Models and reality

December 31, 2021 7 comments

from Lars Syll

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.’

Galileo Galilei’s experiments are often held as exemplary for how to perform experiments to learn something about the real world. Galileo’s heavy balls dropping from the tower of Pisa, confirmed that the distance an object falls is proportional to the square of time and that this law (empirical regularity) of falling bodies could be applicable outside a vacuum tube when e. g. air existence is negligible.

The big problem is to decide or find out exactly for which objects air resistance (and other potentially ‘confounding’ factors) is ‘negligible.’ In the case of heavy balls, air resistance is obviously negligible, but how about feathers or plastic bags?

One possibility is to Read more…

Relative oil prices and differential oil profits

December 30, 2021 7 comments

from Shimshon Bichler and Jonathan Nitzan

If you thought that oil profits are about producing oil, think again.

The enclosed chart, updated from our 2015 Real-World Economics Review paper, ‘Still About Oil?’, shows that the main determinant of oil profit — and specifically of differential oil profit — is not output, but prices.

The figure shows the correlation between two series: (1) the differential oil profits of the world’s integrated oil companies, computed as the ratio between their earnings per share and the earnings per share of all listed firms; and (2) the relative price of oil one year earlier, measured by the $ price of crude oil relative to the U.S. consumer price index. (The reason for the annual lag is that ‘current’ profits represent a trailing average of earnings recorded over the past 12 months.) Read more…

Confusion reigns

December 29, 2021 8 comments

from Peter Radford

What on earth were they doing?

Rocked but undaunted by the great financial crisis the orthodoxy of our central banks survived to fight another day.  The system had been saved.  That no one saw the onrushing crisis is still being debated.  Of course some people saw it coming.  Anyone with a scintilla of understanding of Minsky for instance.  But those folk are hard to find in the top seats of central banks.

The objective of the so-called independent central bank is to preserve the system.  To make it safe for markets to continue undisturbed by the intrusions of political whims.  To save, that is, capitalism from the depraved intrusions of democracy.  The idea is to separate as firmly as possible the political and the economic realms.  After all as economists seem to believe: people are astonishingly rational when they participate as market members, but are hopelessly self-indulgent and irrational when they participate as voters.  We all suffer from split personalities in economic orthodoxy.  Rational one minute, mindlessly mixed up the next.  It’s an interesting view of human behavior.  It undergirds, in rather more formal guise, orthodoxy and its resolute defense of central bank independence.

This independence is supposed to maintain a wall between these two halves of our personalities.  Making the system safe for markets means guarding vigilantly against the inevitable weaknesses of politicians who might fall victim to the democratic urge to look after the majority of voters. Read more…

A golden age of macro economic statistics 4. A Bank of England treasure trove.

December 27, 2021 2 comments

The Bank of England has a 28 MB Excel dataset containing: “A millenium of macro economic data”. A treasure trove. A good thing about it: as it are long term series and as these are roughly based on national accounts data and not just on economics 101 it’s not only focused on GDP but also on sectoral developments and flows between and within sectors. I can’t show it all, and…

Read more…

Happy Christmas and a healthy 2022

December 24, 2021 2 comments

COVID Déjà Vu

December 22, 2021 1 comment

from Blair Fix

As 2021 comes to a close, I’m having a distinct sense of déjà vu. A year ago, I wrote a post celebrating COVID vaccines as a triumph of science. And I noted that vaccine discovery is a collective endeavour. The cumulative number of major vaccines tracks closely with the cumulative number of scientific papers, a bellwether for humanity’s collective knowledge. Here’s the trend:

Figure 1: The cumulative number of major vaccines tracks with the cumulative number of scientific papers. [Sources and methods]

This trend is a beautiful reminder that science is a social endeavour. No matter how novel, every discovery builds on the work of others. Science, in other words, is the quintessential public good. And so are vaccines.

Looking at the roll out of previous vaccines, however, I noted a perverse (but unsurprising) trend. Read more…

Getting ready for the next pandemic: Can we get patent monopolies on the table?

December 21, 2021 3 comments

from Dean Baker

From the way our policy types talk about patents, or refuse to talk about them, they must think that the constitution guarantees life, liberty, and people getting incredibly rich from patents. Even as this pandemic has been needlessly prolonged by patent restrictions on the spread of technology for vaccines, tests, and treatments, resulting in millions of preventable deaths, we are still seeing no real debate as to whether we want to rely on these monopolies as a primary mechanism for financing medical innovation in the future.

At the most basic level, we need an explicit recognition that patent monopolies are just one possible mechanism for financing research. This should have always been obvious, but the pandemic should have hit us over the head with this simple but important fact.

The bulk of the research developing mRNA technology was done on the government’s dime. When it came to developing the Moderna vaccine, the government put up almost a billion dollars for the research and clinical testing. It also provided the company with insurance against failure, with a large advance purchase agreement that would have required it to buy hundreds of millions of doses even if it was not the best available vaccine.

Read more…

On the limited applicability of statistical physics to economics

December 20, 2021 18 comments

from Lars Syll

Statistical mechanics reasoning may be applicable in the economic and social sciences, but only if adequate consideration is paid to the specific contexts and conditions of its application. This requires attention to “non-mechanical” processes of interaction, inflected by power, culture, institutions etc., and therefore of specific histories which gives rise to these factors …

you shall not pass statistical physics - You shall not pass | Meme GeneratorOutside of very specific cases, statistical physics is more likely to provide useful metaphors and ways of thinking than computational techniques and definite answers. Although statistical mechanical explanation can shed light on particular mechanisms that may be at play (e.g. explaining how distributions are shaped by the differences between the ways in which wages and profits may respectively evolve) these must be interpreted in a specific causal context … In the context of the human sciences, agency – not merely the exercise of individual choice but the shaping of the circumstances of collective life – is the central factor both in determining the properties of a system and in shaping individual choices. The exercise of human agency may bring a social system closer to an “equilibrium” in some circumstances, and disrupt it in others. It is among the specifically social factors that must be taken note of in the dialogue between statistical physics and the social sciences.

Sanjay Reddy

Financial regulations

December 19, 2021 7 comments

from Lars Syll

A couple of years ago, former chairman of the Fed, Alan Greenspan, wrote in an article in the Financial Timesre the increased demands for stronger regulation of banks and finance:

Alan Greenspan and Ayn Rand at the White House after Greenspan was sworn in as chairman of Gerald Ford’s Council of Economic Advisers, September 1974Since the devastating Japanese earthquake and, earlier, the global financial tsunami, governments have been pressed to guarantee their populations against virtually all the risks exposed by those extremely low probability events. But should they? Guarantees require the building up of a buffer of idle resources that are not otherwise engaged in the production of goods and services. They are employed only if, and when, the crisis emerges.

The buffer may encompass expensive building materials whose earthquake flexibility is needed for only a minute or two every century, or an extensive stock of vaccines for a feared epidemic that may never occur. Any excess bank equity capital also would constitute a buffer that is not otherwise available to finance productivity-enhancing capital investment.

That is — to say the least — astonishing. Not wanting to take genuine uncertainty or ‘fat tails’ seriously is ominous enough. Is there anything the year 2008 taught us, it is that the ‘tail risks’ are genuinely real and must be included in all financial calculations. But even worse is Read more…

Weekend read – More quotes against economics

December 17, 2021 6 comments

from Asad Zaman

A previous post Quotes Critical of Economics collected assorted quotes which are useful in writing up different kinds of critiques of economics. In addition, I collected quotes from Romer’s Trouble With Macro which are sharply critical of economics. In terms of the “Loyalty, Voice, Exit” paradigm, I look for “Exit” quotes, which suggest that we need to throw out the entire discipline and rebuild on new foundations; for a proposed alternative, see “Uloom-ul-Umran: An Islamic alternative to Western Social Science“. I try to avoid “Voice” critiques which suggest that we can rescue economics by making modifications, minor or major. I have been collecting more quotes along these lines for two years. I was hoping to sort them into categories, and organize them via some commentary, but have not found the time to do so. So instead of waiting longer, I am just publishing them as a random and disorganized collection – given below.

For Marx, ‘pure’ economic theory, that is economic theory which abstracts from a specific social structure, is impossible. It would be similar to ‘pure’ anatomy, abstracted from the specific species which is to be examined. (Ernest Mandel’s Introduction to Fowkes translation of Das Kapital).

Chicago economist Ronald Coase attributed a satirical description of it to the English economist Ely Devons: ‘If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, “What would I do if I were a horse?”’  From Radical Uncertainty by Kay and King.  Read more…

RWER issue no. 98

December 16, 2021 4 comments

real-world economics review

Please click here to support this journal and the WEA
issue no. 98
download whole issue

101 Textbooks

The riddle of the use of impossible examples in microeconomics textbooks
Emmanuelle Bénicourt, Sophie Jallais and Camille Noûs

2

101 Textbooks

The 1-2-3 toolbox of mainstream economics:
promising everything, delivering nothing

Shimshon Bichler and Jonathan Nitzan

23

Capitalists are dispensable, laborers are not
M. Shahid Alam

49

Redistributing income through hierarchy
Blair Fix

58

The Becker model of discrimination is anachronistic and should no longer be taught
John Komlos

87

“Susan Strange saw the financial crisis coming, Your Majesty”
Nat Dyer

92

Measuring economic transformation:
what to make of constant price sectoral GDP

Adam Fforde

112

Booming wealth alongside fiscal concerns about ageing populations
David R Richardson

135

Price indices suitable for the monetary policy
Carlos Guerrero de Lizardi

149

Interview
From the political economy of financial regulation and economic governance to climate change
Jamie Morgan with Andrew P. Baker

169

Board of Editors, past contributors, submissions, etc

203

 

Interpretation of regression results

December 16, 2021 6 comments

from Lars Syll

When econometric and statistical textbooks present simple (and multiple) regression analysis for cross-sectional data, they often do it with regressions like “regress test score (y) on study hours (x)” and get the result

y = constant + slope coefficient*x + error term.

UnknownWhen speaking of increases or decreases in x in these interpretations, we have to remember that it is a question of cross-sectional data and ‘increases’ means that we are referring to ‘increases’ in the value of a variable from one unit in the population to another unit in the same population. Strictly seen it is only admissible to give slope coefficients a dynamic interpretation when we are dealing with time-series regression. For cross-sectional data, we should stick to static interpretations and look upon slope coefficients as giving information about what we can expect to happen to the value of the dependent variable when there is a change in the independent variable from one unit to another. Read more…

Euro Area inflation: troubling but transitory

December 13, 2021 2 comments

Inflation in the Euro Area is high and erodes the purchasing power of many (but not all) incomes. Bad. But it will be transitory. And there is no indication of endogenous macro-economic instability. Why do I think this?

Read more…

CO2 emission imports and exports per capita

December 13, 2021 4 comments

CO2 emissions - Our World in Data

Will we see deflation in the next 12 months in the USA?

December 13, 2021 Leave a comment

from Dean Baker

I’m not worried at this point about a deflationary spiral, but I see what, to my view, is a plausible scenario where the CPI actually goes negative in the next twelve months. I go through the categories and my predictions component by component below, but there are four main items driving the story that I’ll mention here.

First, I assume a sharp reversal in new and used car prices. The 11.1 percent increase in the former and 31.4 percent increase in the latter, have added 1.5 percentage points to the inflation rate over the last year. This run-up is due to the well-known shortage of semi-conductors. It seems that manufacturers are overcoming this shortage and getting up to normal production levels. This may lead to a situation where they are not only meeting normal demand, but actually could be overproducing and needed to markdown prices.  

Read more…

Adam Smith’s idea is still the basis of the discipline of economics

December 11, 2021 10 comments

Apology from the editor

This post has been withdrawn on grounds of misattribution.  But the readers’ comments, which relate to the section beginning on page 50 titled “Adam Smith and the Birth of Western Economics” in

Economies and Cultures: Foundations of Economic Anthropology

by Richard R Wilk and Lisa C. Cliggett | Jan 2, 2007

have been retained.  Read more…

On mediation and causality

December 10, 2021 2 comments

from Lars Syll

mediator“Mediation analysis” is this thing where you have a treatment and an outcome and you’re trying to model how the treatment works: how much does it directly affect the outcome, and how much is the effect “mediated” through intermediate variables …

In the real world, it’s my impression that almost all the mediation analyses that people actually fit in the social and medical sciences are misguided: lots of examples where the assumptions aren’t clear and where, in any case, coefficient estimates are hopelessly noisy and where confused people will over-interpret statistical significance …

More and more I’ve been coming to the conclusion that the standard causal inference paradigm is broken … So how to do it? I don’t think traditional path analysis or other multivariate methods of the throw-all-the-data-in-the-blender-and-let-God-sort-em-out variety will do the job. Instead we need some structure and some prior information.

Andrew Gelman

Causality in social sciences — and economics — can never solely be a question of statistical inference. Causality entails more than predictability, and to really in depth explain social phenomena require theory. Read more…

In the not too long run the economic process is inevitably dominated by a qualitative change

December 9, 2021 10 comments

from Katharine Farrell   

Post-Neoliberal Economics by [Edward Fullbrook, Jamie Morgan]If economics is indeed concerned with how humankind goes about sustaining its own life, day to day, then representing that complexity must be built into the ontology of economic models.  Adjustments to variables, parameters and reference data can all contribute to improving models, but they do not necessarily address the ontological limitation that, in the original liberal theory “representation, [read that of Jevons and Walras] the economic process neither induces any qualitative change nor is affected by the qualitative change of the environment into which it is anchored” (NGR71:2).  This limitation is carried forward, in neoliberal theory, which continues to rely on the mechanical-physics-based mathematics of Walras, albeit with permutations and sometimes remarkable arithmetic acrobatics, and, it must be said, also much of heterodox economics, which continues to seek out ways to adjust and correct the math, in lieu of engaging with this root problem.  The brunt of the problem is, as described by Georgescu-Roegen, that “in the long run or even in the not too long run the economic (as well as the biological) process is inevitably dominated by a qualitative change which cannot be known in advance” (NGR71:17) and which “eludes arithmomorphic schematization” (NGR71:63).  In other words, this particular limitation in both liberal and neoliberal theory, that they fail to include the process of becoming, of causing to come into being, is not a limitation in the calculations but rather in the configuration of the mathematics underlying them (Mayumi, 2001)

The question before the discipline

December 8, 2021 14 comments

from James Galbraith

Economics is a policy discipline. It is engaged with the problems, large and small, of social organization and the general good. As such it co-evolves with circumstances. It is historically contingent. The application of economic ideas to specific problems under specific circumstances may succeed or fail, and in the latter case, people with different ideas normally rise to prominence.

Capitalism is an economic system whose characteristics and problems have preoccupied economists since the 18th century. It is not the only such system; there were economists before capitalism going back to Aristotle. And there have been economists under competing systems: socialism and communism had economists of their own. Today it is common to speak of “varieties of capitalism” (Hall and Soskice, 2001) these too foster economists of differing views and perspectives. Economists and economic theories are a byproduct of the social order that spawns them.

The world to which economic policies are ultimately addressed is a complex system. Yet economists seeking to develop appropriate policies are necessarily guided by simplifications and heuristics. The question before the discipline – and the challenge of this volume – Post-Neoliberal Economics by [Edward  Fullbrook, Jamie Morgan]is to decide what sort of simplification is best suited to the task. In the spirit of C.S. Peirce and of modern science, this paper argues that appropriate generalizations, simplifications, heuristics and principles are to be derived from a study of the actual world. While these may deploy mathematical tools and draw on insights from the behavior of mathematical systems, the latter by themselves are inadequate, especially where they start from the dead dogmas of the neoclassical mainstream: ex nihilo nihil fit. Later in this paper, we will sketch out elements of research strategies that seem suited to a complex economic world. Before reaching that point, we must first draw the critical distinction between the practice of economics in the sense meant here, and the academic discipline that presently describes itself as economics.

Domain shift

December 7, 2021 3 comments

from Peter Radford

Brian Arthur tells us that technology most often advances in the form of domain shifts.  In his narrative technologies cluster in related groups he calls domains.  So individual technologies might advance through a tweak here or there, but the economy advances through a shift from one cluster of technologies to another.

I like this idea.  Especially when we then broaden the topic to use technology as a background against which we view a particular slice of history.  Thus we can think, legitimately about the “steam era” and such.  Adding insight to this, Arthur situates all technologies as extensions of natural phenomena.  So he characterizes a technology as a phenomenon being “captured and put to use”.

All good.  This gives us a practical definition of technology and helps map its evolution onto the changes of society itself as it became more and more infused by technology.

Arthur also tries to make us embrace a very broad notion of technology.  He insists that a great number of social structures can also be defined as technologies.  So a modern business organization is a technology, as is any other institution.  I agree.  When we go further and identify that most, if not all, technologies can be segmented into sub-technologies we start to see commonalities that might elude us in a more holistic analysis.  This does not imply we can predict the higher level organization from the sum of the component parts, but it does allow us to see common ancestors to many of our contemporary technologies: they are rooted in lineages in the same way that the natural world is.

Let’s stay with this. Read more…

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