Real-World Economics Review

from Lars Syll 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.  And when the model is wrong — well, then it’s wrong. The assumption of additivity and linearity means that the outcome variable is,...

from James Galbraith and RWER #84 . . . there are no markets without governance and government and regulations. More precisely: just as Adam Smith pointed out that the division of labor depends on the extent of the market, so the extent of the market depends on the reach of the state – on its capacity to provide security, a framework of law and justice, and to regulate effectively in the public interest. Without each of these, many if not most modern markets could not exist in their...

from Lars Syll The correlation between high executive pay and good performance is “negligible”, a new academic study has found, providing reformers with fresh evidence that a shake-up of Britain’s corporate remuneration systems is overdue. Although big company bosses enjoyed pay rises of more than 80 per cent in a decade, performance as measured by economic returns on invested capital was less than 1 per cent over the period, the paper by Lancaster University Management School says. “Our...

from Lars Syll The euro may be approaching another crisis. Italy, the eurozone’s third largest economy, has chosen what can at best be described as a Euroskeptic government. This should surprise no one. The backlash in Italy is another predictable (and predicted) episode in the long saga of a poorly designed currency arrangement, in which the dominant power, Germany, impedes the necessary reforms and insists on policies that exacerbate the inherent problems, using rhetoric seemingly...

from Dean Baker There is a fundamental flaw in the way that both Donald Trump and his critics generally talk about trade. They make it an issue of country versus country, raising the question of whether China, Canada and other trading partners are treating the United States fairly as a country. Trump of course does this more explicitly with his “America First” rhetoric and complaints about other countries cheating us because they run trade surpluses, but his critics also often use similar...

from David Ruccio Ambassador Nikki Haley’s decision last week to withdraw the United States from the United Nations Human Rights Councilis remarkable. The United States is the first nation in the body’s 12-year history to voluntarily remove itself from membership in the council while serving as a member. Some have alleged that the timing of Haley’s decision is conspicuous. “The move,” read the second paragraph of a CNN report on Haley’s decision, “came down one day after the Office of the...

from Lars Syll Unlike the old neoclassical theories, game theory concerns strategic interaction between different people. It can encompass things like wage bargaining, fraud and lots of other things that neoclassical equilibrium glosses over or leaves out.  And in game theory, free markets full of rational actors can easily, even regularly, lead to inefficient outcomes that require government intervention. Noah Smith/Bloomberg “Free markets full of rational actors.” Sounds great does it...

from Dean Baker The Washington Post repeated a standard theme in reporting on Trump’s trade war with China, that our main concern is not the trade deficit but rather China’s alleged theft of our intellectual property. I have written about this issue before, but there is an important aspect that seems to have gone largely unmentioned, China is likely to have more at risk in this story than the United States. Using the purchasing power parity measure (clearly the appropriate one for this...

from Lars Syll The master-economist must possess a rare combination of gifts …​ He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard....

from Lars Syll A statistician may have done the programming, but when you press a button on a computer keyboard and ask the computer to find some good patterns, better get clear a sad fact: computers do not think. They do exactly what the programmer told them to do and nothing more. They look for the patterns that we tell them to look for, those and nothing more. When we turn to the computer for advice, we are only talking to ourselves … Mathematical analysis works great to decide which...