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description= 15 posts published by Lars Syll during July 2016;
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plicit and implicit acceptance of friedman s as if methodology by mainstream economists has proved to be disastrous the fundamental paradigm of economics that emerged from this methodology not only failed to anticipative the crash of 2008 and its devastating effects this paradigm has proved incapable of producing a consensus within the discipline of economics as to the nature and cause of the economic stagnation we find ourselves in the midst of today in attempting to understand why this is so it is instructive to examine the nature of friedman s arguments within the context in which he formulated them especially his argument that the truth of a theory s assumptions is irrelevant so long as the inaccuracy of a theory s predictions are cataloged and we argue as if those assumptions are true a scientific theory is in fact the embodiment of its assumptions there can be no theory without assumptions since it is the assumptions embodied in a theory that provide by way of reason and logic the implications by which the subject matter of a scientific discipline can be understood and explained these same assumptions provide again by way of reason and logic the predictions that can be compared with empirical evidence to test the validity of a theory it is a theory s assumptions that are the premises in the logical arguments that give a theory s explanations meaning and to the extent those assumptions are false the explanations the theory provides are meaningless no matter how logically powerful or mathematically sophisticated those explanations based on false assumptions may seem to be george blackford if scientific progress in economics as robert lucas and other latter days followers of milton friedman seem to think lies in our ability to tell better and better stories one would of course expect economics journal being filled with articles supporting the stories with empirical evidence confirming the predictions however i would argue that the journals still show a striking and embarrassing paucity of empirical studies that try to substantiate these predictive claims equally amazing is how little one has to say about the relationship between the model and real world target systems it is as though thinking explicit discussion argumentation and justification on the subject isn t considered required if the ultimate criteria of success of a deductivist system is to what extent it predicts and coheres with parts of reality modern mainstream economics seems to be a hopeless misallocation of scientific resources to focus scientific endeavours on proving things in models is a gross misapprehension of what an economic theory ought to be about deductivist models and methods disconnected from reality are not relevant to predict explain or understand real world economies how evidence is treated in modern macroeconomics 29 jul 2016 at 17 16 posted in economics 1 comment new keynesian macroeconomist simon wren lewis has a post on his blog discussing how evidence is treated in modern macroeconomics emphasis added it is hard to get academic macroeconomists trained since the 1980s to address this question because they have been taught that these models and techniques are fatally flawed because of the lucas critique and identification problems but dsge models as a guide for policy are also fatally flawed because they are too simple the unique property that dsge models have is internal consistency take a dsge model and alter a few equations so that they fit the data much better and you have what could be called a structural econometric model it is internally inconsistent but because it fits the data better it may be a better guide for policy being able to model a credible world a world that somehow could be considered real or similar to the real world is not the same as investigating the real world even though all theories are false since they simplify they may still possibly serve our pursuit of truth but then they cannot be unrealistic or false in any way the falsehood or unrealisticness has to be qualified in terms of resemblance relevance etc at the very least the minimalist demand on models in terms of credibility has to give away to a stronger epistemic demand of appropriate similarity and plausibility one could of course also ask for a sensitivity or robustness analysis but the credible world even after having tested it for sensitivity and robustness can still be a far way from reality and unfortunately often in ways we know are important robustness of claims in a model does not per se give a warrant for exporting the claims to real world target systems questions of external validity are important more specifically also when it comes to microfounded dsge macromodels it can never be enough that these models somehow are regarded as internally consistent one always also has to pose questions of consistency with the data internal consistency without external validity is worth nothing yours truly and people like tony lawson have for many years been urging economists to pay attention to the ontological foundations of their assumptions and models sad to say economists have not paid much attention and so modern economics has become increasingly irrelevant to the understanding of the real world within mainstream economics internal validity is still 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 since fully fledged experiments on a societal scale as a rule are prohibitively expensive ethically indefensible or unmanageable economic theorists have to substitute experimenting with something else to understand and explain relations between different entities in the real economy the predominant strategy is to build models and make things happen in these analogue economy models rather than engineering things happening in real economies formalistic deductive glasperlenspiel can be very impressive and seductive but in the realm of science it ought to be considered of little or no value to simply make claims about the model and lose sight of reality neoclassical economics has since long given up on the real world and contents itself with proving things about thought up worlds empirical evidence only plays a minor role in economic theory where models largely function as a substitute for empirical evidence hopefully humbled by the manifest failure of its theoretical pretences the one sided almost religious insistence on axiomatic deductivist modeling as the only scientific activity worthy of pursuing in economics will give way to methodological pluralism based on ontological considerations rather than formalistic tractability to have valid evidence is not enough what economics needs is sound evidence why simply because the premises of a valid argument do not have to be true but a sound argument on the other hand is not only valid but builds on premises that are true aiming only for validity without soundness is setting the economics aspirations level too low for developing a realist and relevant science giving is loving personal 29 jul 2016 at 17 07 posted in varia comments off on giving is loving personal c h hermansson 1917 2016 28 jul 2016 at 21 59 posted in politics society comments off on c h hermansson 1917 2016 ytterligare en av det svenska 1900 talets politiska giganter har gått ur tiden how true is friedman s permanent income hypothesis 28 jul 2016 at 10 39 posted in economics 2 comments noah smith has an article up on bloomberg view on milton friedman s permanent income hypothesis pih noah argues that almost all modern macroeconomic theories are based on pih especially used in formulating the consumption euler equations that make up a vital part of modern new classical and new keynesian macro models so what s the problem well only that pih according to smith is most certainly wrong chris dillow has commented on noah s pih critique arguing that although noah is right he overstates the newness of the evidence against the pih in fact we ve known it was flawed ever since the early 80s he also overstates the pih s intellectual hegemony the standard uk undergraduate textbook says one strong prediction of the simple pih model is that changes in income that are predictable from past information should have no effect on current consumption but there is by now a considerable body of work on aggregate consumption data that suggests this is wrong this is an important result for economic policy because it suggests that changes in income as a result say of tax changes can have a marked effect on consumption and hence on economic activity carlin and soskice macroeconomics imperfections institutions and policies p 221 22 dillow then goes on arguing that pih is not always wrong that it is useful and that it is basically all about context and that this reinforces what dani rodrik has written in economics rules p 5 6 different social settings require different models economists are unlikely ever to uncover universal general purpose models but in part because economists take the natural sciences as their example they have a tendency to misuse models they are prone to mistake a model for the model relevant and applicable under all conditions economists must overcome this temptation well yours truly thinks that on this issue both noah and chris are not critical enough let me elaborate and start with carlin soskice and then move over to rodrik and his smorgasbord view on economic models wendy carlin s and david soskice s macroeonomics textbook macroeconomics institutions instability and the financial system oxford university press 2015 builds more than most other intermediate macroeconomics textbooks on supplying the student with a systematic way of thinking through problems with the help of formal mathematical models they explicitly adapt a new keynesian framework including price rigidities and adding a financial system to the usual neoclassical macroeconomic set up but although i find things like the latter amendment an improvement it s definitely more difficult to swallow their methodological stance and especially their non problematized acceptance of the need for macroeconomic microfoundations from the first page of the book they start to elaborate their preferred 3 equations new keynesian macromodel and after twenty two pages they have already come to specifying the demand side with the help of the permanent income hypothesis and its euler equations but if people not the representative agent at least sometimes can t help being off their labour supply curve as in the real world then what are these hordes of euler equations that you find ad nauseam in these new keynesian macromodels gonna help us my doubts regarding macro economic modelers obsession with euler equations is basically that as with so many other assumptions in modern macroeconomics euler equations and the pih that they build on don t fit reality in the standard neoclassical consumption model underpinning carlin s and soskice s microfounded macroeconomic modeling people are basically portrayed as treating time as a dichotomous phenomenon today and the future when contemplating making decisions and acting how much should one consume today and how much in the future t he euler equation used implies that the representative agent consumer is indifferent between consuming one more unit today or instead consuming it tomorrow further in the euler equation we only have one interest rate equated to the money market rate as set by the central bank the crux is however that given almost any specification of the utility function the two rates are actually often found to be strongly negatively correlated in the empirical literature from a methodological pespective yours truly has to conclude that carlin s and soskice s microfounded macroeconomic model is a rather unimpressive attempt at legitimizing using fictitious idealizations such as pih and euler equations for reasons more to do with model tractability than with a genuine interest of understanding and explaining features of real economies re dani rodrik s economics rules there sure is much in the book i like and appreciate but there is also a very disturbing apologetic tendency in the book to blame all of the shortcomings on the economists and depicting economics itself as a problem free smorgasbord collection of models if you just choose the appropriate model from the immense and varied smorgasbord there s no problem it is as if all problems in economics were conjured away if only we could make the proper model selection underlying rodrik and other mainstream economists views on models is a picturing of models as some kind of experiments i ve run into that view many times over the years when having discussions with mainstream economists on their thought experimental obsession and i still think it s too vague and elusive to be helpful just repeating the view doesn t provide the slightest reasont to believe it limiting model assumptions in economic science always have to be closely examined since if we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we export them to our target systems we have to be able to show that they do not only hold under ceteris paribus conditions and hence only are of limited value to our understanding explanations or predictions of real economic systems mainstream economists usually do not want to get hung up on the assumptions that their models build on but it is still an undeniable fact that theoretical models building on piles of known to be false assumptions such as pih and the euler equations that build on it in no way even get close to being scientific explanations on the contrary they are untestable and hence totally worthless from the point of view of scientific relevance conclusion mainstream macroeconomics building on the standard neoclassical consumption model with its permanent income hypothesis and euler equations has to be replaced with something else preferably with something that is both real and relevant and not only chosen for reasons of mathematical tractability gary becker s big mistake 27 jul 2016 at 18 21 posted in economics 3 comments the 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 you can see the idea in his...
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