Tag Archives: Economics

Wage cuts — the ultimate atomistic fallacy The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history. But now that the man in the street has become aware of what is happening, he, not knowing the why and wherefore, is as full to-day of what may prove excessive fears as, previously, when the trouble was first coming on, he was lacking in what would have been a reasonable anxiety. He begins to doubt the future...

Robert Lucas warped view on advancing knowledge The years 1978-1986 saw the first out-of-sample test by reality of both Lucas’s original theory that it was all information misperceptions driven by unanticipated monetary shocks and Lucas’s later allegiance to Prescott’s theory that it was all shocks to total factor productivity–recessions = “great forgettings”. Both Lucas’s monetary-misperceptions and Prescott’s real business cycle theory failed those tests catastrophically. Yet that — the...

Ultimatum games — take your epsilon and shove it! Given that a normative theory is defined as a theory prescribing how a rational agent should act, neoclassical economic theory certainly has to be considered a normative theory. The problem is — besides that it standardly assumes not only rationality and selfishness, but also e. g. common knowledge of people’s utility functions — that loads of research show that people almost never act in accordance with the theory: There is a tendency...

The financial crisis of 2007-08 hit most laymen and economists with surprise. What was it that went wrong with our macroeconomic models, since they obviously did not foresee the collapse or even make it conceivable? There are many who have ventured to answer this question. And they have come up with a variety of answers, ranging from the exaggerated mathematization of economics, to irrational and corrupt politicians. But the root of our problem goes much deeper. It ultimately goes back to...

Econometrics and the dangers of calling your pet cat a dog The assumption of additivity and linearity means that the outcome variable is, in reality, linearly related to any predictors … and that if you have several predictors then their combined effect is best described by adding their effects together … This assumption is the most important because if it is not true then even if all other assumptions are met, your model is invalid because you have described it incorrectly. It’s a bit...

Economics journals — publishing lazy non-scientific work In a new paper, Andrew Chang, an economist at the Federal Reserve and Phillip Li, an economist with the Office of the Comptroller of the Currency, describe their attempt to replicate 67 papers from 13 well-regarded economics journals … Their results? Just under half, 29 out of the remaining 59, of the papers could be qualitatively replicated (that is to say, their general findings held up, even if the authors did not arrive at the...

Why non-existence of uncertainty is such a monstrously absurd assumption All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface. Perhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under...

Question the monetary system and you’re academically dead!  [embedded content]Bernard Lietaer is a former professor of international finance and president at the Central Bank of Belgium.

Did Keynes ‘accept’ the IS-LM model? Lord Keynes has some interesting references and links for those wanting to dwell upon the question if Keynes really “accepted” Hicks’s IS-LM model. My own view is that  IS-LM doesn’t adequately reflect the width and depth of Keynes’s insights on the workings of modern market economies: 1  Almost nothing in the post-General Theory writings of Keynes suggests him considering Hicks’s IS-LM anywhere near a faithful rendering of his thought. In Keynes’s...

Because I was there when the economics department of my university got an IBM 360, I was very much caught up in the excitement of combining powerful computers with economic research. Unfortunately, I lost interest in econometrics almost as soon as I understood how it was done. My thinking went through four stages: 1.Holy shit! Do you see what you can do with a computer’s help. 2.Learning computer modeling puts you in a small class where only other members of the caste can truly...