s Methodology: A Stake through the Heart of Reason. In this sequence of posts, I will explain how economic methodology went astray in the 20th Century, abandoning empirical evidence in favor of mathematical elegance and ideological purity. Many authors have noted this problem — for instance, Krugman writes that the profession (of economists) as a whole went astray because they mistook the beauty of mathematics for truth (see Quotes Critical of Economics). To explain the flaws of economic methodology, we need to discuss the relationship between economic models and reality.  read more

Making economics relevant

December 28, 2019 49 comments

from Maria Alejandra Madi

This post was written by Carmelo Ferlito.  He is a senior fellow at the Institute for Democracy and Economic Affairs (IDEAS)

I taught economics in Malaysia for seven years. My students were mainly second and third year university students who attended my economics classes (microeconomic theory and policy and history of economic thought) after having already learnt the basic notions of macro and microeconomics.

Most of my students were double majoring in economics and finance. My impression is that, in general, they could see the relevance of finance in their daily lives (it can help in making or saving money) while they struggled to get enthusiastic about economics, which instead was perceived as a set of abstract graphs and formulas, somehow alien from real people’s lives.

Students’ cold relationship with the subject goes hand in hand with the growing disillusionment with the discipline that followed the global financial crisis in 2007 and the apparent inability of economists to see it coming and to deal with it afterwards.   read more

Markov’s inequality (wonkish)

December 27, 2019 7 comments

from Lars Syll

One of the most beautiful results of probability theory is Markov’s inequality (after the Russian mathematician Andrei Markov (1856-1922)):

If X is a non-negative stochastic variable (X ≥ 0) with a finite expectation value E(X), then for every a > 0

P{X ≥ a} ≤ E(X)/a

If the production of cars in a factory during a week is assumed to be a stochastic variable with an expectation value (mean) of 50 units, we can – based on nothing else but the inequality – conclude that the probability that the production for a week would be greater than 100 units can not exceed 50% [P(X≥100)≤(50/100)=0.5 = 50%]

I still feel humble awe at this immensely powerful result. Without knowing anything else but an expected value (mean) of a probability distribution we can deduce upper limits for probabilities. The result hits me as equally surprising today as forty years ago when I first run into it as a student of mathematical statistics.

[For a derivation of the inequality, see e.g. Sheldon Ross, Introduction to Probability and Statistics for Engineers and Scientists, Academic Press, 2009]

Econ 101 – textbook warning

December 26, 2019 6 comments

Twinkle, twinkle through 365 nights – on one battery!

December 24, 2019 1 comment

Merry christmas and a happy new year! And a picture of an off the shelf heart shaped 2018 Christmas adornment which managed to twinkle 365/24/7 (even when not very bright) on one off the shelf battery, showing the power and the glory of modern contemporary off the shelf led and battery technology. Let’s embrace and welcome the next 365. And dump the last remaining 19th century technology totally outdated short lived energy wasting heat squandering incandescent light bulbs before the next year starts, making 2020 a happy place in advance.
Read more…

Inhuman development

December 23, 2019 3 comments

from David Ruccio

There is a specter haunting capitalist development around the globe.

In fact, the latest Human Development Report begins by naming that menacing apparition:

The wave of demonstrations sweeping across countries is a clear sign that, for all our progress, something in our globalized society is not working.

Different triggers are bringing people onto the streets: the cost of a train ticket, the price of petrol, political demands for independence.

A connecting thread, though, is deep and rising frustration with inequalities.

If anything, that’s an understatement. It’s not just “something” that is wrong; contemporary capitalism as a whole is not working, except for a tiny—but quite powerful—group at the top. The rest of us are being subjected to what can only be called inhuman forms of development.

Let’s remember how the United Nations, following the work of Amartya Sen, defines human development:

people’s capabilities—their freedoms to make life choices—are fundamental. Capabilities are at the heart of human development. . .

Capabilities evolve with circumstances as well as with values and with people’s changing demands and aspirations. Today, having a set of basic capabilities—those associated with the absence of extreme deprivations—is not enough. Enhanced capabilities are becoming crucial for people to own the “narrative of their lives.”

For the past 20 years, capabilities have been defined in terms of what a person can be (“beings”) or do (“doings”). The objective of human development is then to expand the set of capabilities of each individual.

Read more…

The problem with ‘Divisia’ money

December 23, 2019 Leave a comment

According to some economists, ‘Divisia money’ is, as a monetary aggregate, a superior and neoclassical alternative to the more often used M2 or M3 ‘single sum’ aggregates. But looking at such money aggregates in isolation prevents economists from analyzing monetary developments using the integrated and statistically coherent Flow of Funds framework which ties the growth of money to the growth of credit. Divisia money is not a sound alternative. The Flow of Funds are.


The graph shows that aggregate lending data are much more indicative of the growth of financial vulnerabilities and booms and busts than data on money. Read more…

RBC models — willfully silly obscurantism

December 22, 2019 5 comments

from Lars Syll



As a result of the three waves of new classical economics, the field of macroeconomics became increasingly rigorous and increasingly tied to the tools of microeconomics. The real business cycle models were specific, dynamic examples of Arrow–Debreu general equilibrium theory. Indeed, this was one of their main selling points. Over time, proponents of this work have backed away from the assumption that the business cycle is driven by real as opposed to monetary forces, and they have begun to stress the methodological contributions of this work. Today, many macroeconomists coming from the new classical tradition are happy to concede to the Keynesian assumption of sticky prices, as long as this assumption is imbedded in a suitably rigorous model in which economic actors are rational and forward-looking.

Greg Mankiw

Well, rigour may be fine, but how about reality? Read more…

Foundations of probability 7-9

December 21, 2019 Leave a comment

Greenhouse gas emissions and the right to dump sewage on your lawn

December 20, 2019 9 comments

from Dean Baker

In debates over protecting the environment, and especially global warming, it is standard practice to refer to the pro-protection side as being in favor of government regulation and the anti-protection side as being pro-free market. This is nonsense and it is nonsense in a way that strongly benefits the enemies of environmental protection.

There is a simple way to think about environmental protection. If I build a home and want to dispose of my sewage in the cheapest possible way, I will just dump it on my neighbor’s lawn. Environmental regulation means having the government say that I can’t do this.

It is bizarre that somehow the prohibition of dumping my sewage on my neighbor’s lawn is treated as government regulation interfering in the market. The government is protecting my neighbor’s property. Prohibiting me from dumping sewage on her lawn is not really different from prohibiting me from building an addition that takes up half of her lot. In both cases, the government is not acting to interfere with the market, it is acting to protect the property rights that are the foundation of the market. Read more…

Microfoundations and economic policy choices

December 19, 2019 20 comments

Lars Syll

41I1CkwyXjLSince there will generally be many micro foundations consistent with some given aggregate pattern, empirical support for an aggregate hypothesis does not constitute empirical support for any particular micro foundation … Lucas himself points out that short-term macroeconomic forecasting models work perfectly well without choice-theoretic foundations: “But if one wants to know how behaviour is likely to change under some change in policy, it is necessary to model the way people make choices” (Snowdon and Vane 2005, interview with Robert Lucas). The question, of course, is why on earth would one insist on deriving policy implications from foundations that deliberately misrepresent actual behavior?

Yes, indeed, why would one?

Defenders of microfoundations and its rational expectations equipped representative agent’s intertemporal optimization often argue as if sticking with simple representative agent macroeconomic models doesn’t impart a bias to the analysis. Yours truly unequivocally reject that unsubstantiated view. Read more…

Taxing the surplus—not

December 17, 2019 18 comments

from David Ruccio

fredgraph (1)

There aren’t many ways ordinary Americans have a say in what happens to the surplus that determines their fate.

Most of the surplus in the United States is appropriated by the boards of directors of large corporations. But most employees are excluded from the decisions in their workplaces about what’s done with that surplus. Their local communities, where the corporations operate, don’t have much of a say either.

That leaves federal taxes. Corporate income taxes are pretty much the only way the nation—and therefore its citizen-workers—can lay claim to a share of the surplus, which it can then use to finance government programs.

Given the tremendous growth in corporate profits in recent decades—including in recent years, during the recovery from the Second Great Depression—taxes on corporate profits should have been sufficient to expand existing government programs, create new ones, and even close the deficit.

But that hasn’t happened. Not at all. As is clear from the chart above, while corporate profits (both before and after taxes) have soared, the tax receipts on corporate income have actually declined. Read more…