Trade Wars: The economic and political theoretical implications and their impact on multilateralism – A Call for Papers

February 12, 2020 Leave a comment

new issue of WEA Commentaries

February 12, 2020 Leave a comment

WEA Commentaries

Volume 10, Issue 1  –    February 2020
download whole issue

Simpson’s Paradox 
          – Asad Zaman
How International Corporations Could Be Taxed and Why the US is Working to Prevent It
          – Norbert Häring
The Transnational Corporation and Economics 
          – Grazia Ietto- Gillies
Challenges of Complexity Economics
          – Joachim H. Spangenberg and Lia Polotzek
WEA Commentaries Appoints New Co-Editors
WEA contact details

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We can develop new drugs without patent monopolies # 54,217

February 12, 2020 5 comments

from Dean Baker

It is often said that intellectuals have a hard time dealing with new ideas. This is perhaps nowhere better demonstrated with the fixation with patent monopolies as the primary mechanism for financing the development of new drugs.

Bloomberg gave us a beautiful example of this narrow mindedness with a column from Max Nisen on the possibility that China may require the compulsory licensing of a patent on a drug developed by Gilead, in order to produce a treatment for the Coronavirus. A compulsory license means that sacrificing the monopoly Gilead had expected, which means it will only get a small fraction of the revenue it might have otherwise anticipated. Nisen is concerned that this lost revenue will reduce expected profit in the future, meaning that companies like Gilead would have much less incentive in developing cures for epidemics like the Coronavirus.

While drug companies do operate to make a profit, the part of the story that Nisen misses is that the profit does not have to be gained through patent monopolies. Suppose that the U.S. and other governments put up research funding, which private corporations like Gilead could bid on based on their expertise and track record. In this case, a condition of the research is that all patents would be in the public domain (the companies were already paid for their work) and all results would be fully public as soon as practical. Read more…

Econometrics — fictions masquerading as science

February 11, 2020 19 comments

from Lars Syll

rabbitIn econometrics one often gets the feeling that many of its practitioners think of it as a kind of automatic inferential machine: input data and out comes casual knowledge. This is like pulling a rabbit from a hat. Great — but first you have to put the rabbit in the hat. And this is where assumptions come into the picture.

As social scientists — and economists — we have to confront the all-important question of how to handle uncertainty and randomness. Should we equate randomness with probability? If we do, we have to accept that to speak of randomness we also have to presuppose the existence of nomological probability machines, since probabilities cannot be spoken of – and actually, to be strict, do not at all exist – without specifying such system-contexts.

Read more…

Mistaken methodology of econometrics

February 11, 2020 1 comment

from Asad Zaman

This is the continuation of a sequence of posts on methodology of economics and econometrics (For previous posts, see: Mistaken Methodologies of Science 1Models and Realities 2Thinking about Thinking 3Errors of Empiricism 4Three Types of Models 5Unrealistic Mental Models 6The WHY of Crazy Models 7The Knowledge of Childless Philosophers 8Beyond Kant 9,). In this (10th) post, we consider the methodology of econometrics, which is based on Baconian or observational models. That is, econometric models tend to look only at what is available on the surface, as measured by observations, without attempting to discover the underlying reality which generates these observations. This is an over-simplified description, and we will provide some additional details about econometric methodology later.

The methodology of econometrics is rarely discussed in econometrics textbooks. Instead, students are taught how to DO econometrics in an apprentice-like fashion. All textbooks mentions the “assumptions of the regression model” in an introductory chapter. In later chapters, they proceed to do regression analysis on data, without any discussion of whether or not these assumptions hold, and what difference it could make to the data analysis. The student is taught – by example, not by words – that these assumptions do not matter, and we can always assume them to be true. In fact, as I learned later, these assumptions are all-important and these actually drive all the analysis. By ignoring them, we create the misleading impression that we are learning from the data, when in fact, the results of the analysis come out of the hidden assumptions we make about it. Once one realized this clearly, it becomes EASY to carry out a regression analysis which makes any data produce any result at all, by varying the underlying assumptions about the functional form, and the nature of the unobservable errors. This issue is discussed and explained in greater detail in my paper and video lecture on “Choosing the Right Regressors“.  The fundamental underlying positivist principles of econometric methodology, which are never discussed and explained, can be summarized as the following three ideas: read more

The left becomes center: financial transactions taxes and beyond

February 10, 2020 4 comments

from Dean Baker

Last week, Antonio Weiss, along with co-author Laura Kawano, released a paper advocating a financial transactions tax (FTT). I have long been an advocate of FTTs, so I’m always glad to see another paper making the case.

However, what made this paper especially noteworthy is Weiss’s background. Weiss had been a top Treasury official under President Obama, and previously a partner at the investment bank, Lazard, so he is not the sort of person who would typically be expected to support a FTT.

Even more striking is the fact that the paper was published by the Hamilton Project at the Brookings Institution. The founder and main funder of the Hamilton Project is Robert Rubin. Rubin has a long career in the financial sector, including top positions at both Goldman Sachs and Citigroup.

Between his jobs at these two Wall Street behemoths, Rubin held top positions in the Clinton administration, serving as both head of the National Economic Council and Treasury Secretary. There is probably no one who has been more visibly associated with the idea of giving the financial sector free rein than Mr. Rubin. For this reason, it is really remarkable that a paper advocating a FTT would come out of the Hamilton Project. Read more…

Understanding income: You can’t get there from here

February 10, 2020 3 comments

from Blair Fix

You can’t get the right answer when you ask the wrong question.

This truism, I’ve come to believe, explains much of what is wrong with economics. When it comes to studying income, economists ask the wrong question. Economists, I argue, have mostly asked: is income fair? The problem is that this is a moral question, not a scientific one. It has no scientific answer.

When the wrong questions get entrenched

You can’t get the right answer when you ask the wrong question. This principle seems trivial. Of course you need to ask the right question! The problem, though, is that when you do science it’s rarely obvious which question is right. Compounding this problem is the fact that scientists are, well, human.

Once we (scientists) pose a question, we get engrossed with answering it. The problem is that it’s not easy to answer a question while simultaneously being skeptical of it. It’s like adding two numbers while you think about multiplying them instead. It’s an exercise in cognitive dissonance.

Here’s how you can make this exercise even more difficult. Join a group in which everyone else asks the same question. This, in a nutshell, is what it means to belong to a scientific discipline. A discipline is a group of people who agree on the questions they’re asking. Particle physicists, for example, agree to ask “what are the fundamental constituents of matter?” Evolutionary biologists agree to ask “what are the determinants of evolution?” Economists, I’ll argue, agree to ask “is income fair?” Read more…

Problems of index fund capitalism

February 9, 2020 Leave a comment

fro Norbert Häring

If the trend of the last two decades continues, index funds could control 40 percent of the voting rights in the largest corporations by 2040.The share is already up to 25 percent in the US. There a two perspectives on this. Some scholars say it threatens shareholder value, others fear it will lead to too much of it. I side with the latter. …

Law-and-economics professors Lucian Bebchuk and Scott Hirst from the Universities of Harvard and Boston make the extrapolation of the index funds share in votes in their paper “The Specter of the Giant Three”.

The concentration of shares in an ever smaller number of fund companies is a trend that has started roughly 70 years ago. In 1960 only about six percent of US shares were held by capital management companies. This share has increased tenfold to 65 percent by 2017, according to Bebchuk and Hirst.

Index funds don’t select shares, actively, but instead replicate passively the composition of a stock market index with their assets, such as the DAX or the Standard & Poor’s 500 (S & P 500). The advantage for investors is that they do not have to pay fund managers and analysts to work on stock selection. Experience has shown that the majority of actively managed funds do not outperform index funds even before fees.

The Giant Three

Read more…

Overcontrolling in econometrics — a wasteful practice ridden with errors

February 7, 2020 6 comments

from Lars Syll

The gender pay gap is a fact that, sad to say, to a non-negligible extent is the result of discrimination. And even though many women are not deliberately discriminated against, but rather self-select into lower-wage jobs, this in no way magically explains away the discrimination gap. As decades of socialization research has shown, women may be ‘structural’ victims of impersonal social mechanisms that in different ways aggrieve them. Wage discrimination is unacceptable. Wage discrimination is a shame.

You see it all the time in studies. “We controlled for…” And then the list starts. The longer the better. Income. Age. Race. Religion. Height. Hair color. Sexual preference. Crossfit attendance. Love of parents. Coke or Pepsi. The more things you can control for, the stronger your study is — or, at least, the stronger your study seems. Controls give the feeling of specificity, of precision. But sometimes, you can control for too much. Sometimes you end up controlling for the thing you’re trying to measure …

paperAn example is research around the gender wage gap, which tries to control for so many things that it ends up controlling for the thing it’s trying to measure. As my colleague Matt Yglesias wrote:

“The commonly cited statistic that American women suffer from a 23 percent wage gap through which they make just 77 cents for every dollar a man earns is much too simplistic. On the other hand, the frequently heard conservative counterargument that we should subject this raw wage gap to a massive list of statistical controls until it nearly vanishes is an enormous oversimplification in the opposite direction. After all, for many purposes gender is itself a standard demographic control to add to studies — and when you control for gender the wage gap disappears entirely!” … Read more…

Beyond Kant

February 6, 2020 1 comment

from Asad Zaman

This is a continuation of previous post on “The Knowledge of Childless Philosophers“. I would like to clarify some aspects of the theory of knowledge which have become muddled and confused because childless philosophers did not observe how children learn about the world, and acquire knowledge starting from scratch. If they had taken this as the basic model for how we acquire knowledge, they would have been able to avoid a huge number of mistakes.

A realist methodology for science starts from the realization that scientific knowledge goes FAR BEYOND the realm of the observable. Electrons, Neutrons, Positrons have different kinds of charges, and act in different – incredible and amazing –  ways, but the link between them and observable phenomena is extremely weak and indirect. One of the readers’ comments on a previous post was: how can we learn about what we cannot observe?   read more

How do you spot a crank?

February 6, 2020 5 comments

from Blair Fix

I confess that I have a recurring nightmare. In it, I realize that everything I’ve ever written about economics is wrong. Neoclassical economics is not, as I’ve repeatedly claimed, a pile of bullshit. In this nightmare, neoclassical economics is correct. And as a strident critic of neoclassical theory, I realize the horrible truth. I’m a crank!

I wake up in a cold sweat, wondering if I’m wasting my life. Then, as rational thought returns, my fears ebb away. I think about everything I know about neoclassical economics — its flaws, its absurdities. I reassure myself that I’ve made the right choice. I’m not a crank. I’m a rational critic of an absurd theory.

The crank identification problem

Now that I’ve told you about my nightmare, I’ll assure you that this post is not about my late-night fears. Instead, my nightmare got me thinking about an age-old problem in science. How do you tell if someone is a crank? Read more…

Costs of owner occupied houses should be in the price index. But in the right way.

February 6, 2020 1 comment

HICP

The ECB rightly wants to pay more attention to costs of ‘owner occupied houses’ (OOH) when it comes to inflation. Statisticians often use ‘imputed rents’ to do this. The ECB shouldn’t do this but should look at actual costs of owners of houses. Read more…

Hicks on the limited applicability of probability calculus

February 5, 2020 13 comments

from Lars Syll

When we cannot accept that the observations, along the time-series available to us, are independent, or cannot by some device be divided into groups that can be treated as independent, we get into much deeper water. For we have then, in strict logic, no more than one observation, all of the separate items having to be taken together. For the analysis of that the probability calculus is useless; it does not apply. We are left to use our judgement, making sense of what has happened as best we can, in the manner of the historian. Applied economics does then come back to history, after all.

hicksI am bold enough to conclude, from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed. We have no business to turn to them automatically; we should always ask ourselves, before we apply them, whether they are appropriate to the problem at hand. Very often they are not. Thus it is not at all sensible to take a small number of observations (sometimes no more than a dozen observations) and to use the rules of probability to deduce from them a ‘significant’ general law. For we are assuming, if we do so, that the variations from one to another of the observations are random, so that if we had a larger sample (as we do not) they would by some averaging tend to disappear. But what nonsense this is when the observations are derived, as not infrequently happens, from different countries, or localities, or industries — entities about which we may well have relevant information, but which we have deliberately decided, by our procedure, to ignore. By all means let us plot the points on a chart, and try to explain them; but it does not help in explaining them to suppress their names. The probability calculus is no excuse for forgetfulness.

John Hicks’ Causality in economics ought to be on the reading list of every course in economic methodology.

Economics awaits a Darwinian revolution

February 5, 2020 40 comments

from Blair Fix and RWER issue #90

Modern economics, I have come to believe, resembles pre-Darwinian biology. By this, I mean that economics is captivated by an ideology that is stopping scientific progress. Let’s look at the parallels.

Before Darwin, biologists believed that life on Earth was created by God. This seductive idea stunted scientific progress for centuries. Much of the evidence for evolution – the fossil record, the similar anatomy of different species – was staring scientists in the face long before Darwin proposed his theory of evolution. But because life was viewed as God’s eternal creation, this evidence was mostly ignored.

Darwin’s “dangerous idea”[1] – evolution by natural selection – gave meaning to this evidence. Life was not an eternal order, Darwin proposed. Instead, it was an evolving system, driven by differential reproduction. The plethora of evidence for evolution suddenly made sense.

In hindsight, Darwin’s idea seems obvious, almost trivial. But it was not at the time. Most scientists were simply unable to imagine alternatives to their ideology of an unchanging cosmos. The situation is much the same in economics today. Read more…

A policy-makers toolkit for state-backed digital currencies: do we need this?

from Maria Alejandra Madi

Since the 2008 global financial crisis, the financial regulation scenario faces new drivers and challenges.  Bank transactions by internet and mobile banking have sharply increased. In this digital environment, new technologies – such as advanced analytics, big data, in addition to the use of robotics, artificial intelligence, new forms of encryption and biometrics – have been enabling changes in the provision of financial products and services. The current wave of financial innovations is being increasingly oriented to more friendly digital channels through apps in the context of mobile banking strategies that privilege the development of open banking and further interactions with social media

Indeed, the increasing digitalization of financial transactions is also related to changes in the banks’ competitive environment, where the intense growth of the start-ups called fintechs, especially since 2010, has revealed a new articulation between finance and technology. Such fintechs are companies organized as digital platforms with business models focused on costumer relationship in the areas of payment systems, insurance, financial consultancy and management, besides virtual coins. Among other initiatives, we can highlight the crypto fintech products, such as a consumer app for the Bakkt, the Bitcoin futures contracts exchange run by the Intercontinental Exchange.  read more

The knowledge of childless philosophers

February 3, 2020 6 comments

from Asad Zamzn

Continuing from the previous post on The WHY of Crazy Models, I attribute a large portion of the blame to massively wrong theories of knowledge. A little bit of study of epistemology is enough to give anyone a headache. Because of this, instead of investing the time and effort to decipher what the philosophers are saying, the rest of us are willing to take it on faith. No one is aware of the massive amount of damage done by philosophers – most philosophers themselves are unaware the tremendous influence that their failures in the past have had on the real world. Similarly, the non-philosophers are unaware of how deeply their thoughts have been affected by false and obsolete philosophies, now rejected by the philosophers. Keynes summed up the state of affairs nicely in his apt quote:  “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back” –  While Keynes thinks that practical men of affairs are slaves of economists, I believe that the economists and social scientists are slaves of defunct philosophers, without realizing this.

In preparing this post, I decided to review the theories of knowledge, to provide a brief sketch of how epistemology went astray, allowing us to create crazy models and to consider them as an advance on knowledge. I found a . . . read more

40 years of wage redistribution in the USA

February 3, 2020 Leave a comment

Chicago economics — where do we unload the garbage?

February 3, 2020 3 comments

from Lars Syll

chicagotrashThere is also a practical problem, if economics as a discipline is to survive. There is a huge amount of junk in the peer-reviewed economics literature -– the reviewing process is no protection when the reviewers themselves are prejudiced. A comparison that comes to mind is the collapse of “scientific” eugenics. There were vast amounts of that written, and now it is only read as an object example of the capture of a social science by prejudice and authoritarianism. For economists, meantime, there is a huge task ahead: the garbage must be taken out; removed from the field’s teaching, textbooks, and policy advice. It will be a generation at least before this is set right, if indeed it can be set right at all.

Advice Unask

Human sociality and resource distribution

February 2, 2020 10 comments

from Blair Fix and RWER issue #90

Is it obvious to you that humans are evolved social animals? Is it also obvious that our sociality is central to how we distribute resources? If you think so, you’re probably not an economist.

Through years of schooling, mainstream economists are trained to ignore the obvious facts about human nature. The theories that economists learn make it impossible for them to understand human sociality. Economists are trained that humans are asocial “globules of desire”. This is Thorstein Veblen’s satirical term for “homo economicus”, the economic model of man. Here’s Veblen describing homo economicus:

“The hedonistic conception of man is that of a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-poised in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before” (Veblen, 1898).

As Veblen makes clear, economists’ model of human behavior is bizarre. Indeed, the assumptions are so far-fetched that one wonders how this “theory” ever gained acceptance. Read more…

Models and evidence in economics

January 31, 2020 60 comments

from Lars Syll

UnknownAnalogue-economy models may picture Galilean thought experiments or they may describe credible worlds. In either case we have a problem in taking lessons from the model to the world. The problem is the venerable one of unrealistic assumptions, exacerbated in economics by the fact that the paucity of economic principles with serious empirical content makes it difficult to do without detailed structural assumptions. But the worry is not just that the assumptions are unrealistic; rather, they are unrealistic in just the wrong way.

Nancy Cartwright

One of the limitations with economics is the restricted possibility to perform experiments, forcing it to mainly rely on observational studies for knowledge of real-world economies.

But still — the idea of performing laboratory experiments holds a firm grip of our wish to discover (causal) relationships between economic ‘variables.’If we only could isolate and manipulate variables in controlled environments, we would probably find ourselves in a situation where we with greater ‘rigour’ and ‘precision’ could describe, predict, or explain economic happenings in terms of ‘structural’ causes, ‘parameter’ values of relevant variables, and economic ‘laws.’ Read more…