Monday , May 25 2020
Home / Asad Zaman
Asad Zaman

Asad Zaman

Physician executive. All opinions are my personal. It is okay for me to be confused as I’m learning every day. Judge me and be confused as well.

Articles by Asad Zaman

How economic models became substitutes for reality

3 days ago

From Asad Zaman
The problem at the heart of modern economics is buried in its logical positivist foundations created in the early twentieth century by Lionel Robbins. Substantive debates and critiques of 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 macroeconomic 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

Read More »

The misleading case for free markets

14 days ago

From Asad Zaman
This sequence of posts goes through Charles Goodhart’s book on Evolution of Central Banking. Previous post is: RG5 Evolution of Economic Systems
Chapter 2 opens with a discussion of the views of Walter Bagehot (pronounce as badge-it), author of Lombard Street, which has received a lot of recent acclaim as masterpiece on central banking. After the Global Financial Crisis, Martin Wolf asked “Doesn’t what has happened in the past few years simply suggest that [academic] economists did not understand what was going on?”. Larry Summers responded by naming Lombard Street (1873). There are many articles which examine how a 150 year old book provides insights into the financial crisis which modern economists do not understand!. See, for example, Brad De-Long’s This Time is Not

Read More »

Evolution of economic systems

17 days ago

From Asad Zaman
Economic systems evolve, sometimes under external dynamic and sometimes under internal dynamics. As they evolve, economic theories co-evolve, however their can be (often are) lags in understanding – so theories relevant to one system are applied to another, with disastrous results.
Human beings started out with tribal societies, and spent the longest period of history in this form. They societes were egalitarian and communal. They were not market oriented. Production and  distribution was done by consensus of the community. Communities were self-sufficient, producing or acquiring basic needs for all members, without any markets or trade. For more details, see “Hunter-Gatherer Societies”.  An essential point to understand is that the economic system shaped the nature of

Read More »

Economic theories cannot be understood outside their historical context

21 days ago

From Asad Zaman
It is an Obvious Truth that economic theories analyze specific historical economic systems.
In nomadic societies, there is no production. Economics would be about finding plants, game, and moving according to seasons.
In agricultural societies, private property becomes important. Those who plant need to have rights to harvest their plantings.
Feudal Societies are mostly self-sufficient in commodities and operate without money. These are barter societies. Money is not a goal, but only a means to get more goods. Karl Marx explained this via the formula: C – M – C’  which means that Commodities are sold for money, which is used to get different commodities.
Market societies: people sell labor for wages to produce commodities. Money is used for purchase. Money is main

Read More »

Arguments against Central Banks

26 days ago

From Asad Zaman
RG2 (Reading Guide 2) – Continues from previous posts on Reading Course: Central Banking and Readers Guide: Goodhart on Central Banks. Writeup is given following the ten minute video:
[embedded content]
Goodhart starts by discussing discontent with Central Banking System. He wrote this book well before the GFC 2007 -8, which has created much greater discontent. There are two different lines of attack on Central Banking:
Free Banking: Private Creation and Provision of Money. Today, this idea would find shape in large scale private creation of money via bitcoins, FB Libra, community money, and many other innovative ideas for creation of money without governments being involved.
Regulated Central Banks: Banks should follow specified rules, like Friedman’s rule of 6%

Read More »

Reading course: Central Banking

April 22, 2020

From Asad Zaman
I am in process of creating an online course on the history of Central Banking. The era of online courses has been forced upon us by the Corona Virus, though I have been meaning to do this for a long time. The WEA Pedagogy Blog seems like a great place to do a beta-test. I would like to start by inviting the audience to read through Charles Goodhart’s book on the Evolution of Central Banking. We would plan to read one chapter a week and discuss it on posts and/or comments on posts on this blog. Those who formally register on the Google Form: History of Central Banking will be put on an email discussion group for the book, and also get a link to download a copy of the book itself. Some motivation for why it is worth reading this book is given below:
Conventional Macro

Read More »

Mäki Rules on Rodrik’s Rules

April 8, 2020

From Asad Zaman
Mäki, Uskali. “Rights and wrongs of economic modelling: refining Rodrik.” Journal of Economic Methodology 25.3 (2018): 218-236.
Introduction: I must confess to having admired Dani Rodrik. His research was iconoclastic, fearlessly going after many sacred cows of economics. So, I was saddened and disappointed by his defense of Economics: Rodrik, Dani (2015) Economics Rules. Why Economics Works, When It Fails, and How to Tell the Difference. Oxford UP. Rodrik uses “rules” in a dual sense; a set of rules to discriminate between good and bad economics, as well as an assertion of the superiority of economics. This post is a fairly longish 2100 word summary of the first half of  Mäki’s trenchant critique the book, linked above. If I find the time and energy, I might do the

Read More »

GDP comparisons across time

March 10, 2020

From Asad Zaman
This continues a sequence of posts aiming to show how apparently objective statistics conceal large numbers of arbitrary value judgements.  (1) Lies, Damned Lies, and Statistics, (2) Subjectivity Concealed in Index Numbers, (3) The Values of a Market Society, (4) Cross-Country Comparisons of Wealth, (5) Purchasing Power Parity, (6) Downfall of Rhetoric in 20th Century, (7) Facts & Values: Distinction or Dichotomy?. This is the 8th post, which considers comparisons of GDP across time within a single country.
In comparisons across countries, we face the difficulty that the concept of “wealth” has varied across societies, and changed with time. The “average basket” of goods varies for each country, because different societies have different preferences and values. We

Read More »

Facts & Values: Distinction or Dichotomy?

March 3, 2020

From Asad Zaman
This continues from the previous post on the Downfall of Rhetoric in 20th Century
Even though our goal is to explain how apparently objective looking statistics conceal arbitrary and subjective judgments, the path we take requires a detour through “epistemology”, or the theory of knowledge. Instead of the deep discussion provided by Putnam (2002, Collapse of the Fact/Value Dichotomy), we will take a shortcut, and look at how these philosophical debates and controversies about have shaped the way that social sciences in general, and statistics in particular, have conceived of the relationship between the numbers we analyzed and the real world that generates these numbers. The wide gap between the philosophers and other intellectuals can be seen clearly in their

Read More »

Downfall of rhetoric in 20th century

February 29, 2020

From Asad Zaman
One of most effective and powerful among modern forms of rhetoric is the use of statistics to conceal the ancient methods for persuasion. How this is done is the main topic of our essay.
In a sequence of posts ( Lies, Damned Lies, and Statistics, Subjectivity Concealed in Index Numbers, The Values of a Market Society, Cross-Country Comparisons of Wealth, and Purchasing Power Parity), I have tried to explain how the statistics we use conceal arbitrary value judgments. This is the modern form of rhetoric, which is deadly, because the values are built into numbers, hidden in the process by which the numbers are manufactured, and not open to discussion and dispute. The initial post gives a brief hint as to how this state of affairs emerged. This post elaborates some more on

Read More »

Purchasing Power Parity

February 26, 2020

From Asad Zaman
In a sequence of posts starting with  Lies, Damned Lies, and Statistics,  I have argued that the attempt to reduce multiple indicators to one number always introduces subjective elements relating to choice of factors, and relative weights to be assigned. By using technical jargon to justify choice of weights, the value judgments involved in this choice are concealed under a cloak of objectivity. This creates a modern form of rhetoric, where the arguments are made using numbers, and the values that went into the manufacture of these numbers remain hidden, and therefore, are not discussed. This concealment of values resulted from the creation of an artificial dichotomy between facts and values which became widely accepted. Values are considered unscientific, personal

Read More »

Cross-country comparisons of wealth

February 23, 2020

From Asad Zaman
This continues a sequence of posts on how objective looking statistics conceal hidden values, because a positivist approach prohibits open expression and discussion of value judgments. Previous posts in the sequence are: Lies, Damned Lies, and Statistics, Subjectivity Concealed in Index Numbers, and The Values of a Market Society.
Countries compete with each other on the GDP numbers, without any awareness of the values which are embodied in such competitions. Such comparisons are fraught with many difficulties. We illustrate the difficulties which arise when we try to compare GDP across nations. To being with, let us examine the GDP data measured in Local Currency Units (LCU) for the countries India, Pakistan, Malaysia, Bangladesh, China and Irland from the World

Read More »

The values of a market society

February 21, 2020

From Asad Zaman
Continued from previous post on Subjectivity Concealed in Index Numbers. Because modern epistemology rejects values as being just opinions, and only accepts facts as knowledge, values have be to disguised in the shape of facts. What better way to do this than by embodying them in cold hard and indisputable numbers? This post discussed how the GDP embodies the values of a market society.
From the sixteenth to the eighteenth century, the values of European societies were radically transformed by a complex combination of forces. Traditional social values, originating from Christianity, can be roughly summarized as follows:
Community: All members are part of a common body, striving together for common goals.
Social Responsibility: All members must take care of each other.

Read More »

Subjectivity concealed in index numbers

February 19, 2020

From Asad Zaman
This continues from the previous post on Lies, Damned Lies, and Statistics.

More than 1.5 million copies sold, more than all other textbooks of statistics combined. Online copy
The vast majority of our life experience is built upon knowledge which cannot be reduced to numbers and facts. Our hopes, dreams, struggles, sacrifices, what we live for, and what we are ready to die for – none of these things can be quantified. However, as we have discussed, logical positivists said that what cannot be observed by our senses cannot be part of a scientific theory. As a result of this false idea, later disproven by philosophers, the attempt was made to measure everything – numbers were assigned to intelligence, trust, integrity, corruption, preferences, etc. – even though a

Read More »

Failure of Turing’s conjecture

February 13, 2020

From Asad Zaman
Note that this is a very POSITIVIST idea — if the surface appearances match, that is all that matters.
       
I quote a passage from Pearl: The Book of Why, which provides a gentle introduction to the newly developed field (largely by him) of causal inference via path diagrams:
In 1950, Alan Turing asked what it would mean for a computer to think like a human. He suggested a practical test, which he called “the imitation game,” but every AI researcher since then has called it the “Turing test.” For all practical purposes, a computer could be called a thinking machine if an ordinary human, communicating with the computer by typewriter, could not tell whether he was talking with a human or a computer. Turing was very confident that this was within the realm of

Read More »

Mistaken methodology of econometrics

February 11, 2020

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 1, Models and Realities 2, Thinking about Thinking 3, Errors of Empiricism 4, Three Types of Models 5, Unrealistic Mental Models 6, The WHY of Crazy Models 7, The Knowledge of Childless Philosophers 8, Beyond 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

Read More »

Beyond Kant

February 6, 2020

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

Read More »

The knowledge of childless philosophers

February 3, 2020

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

Read More »

The WHY of crazy models

January 30, 2020

From Asad Zaman
I was professionally trained as an economist, and learned how to build models with the best. As described in detail in a previous post on “The Education of An Economist“, it was only by accident that, a long time after graduate school, I learned of glaring conflicts between the theory I had been taught, and the historical evidence about effects of free trade and trade barriers. Further exploration along this direction dramatically widened the chasm between the economic theories I had learnt, and the historical and empirical evidence all around me. This led me to a set of puzzles which I have been struggling with for the past two decades. [1] Why is that economists are not aware of the conflict between economic theories and empirical evidence? [2] Why is it that

Read More »

The WHY of crazy models

January 21, 2020

From Asad Zaman
I was professionally trained as an economist, and learned how to build models with the best. As described in detail in a previous post on “The Education of An Economist“, it was only by accident that, a long time after graduate school, I learned of glaring conflicts between the theory I had been taught, and the historical evidence about effects of free trade and trade barriers. Further exploration along this direction dramatically widened the chasm between the economic theories I had learnt, and the historical and empirical evidence all around me. This led me to a set of puzzles which I have been struggling with for the past two decades. [1] Why is that economists are not aware of the conflict between economic theories and empirical evidence? [2] Why is it that

Read More »

Simpson’s Paradox

January 19, 2020

From Asad Zaman
Statistics and Econometrics today are done without any essential reference to causality – this is much like try to figure out how birds fly without taking into account their wings. Judea Pearl “The Book of Why” Chapter 2 tells the bizarre story of how the discipline of statistics inflicted causal blindness on itself, with far-reaching effects for all sciences that depend on data. These notes are planned as an accompaniment and detailed explanation of the Pearl, Glymour, & Jewell textbook on Causality: A Primer. The first steps to understand causality involve a detailed analysis of the Simpson’s Paradox. This has been done in the sequence of six posts, which are listed, linked, and summarized below
1-Simpson’s Paradox: Suppose that there are only two departments at

Read More »

Three types of models – 5

January 11, 2020

From Asad Zaman
It is important to understand that there are three type of models, corresponding the following diagram. The simplest type of model is a pattern in the data that we observe. A second type of model is a “mental model”. This is a structure we create in our own minds, in order to understand the patterns that we see in the observations. The third type of model is a structure of the hidden real world, which generates the patterns that we see. Some examples will be helpful in clarifying these ideas about the typology of models.

Empirical Models: The simplest kind of model consists of a pattern that we see in the observations. For example, read more

Read More »

Errors of empiricism 4

January 8, 2020

From Asad Zaman
Empiricism holds that observations are all that we have. We cannot penetrate through the observations to the hidden reality which generates these observations. Here is a picture which illustrates the empiricist view of the world:

The wild and complex reality generates signals which we observe using our five senses. The aspects of reality which we can observe are the only things that we can know about reality. The true nature of hidden reality, as it really is, independent of our observations, is unknown and can never be known to us. Influential philosopher Kant calls it the “thing-in-itself”. Noumena is the wild reality, and Phenomena is what we can perceive/observe about the reality. Quote from Encyclopedia Britannica:  read more

Read More »

Thinking about Thinking 3

January 6, 2020

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

Read More »

Models and Realities 2

January 3, 2020

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.

Read More »

Mistaken methodologies of science 1

December 30, 2019

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

Read More »

Foundations of probability 1-3

December 6, 2019

From Asad Zaman
In this sequence of posts, I will go through a recent paper of mine, which explains that BOTH of the currently dominant approaches to probability are deeply, fundamentally, and irreparably flawed. The reason for this is that probability is a real-world phenomenon which is unobservable and unmeasurable. The early 20th Century foundations for probability were built at a time when logical positivism was dominant as the philosophy of science. Furthermore, despite its abandonment by philosophers, its central ideas continue to be widely believed, especially among economists. We will see that both frequentism and subjectivism are attempts to reduce the unobservable to the observable, but this is fundamentally impossible, and all such attempts are doomed to failure.

Read More »

The Great Transformation of economic theory

October 29, 2019

From Asad Zaman
In the Origins of Central Banking, we discussed how the Bank of England was created in 1694 to provide funding for a war with France. The success of this institution was noted, and it was replicated across Europe, so that Central Banks came into existence to finance the nearly continuous wars between European powers that characterized the 18th Century. The 19th Century was unusual in that European powers set aside differences to create a Hundred Years of Peace (1814 to 1914), in order to go on a spree of global colonization and conquest. The transition from war to peace also created a transformation in economic theories from Mercantilism to Free Trade. Some aspects of this transition are discussed below.
The Root of All Evil
An essential aspect of the Great

Read More »

Central Bank History (3/5) 1914-1980

October 9, 2019

From Asad Zaman
This series of posts is based on a single lecture (Lecture 13 of Advanced Macro II) exploring the evolving functions of Central Banks through time. It goes through a vast amount of material in a very short time, and hence is a very sketchy treatment. This is the 3rd post,  which deals with the period from WW! to the 1980s.  read more

Read More »