From Lars Syll

Statistician Andrew Gelman has an interesting blogpost up on what inference in science really means:

I like Don Rubin’s take on this, which is that if you want to go from association to causation, state very clearly what the assumptions are for this step to work. The clear statement of these assumptions can be helpful in moving forward …

Another way to say this is that all inference is about generalizing from sample to population, to predicting the outcomes of hypothetical interventions on new cases. You can’t escape the leap of generalization. Even a perfectly clean randomized experiment is typically of interest only to the extent that it generalizes to new people not included in the original study.

I agree — but that’s also why we so often fail (even when having the

## Articles by Lars Syll

## Keynes on the methodology of econometrics

5 days agoFrom Lars Syll

There is first of all the central question of methodology — the logic of applying the method of multiple correlation to unanalysed economic material, which we know to be non-homogeneous through time. If we are dealing with the action of numerically measurable, independent forces, adequately analysed so that we were dealing with independent atomic factors and between them completely comprehensive, acting with fluctuating relative strength on material constant and homogeneous through time, we might be able to use the method of multiple correlation with some confidence for disentangling the laws of their action … In fact we know that every one of these conditions is far from being satisfied by the economic material under investigation.

Letter from John Maynard Keynes to

## Say ‘consistent’ one more time and I …

9 days agoFrom Lars Syll

Being able to model a credible world, a world that somehow could be considered ‘similar’ to the real world is not the same as investigating the real world. The minimalist demand on models in terms of ‘credibility’ and ‘consistency’ has to give away to stronger epistemic demands. Claims in a ‘consistent’ model do 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 macro models. 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 has for many years been urging economists

## Beyond mathematical modelling

11 days agoFrom Lars Syll

Mathematical modelling has now dominated the economics academy for so long that younger people that emerge from economic studies who are dissatisfied with what they are taught, cannot think beyond the modelling. They have been immersed in it so long that it is a kind of common sense to them. The idea that modelling is bound to be almost always irrelevant just does not compute for many. Yet they recognize that modern academic economics mostly does not provide any insights. So, they assume that the fault lies in the sorts of topics covered, or conclusions drawn etc. with the solution to be found by way of doing the modelling differently. It is all quite dire …

The only diversity the mainstream advocate is that which remains consistent with the mathematical modelling

## MMT basics

13 days agoFrom Lars Syll

We have already shown that deficit spending increases our collective savings. But what happens if Uncle Sam borrows when he runs a deficit? Is that wht eats up savings and forces interest rates higher? The answer is no.

The financial crowding-out story asks us to imagine that there’s a fixed supply of savings from which anyone can attempt to borrow …

MMT rejects the loanable funds story, which is rooted in the idea that borrowing is limited by access to scarce financial resources …

Government deficits always lead to a dollar-for-dollar increase in the supply of net financial assets held in the nongovernment bucket. That’s not a theory. That’s not an opinion. It’s just the cold hard reality of stock-flow consistent accounting.

So fiscal deficits — even with government

## Does it — really — take a model to beat a model? No!

16 days agoFrom Lars Syll

Many economists respond to criticism by saying that ‘all models are wrong’ … But the observation that ‘all models are wrong’ requires qualification by the second part of George Box’s famous aphorism — ‘but some are useful’ … The relevant criticism of models in macroeconomics and finance is not that they are ‘wrong’ but that they have not proved useful in macroeconomics and have proved misleading in finance.

When we provide such a critique, we often hear another mantra to which many economists subscribe: ‘It takes a model to beat a model.’ On the contrary, we believe that it takes facts and observations to beat a model … If a model fails to answer the problem to which it is addressed, it should be put back in the toolbox … It is not necessary to have an alternative tool

## Hans Albert turns 100

17 days agoFrom Lars Syll

Clearly, it is possible to interpret the ‘presuppositions’ of a theoretical system … not as hypotheses, but simply as limitations to the area of application of the system in question. Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought …

A further possibility for immunizing theories consists in simply leaving open the area of application of the constructed model so that it is impossible to refute it with counter examples. This of course is usually done without a complete knowledge of the

## Thinking about thinking

18 days agoFrom Lars Syll

Unfortunately, the greater part of economic controversies arise from confronting dogmas. The style of argument is that of theology, not of science … In economics, new ideas are treated, in theological style, as heresies and as far as possible kept out of the schools by drilling students in the habit of repeating the old dogmas, so as to prevent established orthodoxy from being undermined …

On the plane of academic theory, the importance of the Keynesian revolution was to show that all the familiar dogmas are set in a world without time and cannot survive the simple observation that decisions, in economic life, are necessarily taken in the light of uncertain expectations about their future consequences.

Orthodox theory reacted to this challenge, in true theological style,

## The future of macroeconomics

21 days agoFrom Lars Syll

But why are DSGE models still in the mix at all, and in a key position? Given all the criticisms, what can such models tell us, even as a ‘first pass at important questions’? Multiple equilibria do allow for discussion of a wider range of scenarios, but any discussion of a particular scenario is still constrained by the requirements of general equilibrium theory. These requirements are at the root of the more fundamental critiques of DSGE. While Vines and Wills set out an impressive research agenda to flesh out this multiple-equilibrium approach, we need to reflect on the constraints imposed by general equilibrium theorising itself.

We therefore need to revisit the fundamental problems with general equilibrium theory and the restrictions it imposes on what is admissible.

## Teaching heterodox microeconomics

23 days agoFrom Lars Syll

Clearly, neoclassical economists believe that neoclassical microeconomic theory is theoretically coherent and provides the best explanation of economic activity; therefore there is no good reason to not teach it, if not exclusively. Many heterodox economists also broadly agree with this position, although not with all the particulars. However, sufficient evidence exists showing that as a whole neoclassical microeconomic theory is theoretically incoherent and without empirical support (see Lee and Keen, 2004; and Keen, 2001). Moreover, the methodological underpinning of neoclassical microeconomics is open to criticisms. The methodological approach of neoclassical economics is based on a pre-vision of supply and demand and/or a Walrasian general equilibrium all combined

## Best advice to an aspiring economist — don’t be an economist

26 days agoFrom Lars Syll

And still, amidst all this tumult, many economists are disinclined to rethink the foundations of their field. It reminds me of the closing joke in Woody Allen’s film Annie Hall. A guy has a crazy brother who thinks he is a chicken. The doctor asks, ‘Why don’t you turn him in?’ The guy replies, ‘I would, but I need the eggs.’ ”

Why is the free-market discourse so perdurable despite so many social, ecological, and political realities that call its logic and categories of thought into question? Because the whole field, despite its flaws, is functional enough and entrenched. It needs the eggs — the certitude of quantitative analysis aping the hard sciences, the credentialed expertise always in demand by powerful institutions, the prestige that comes with proximity to

## It’s time to tax the Wall Street casino!

28 days agoFrom Lars Syll

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism — which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.

These tendencies are a scarcely avoidable outcome of our having

## Mainstream economics — a waste of time on a staggering scale

January 26, 2021From Lars Syll

Though an enthusiast of reason, I believe that rational choice theory has failed abysmally, and it saddens me that this failure has brought discredit upon the very enterprise of serious theorizing in the field of social study …

Rational choice theory is far too ambitious. In fact, it claims to explain everything social in terms of just three assumptions that would hold for all individuals in all social groups and in every historical period. But a Theory of Everything does not explain anything in particular … And being unable to account for differences among individuals and for the variety of social interactions, systems, processes, and institutions, the theory is bound to be unrealistic, i. e., false …

The reader may feel that my criticism is excessive: that I am

## The Keynes-Ramsey-Savage debate on probability

January 24, 2021From Lars Syll

Mainstream economics nowadays usually assumes that agents that have to make choices under conditions of uncertainty behave according to Bayesian rules, axiomatized by Ramsey (1931) and Savage (1954) — that is, they maximize expected utility with respect to some subjective probability measure that is continually updated according to Bayes theorem. If not, they are supposed to be irrational, and ultimately – via some “Dutch book” or “money pump”argument – susceptible to being ruined by some clever “bookie”.

Bayesianism reduces questions of rationality to questions of internal consistency (coherence) of beliefs, but – even granted this questionable reductionism – do rational agents really have to be Bayesian? As I have been arguing elsewhere (e. g. here, here and here)

## On the difference between econometrics and data science

January 22, 2021From Lars Syll

Causality in social sciences can never solely be a question of statistical inference. Causality entails more than predictability, and to really in depth explain social phenomena require theory. The analysis of variation can never in itself reveal how these variations are brought about. First when we are able to tie actions, processes or structures to the statistical relations detected, can we say that we are getting at relevant explanations of causation.

Most facts have many different, possible, alternative explanations, but we want to find the best of all contrastive (since all real explanation takes place relative to a set of alternatives) explanations. So which is the best explanation? Many scientists, influenced by statistical reasoning, think that the likeliest

## Leontief’s devastating critique of econom(etr)ics

January 19, 2021From Lars Syll

Much of current academic teaching and research has been criticized for its lack of relevance, that is, of immediate practical impact … I submit that the consistently indifferent performance in practical applications is in fact a symptom of a fundamental imbalance in the present state of our discipline. The weak and all too slowly growing empirical foundation clearly cannot support the proliferating superstructure of pure, or should I say, speculative economic theory …

Uncritical enthusiasm for mathematical formulation tends often to conceal the ephemeral substantive content of the argument behind the formidable front of algebraic signs … In the presentation of a new model, attention nowadays is usually centered on a step-by-step derivation of its formal properties. But

## Fooled by randomness

January 16, 2021From Lars Syll

A non-trivial part of teaching statistics to social science students is made up of learning them to perform significance testing. A problem yours truly has noticed repeatedly over the years, however, is that no matter how careful you try to be in explicating what the probabilities generated by these statistical tests — p-values — really are, still most students misinterpret them.

A couple of years ago I gave a statistics course for the Swedish National Research School in History, and at the exam I asked the students to explain how one should correctly interpret p-values. Although the correct definition is p(data|null hypothesis), a majority of the students either misinterpreted the p-value as being the likelihood of a sampling error (which of course is wrong, since the

## Garbage-can econometrics

January 14, 2021From Lars Syll

When no formal theory is available, as is often the case, then the analyst needs to justify statistical specifications by showing that they fit the data. That means more than just “running things.” It means careful graphical and crosstabular analysis …

When I present this argument … one or more scholars say, “But shouldn’t I control for every-thing I can? If not, aren’t my regression coefficients biased due to excluded variables?” But this argument is not as persuasive as it may seem initially.

First of all, if what you are doing is mis-specified already, then adding or excluding other variables has no tendency to make things consistently better or worse. The excluded variable argument only works if you are sure your specification is precisely correct with all

## Econometrics and the challenge of regression specification

January 11, 2021From Lars Syll

Most work in econometrics and regression analysis is — still — made on the assumption that the researcher has a theoretical model that is ‘true.’ Based on this belief of having a correct specification for an econometric model or running a regression, one proceeds as if the only problem remaining to solve have to do with measurement and observation.

When things sound too good to be true, they usually aren’t. And that goes for econometric wet dreams too. The snag is, of course, that there is pretty little to support the perfect specification assumption. Looking around in social science and economics we don’t find a single regression or econometric model that lives up to the standards set by the ‘true’ theoretical model — and there is pretty little that gives us reason to

## Overconfident economists

January 9, 2021From Lars Syll

Worst of all, when we feel pumped up with our progress, a tectonic shift can occur, like the Panic of 2008, making it seem as though our long journey has left us disappointingly close to the State of Complete Ignorance whence we began …

It often takes years down the Path, but sooner or later, someone articulates the concerns that gnaw away in each of us and asks if the Assumptions are valid …

It would be much healthier for all of us if we could accept our fate, recognize that perfect knowledge will be forever beyond our reach and find happiness with what we have …

Can we economists agree that it is extremely hard work to squeeze truths from our data sets and what we genuinely understand will remain uncomfortably limited? We need words in our methodological vocabulary to

## NAIRU — closer to religion than science

January 5, 2021From Lars Syll

Once we see how weak the foundations for the natural rate of unemployment are, other arguments for pursuing rates of unemployment economists once thought impossible become more clear. Wages can increase at the expense of corporate profits without causing inflation …

The harder we push on improving output and employment, the more we learn how much we can achieve on those two fronts. That hopeful idea is the polar opposite of a natural, unalterable rate of unemployment. And it’s an idea and attitude that we need to embrace if we’re to have a shot at fully recovering from the wreckage of the Great Recession.

Mike Konczal / Vox

NAIRU does not hold water simply because it has not existed for the last 50 years. But still today ‘New Keynesian’ macroeconomists use it — and its

## Mainstream economics finally made it …

January 3, 2021## On logic and science

December 31, 2020From Lars Syll

Read More »## Econometrics — the art of pulling a rabbit out of a hat

December 26, 2020From Lars Syll

In 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 causal knowledge. This is — as Joan Robinson once had it — 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 in to the picture.

The assumption of imaginary ‘superpopulations’ is one of the many dubious assumptions used in modern econometrics, and as Clint Ballinger highlights, this is a particularly questionable rabbit pulling assumption:

Inferential statistics are based on taking a random sample from a larger population … and attempting to draw conclusions about a) the larger population from that data and b) the probability that the relations

## Why everything we know about modern economics is wrong

December 24, 2020From Lars Syll

The proposition is about as outlandish as it sounds: Everything we know about modern economics is wrong. And the man who says he can prove it doesn’t have a degree in economics. But Ole Peters is no ordinary crank. A physicist by training, his theory draws on research done in close collaboration with the late Nobel laureate Murray Gell-Mann, father of the quark …

His beef is that all too often, economic models assume something called “ergodicity.” That is, the average of all possible outcomes of a given situation informs how any one person might experience it. But that’s often not the case, which Peters says renders much of the field’s predictions irrelevant in real life. In those instances, his solution is to borrow math commonly used in thermodynamics to model outcomes

## What can RCTs tell us?

December 23, 2020From Lars Syll

We seek to promote an approach to RCTs that is tentative in its claims and that avoids simplistic generalisations about causality and replaces these with more nuanced and grounded accounts that acknowledge uncertainty, plausibility and statistical probability …

Whilst promoting the use of RCTs in education we also need to be acutely aware of their limitations … Whilst the strength of an RCT rests on strong internal validity, the Achilles heel of the RCT is external validity … Within education and the social sciences a range of cultural conditions is likely to influence the external validity of trial results across different contexts. It is precisely for this reason that qualitative components of an evaluation, and particularly the development of plausible accounts of

## MMT perspectives on rising interest rates

December 21, 2020From Lars Syll

The Bank of England is today wholly-owned by the UK government, and no other body is allowed to create UK pounds. It can create digital pounds in the payments system that it runs, thus marking up and down the accounts of banks, the government and other public institutions. It also acts as the bank of the government, facilitating its payments. The Bank of England also determines the bank rate, which is the interest rate it pays to commercial banks that hold money (reserves) at the Bank of England …

The interest rate that the UK government pays is a policy variable determined by the Bank of England. Furthermore, it is not the Bank of England’s remit to bankrupt the government that owns it. The institutional setup ensures that the Bank of England supports the liquidity and

## Arrow-Debreu obsession

December 17, 2020From Lars Syll

I’ve never yet been able to understand why the economics profession was/is so impressed by the Arrow-Debreu results. They establish that in an extremely abstract model of an economy, there exists a unique equilibrium with certain properties. The assumptions required to obtain the result make this economy utterly unlike anything in the real world. In effect, it tells us nothing at all. So why pay any attention to it? The attention, I suspect, must come from some prior fascination with the idea of competitive equilibrium, and a desire to see the world through that lens, a desire that is more powerful than the desire to understand the real world itself. This fascination really does hold a kind of deranging power over economic theorists, so powerful that they lose the

## Why economic models do not explain

December 14, 2020From Lars Syll

In physics, we have theories and centuries of experience and experiments that show how gravity makes bodies move. In economics, we know there is nothing equivalent. Mainstream economists necessarily have to load their theories and models with sets of auxiliary structural assumptions to get any results at all in their models.

So why then do mainstream economists keep on pursuing this modelling project?

Mainstream ‘as if’ models are based on the logic of idealization and a set of tight axiomatic and ‘structural’ assumptions from which consistent and precise inferences are made. The beauty of this procedure is, of course, that if the assumptions are true, the conclusions necessarily follow. But it is a poor guide for real-world systems. As Hans Albert has it on this ‘style

## Statistics and causation — a critical review

December 12, 2020From Lars Syll

Causal inferences can be drawn from nonexperimental data. However, no mechanical rules can be laid down for the activity. Since Hume, that is almost a truism. Instead, causal inference seems to require an enormous investment of skill, intelligence, and hard work. Many convergent lines of evidence must be developed. Natural variation needs to be identified and exploited. Data must be collected. Confounders need to be considered. Alternative explanations have to be exhaustively tested. Before anything else, the right question needs to be framed. Naturally, there is a desire to substitute intellectual capital for labor. That is why investigators try to base causal inference on statistical models. The technology is relatively easy to use, and promises to open a wide variety