Tag Archives: Economics

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Yesterday John Kay had an interesting article about models and forecasting in Financial Times: A bane of this economist’s life is the belief that economics is clairvoyance. I should, according to this view, be offering prognostications of what gross domestic product growth will be this year and when the central bank will raise interest rates … What was the right answer on January 1 1989 to the question “will the Berlin Wall be pulled down in 1989?” A shrewd commentator would have said...

Krugman on models (II) Last year Alex Rosenberg — chair of the philosophy department at Duke University and renowned economic methodologist — had an interesting article on What’s Wrong with Paul Krugman’s Philosophy of Economics in 3:AM Magazine: Krugman writes: ‘So how do you do useful economics? In general, what we really do is combine maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both...

Bad taste in mouth modeling How do mainstream economists react when confronted with the monumental absence of empirical fit of their macroeconomic models? Well, they do as they always have done — they use one of their four pet strategies for immunizing their models to the facts: (1) Treat the model as an axiomatic system, making all its claims into tautologies — ‘true’ by the meaning of propositional connectives. (2) Use unspecified auxiliary ceteris paribus assumptions, giving all claims...

Does more government help or hurt?  [embedded content] Through history public debts have gone up and down, often expanding in periods of war or large changes in basic infrastructure and technologies, and then going down in periods when things have settled down. The pros and cons of public debt have been put forward for as long as the phenomenon itself has existed, but it has, notwithstanding that, not been possible to reach anything close to consensus on the issue — at least not in a long...

The initial choice of a prior probability distribution is not regulated in any way. The probabilities, called subjective or personal probabilities, reflect personal degrees of belief. From a Bayesian philosopher’s point of view, any prior distribution is as good as any other. Of course, from a Bayesian decision maker’s point of view, his own beliefs, as expressed in his prior distribution, may be better than any other beliefs, but Bayesianism provides no means of justifying this position....

DeLong, Summers & Krugman on models Larry Summers, Brad DeLong, and Paul Kugman are having an extended discussion on the role of models in economics on their blogs this week. That’s good. Since the model is the message in economics today, that is actually the most important discussion possible to have in economics. Krugman is arguing that models are not ‘always the right guide for policy, but still necessary for disciplining our policy preferences.’ According to Krugman, ‘the...

Joke of the century Inequality continues to grow all over the world. In case you think that it’s different in my own country — Sweden — you should take a look at data from Statistics Sweden and this (Swedish) video. The Gini coefficient is a measure of inequality (where a higher number signifies greater inequality) and for Sweden we have this for the disposable income distribution:            Source: Statistics Sweden and own calculations What we see happen in the US, the UK, and Sweden,...

Calibration — how to perform decades of scientific fraud One may wonder how much calibration adds to the knowledge of economic structures and the deep parameters involved … Micro estimates are imputed in general equilibrium models which are confronted with new data, not used for the construction of the imputed parameters … However this procedure to impute parameter values into calibrated models has serious weaknesses … First, few ‘deep parameters’ have been established at all … Second,...

Balanced budget — an old fashioned religion I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked, [it] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes...