from David Ruccio
In the summer of 2014, Ta-Nehisi Coates made headlines by announcing that he had changed sides and was now in favor of reparations to African-Americans (accompanied by an explanation of why, in contrast to four years earlier, he had changed his mind). Two weeks ago, Coates made headlines again by criticizing Bernie Sanders for opposing “reparations for slavery” (accompanied, a week later, by a defense of his critique of Sanders).
Needless to say, this is a sensitive debate, one that over time might contribute to the development of a progressive movement in the United States but also one that, at the present moment, threatens to undermine the fragile foundations of that movement. So, I want to step lightly and, instead of taking a firm position, merely raise a few issues for further discussion. Read more…
from Lars Syll
The unpopularity of the principle of organic unities shows very clearly how great is the danger of the assumption of unproved additive formulas. The fallacy, of which ignorance of organic unity is a particular instance, may perhaps be mathematically represented thus: suppose f(x) is the goodness of x and f(y) is the goodness of y. It is then assumed that the goodness of x and y together is f(x) + f(y) when it is clearly f(x + y) and only in special cases will it be true that f(x + y) = f(x) + f(y). It is plain that it is never legitimate to assume this property in the case of any given function without proof.
J. M. Keynes “Ethics in Relation to Conduct” (1903)
Since econometrics doesn’t content itself with only making optimal predictions, but also aspires to explain things in terms of causes and effects, econometricians need loads of assumptions — most important of these are additivity and linearity. Important, simply because if they are not true, your model is invalid and descriptively incorrect. It’s like calling your house a bicycle. No matter how you try, it won’t move you an inch. When the model is wrong — well, then it’s wrong.
from David Ruccio
Most of us have little understanding of what makes equity markets move in one direction or another.
A long time ago, one of my professors explained to me: “It’s 5 percent fundamentals; the rest is determined by however big investors feel when they wake up in the morning.”
What about the experts? Well, according to Adena Friedman, president and chief operating officer of Nasdaq Inc.,
“Once emotion comes out of the market, fundamentals should prevail.”
Really, in markets that are by their very nature speculative, how can one distinguish between emotions and fundamentals?!
from Asad Zaman
In January 1997, the annual convention of the American Economic Association included a session entitled “Is There a Core of Practical Macroeconomics That We Should All Believe?”. Several prominent macro-economists presented their takes on this issue. Since the authors were macroeconomists, it is not surprising that many of them start their papers with a “resounding” yes. However, reading the papers, we find only a host of confusions and contradictions. When asserting a core belief, each author discusses many controversies surrounding that core belief. Furthermore, the core varies from author to author. Also, after the Global Financial Crisis of 2007-8, none the core beliefs appear to be tenable. None of the extant Macro models contains any suggestion of the possibility of such a severe macroeconomic disturbance.
Readers of the RWER blog have been treated to a virtually inexhaustible collection of critiques of conventional economic theories. Furthermore, the blog posts are only a small sample of critical materials gathered at length in many books and papers. Nonetheless, there is no doubt that conventional economics remains firmly entrenched in universities as well as governments, international institutions and all corridors of power. Given that conventional economics is seriously defective, why is this the case, and what can we do to change thing? Read more…
David Sloan Wilson has an interesting blogpost about modern evolutionary theory and economics in which he compares the ideas in a highly intelligent 1996 speech about this by Paul Krugman with subsequent developments in evolutionary theory. It reminds me a little of the early twentieth century ideas of Kropotkin (see this post on this blog): “Kropotkin … noticed that groupings of species thrived through cooperation. Researching human settlements in Siberia, Kropotkin likewise noted cooperation and mutual aid as the foundation for dealing with the larger struggle for survival against natural challenges.”
Let’s revisit Krugman’s four components of economics in the light of these developments in evolutionary theory.
1) It’s about what individuals do. “Methodological individualism is of the essence”. Not any more. Read more…
from Norbert Häring
A central bank governor in Athens conspires with the President of the Republic to sabotage the negotiation strategy of his government to weaken it in its negotiations with the European Central Bank. After the government has capitulated, this governor, who is a close friend of the new finance minister and boss of the finance ministers wife, and the President of the Republic travel together to the ECB to collect their praise and rewards. This is not an invention, this is now documented.
On 19 January the German Central Bank in Frankfurt informed the media that the Greek President Prokopis Pavlopoulos visited the ECB and met with ECB-President Mario Draghi, and that he was accompanied by the President of the Greek central Bank, Yanis Stournaras.
Remember. When the Syriza-led government in Athens was in tense negotiations with the European institutions, the ECB excerted pressure by cutting Greek banks off the regular financing operations with the ECB. They could get euros only via Emergency Liquidty Assistance from the Greek central bank and the ECB placed a strict limit on these. Finance minister Yanis Varoufakis worked on emergency plans to keep the payment system going in case the ECB would cut off the euro supply completely.
from Lars Syll
Mainstream — neoclassical — economics has become increasingly irrelevant to the understanding of the real world. The main reason for this irrelevance is the failure of economists to match their deductive-axiomatic methods with their subject.
The idea that a good scientific theory must be derived from a formal axiomatic system has little if any foundation in the methodology or history of science. Nevertheless, it has become almost an article of faith in modern economics. I am not aware, but would be interested to know, whether, and if so how widely, this misunderstanding has been propagated in other (purportedly) empirical disciplines. The requirement of the axiomatic method in economics betrays a kind of snobbishness and (I use this word advisedly, see below) pedantry, resulting, it seems, from a misunderstanding of good scientific practice …
This doesn’t mean that trying to achieve a reduction of a higher-level discipline to another, deeper discipline is not a worthy objective, but it certainly does mean that one cannot just dismiss, out of hand, a discipline simply because all of its propositions are not deducible from some set of fundamental propositions. Insisting on reduction as a prerequisite for scientific legitimacy is not a scientific attitude; it is merely a form of obscurantism
Graph 1. Unemployment in France (Eurostat)
Is the unusual combination of low oil prices, a relatively low exchange rate, less austerity and low interest rates finally paying off? The European labour market shows some green shoots. European unemployment is going down, which is to a relatively large extent due to rapidly decreasing French unemployment (graph 1). French youth unemployment is not (yet?) going down and women younger than 25 as well as those between 25 and 74 do quite a bit better than men of the same age but on average after July French unemployment has suddenly plunged. Read more…
from David Ruccio
The current global distribution of wealth makes as much sense as the math in the title I’ve chosen for this post.
from Edward Fullbrook
The global inequality crisis is reaching new extremes. The richest 1% now have more wealth than the rest of the world combined. Power and privilege is being used to skew the economic system to increase the gap between the richest and the rest. A global network of tax havens further enables the richest individuals to hide $7.6 trillion. The fight against poverty will not be won until the inequality crisis is tackled.
An Economy for the 1%, Oxfam Briefing Paper, 18 January 2016
Should Europe accept more asylum seekers? Let’s restrict the analysis to Germany – as the German situation seems out of political control.
In 2015, not the often stated one million but about 477.000 people applied for asylum in Germany (Bundesamt für Migration und Flüchtlinge, The Economist is one of the rare periodicals/journals who gets this easily checked fact right). Of these, 163.000 came from Syria and about 145.000 came from the failed states of the Western Balkan (Albania, Kosovo, Serbia, Macedonia, Monte Negro). Read more…
From: Norbert Häring
Presentation by Norbert Häring at the symposium “The ECB – Europe’s unelected government” on 14 Jnauary 2016 at the European Parliament in Brussels.
Ladies and Gentlemen,
What I would like you to do with me today, is to try out a different angle for looking at the ECB and at central banks in general. I will not promise you that you will get the complete picture from this angle, but you might see stuff you have not seen from the usual angles.
From the most common point of view, the ECB looks like a special government entity which wants to promote the interest of the population at large, and does so more or less imperfectly, depending on your attitude. Perspectives differ a bit of course between conservatives and the left. The left would usually accept more inflation to get higher wages and more employment, the right would tend to argue that the general good is served best if inflation is kept low. While disagreement can be fierce, the general angle from which both sides look at the ECB is more or less the same and the ECB’s motivation and nature is not questioned.
This is a major mistake.
from Lars Syll
Oxford macroeconomist Simon Wren-Lewis has a post up on his blog discussing whether mainstream macroeconomics is eclectic or not. His answer is — both yes and no:
Does this mean academic macroeconomics is fragmented into lots of cliques, some big and some small? Not really … This is because these models (unlike those of 40+ years ago) use a common language …
It means that the range of assumptions that models (DSGE models if you like) can make is huge. There is nothing formally that says every model must contain perfectly competitive labour markets where the simple marginal product theory of distribution holds, or even where there is no involuntary unemployment, as some heterodox economists sometimes assert. Most of the time individuals in these models are optimising, but I know of papers in the top journals that incorporate some non-optimising agents into DSGE models. So there is no reason in principle why behavioural economics could not be incorporated …
It also means that the range of issues that models (DSGE models) can address is also huge …
Mainstream academic macro is very eclectic in the range of policy questions it can address, and conclusions it can arrive at, but in terms of methodology it is quite the opposite.
Wren-Lewis tries to give a picture of modern macroeconomics as a pluralist enterprise. Read more…
from Lars Syll
There have been over four decades of econometric research on business cycles … The formalization has undeniably improved the scientific strength of business cycle measures …
But the significance of the formalization becomes more difficult to identify when it is assessed from the applied perspective, especially when the success rate in ex-ante forecasts of recessions is used as a key criterion. The fact that the onset of the 2008 financial-crisis-triggered recession was predicted by only a few ‘Wise Owls’ … while missed by regular forecasters armed with various models serves us as the latest warning that the efficiency of the formalization might be far from optimal. Remarkably, not only has the performance of time-series data-driven econometric models been off the track this time, so has that of the whole bunch of theory-rich macro dynamic models developed in the wake of the rational expectations movement, which derived its fame mainly from exploiting the forecast failures of the macro-econometric models of the mid-1970s recession.
The limits of econometric forecasting has, as noted by Qin, been critically pointed out many times before.
Trygve Haavelmo — with the completion (in 1958) of the twenty-fifth volume of Econometrica — assessed the the role of econometrics in the advancement of economics, and although mainly positive of the “repair work” and “clearing-up work” done, Haavelmo also found some grounds for despair: Read more…
from Peter Radford
Notes from the cutting room floor:
Lest anyone be mistaken I am aware that we live in a world of models. Everything we do can be described at some level of abstraction as a model. Our entire ability to live is based upon modeling. Our various systems and bodily functions are models. That is these things are solutions to problems, and those solutions are encoded some way so as to allow that code to cause behavior that, within our environment, is efficacious,
Models are simply a way of testing and examining a specific solution to a problem. Sometimes they begin life in a rather ad hoc fashion, as guesswork, or heuristic. Other times they are the result of prior thought, in which case they represent a point along a line of modeling stretching back a long time. Perhaps so far back that their origins are forgotten. Or perhaps only so far back as the last test of an older model.
In any case models are small packages of our ideas spliced together towards some end. That end being a solution. A problem solved.
Evolution, of course, is the greatest problem solver of all, so the processes of evolution give us insight into modeling. We create models. We test them. We select, as successful, those that survive when let loose into our environment. Read more…
from David Ruccio
The share of income captured by the 1 percent more than doubled (from 10 to 20.1 percent) between 1980 and 2013.
How did they do it?
from Claude Hillinger
Federico Fubini has published a highly relevant article The Closed Marketplace of Economic Ideas regarding the remarkable stability of the rankings of top economists in the face of the evident failure of their theories.
Fubini compares this stability with the greater variability in the rankings of the largest corporations. This comparison is irrelevant since the two fields are entirely different. More relevant would be a comparison with a ranking in natural science. I don’t have such a ranking comparison, but it is obvious that if it were made say in physics, the ranking would be even more stable going back to Newton, or Galileo, or even Archimedes. The physicists discovered lasting truths and there is no reason for ever reducing their fame. So, is all well with economics? Does not any successful science produce a stable list of its greatest contributors? A genuine science does, a pseudo-science unfortunately does also!
Those wondering how economics came to its present sorry state may wish to consult my recent e-Book on the subject: Unnatural science: The conflict between reason and ideology in economics and the other social sciences
from Jorge Buzaglo
It is interesting to see how the picture changes completely when we measure arms exports per capita for the 15 largest expporters (for the same year (2014), in million (1990) dollars): Read more…
from Peter Radford
Paul Krugman came remarkably close to giving economics a big negative review in his New York Times blog last week. To sum up his argument: economics is very good at talking about, although not resolving, issues that are tractable to formal modeling — anything else not so much. You see there’s this gigantic blind spot in modern economics. If a topic cannot be modeled then it doesn’t attract too much attention. At least in the bright lights of the mainstream version of the subject. Which, of course, begs the question: what is economics missing?
Krugman’ attention was brought to this blight by an article by Justin Fox who bemoans the early lack of interest in inequality displayed by a profession whose core focus seems to encompass such a vital topic.
Here’s what Krugman said:
“I’m a few days late on this characteristically lucid Justin Fox column on why it took so long for economists to focus on income inequality. But as one of the economists who did write about inequality — especially the rise of the one percent — pretty early, I think Fox has missed one important aspect: it’s a hard issue to model.”
Well, that’s pretty straightforward. Read more…