Tag Archives: Economics

Are all models wrong? If you say “All models are wrong” then the most important issue is to define the words. “All” is quite clear, “are” also is without much doubt. So, we are left with “models” and “wrong” … The more interesting discussion is the one about the definition of truth. The philosopher Bertrand Russell has written something on truth about a century ago in his book The Problems of Philosophy (ch. XII): “It will be seen that minds do not create truth or falsehood. They create...

Validity is NOT enough Mainstream economics today is in the story-telling business whereby economic theorists create make-believe analogue models of the target system – usually conceived as the real economic system. This modeling activity is considered useful and essential. Since fully-fledged experiments on a societal scale as a rule are prohibitively expensive, ethically indefensible or unmanageable, economic theorists have to substitute experimenting with something else. To understand...

Utility — an almost vacuous concept There is always a danger that, as you climb higher and higher, the principles become more and more general and harder and harder to translate into lower level operational principles … The economic notion of Utility looks dangerously general in the hands of, for example, Gary Becker. Becker won the Nobel Prize for modeling great swathes of what we do in day-to-day life under the principles of market equilibrium and rational choice theory, from drug...

Rational expectations — a theory without empirical content Cassidy: What about the rational-expectations hypothesis, the other big theory associated with modern Chicago? How does that stack up now? Heckman: I could tell you a story about my friend and colleague Milton Friedman. In the nineteen-seventies, we were sitting in the Ph.D. oral examination of a Chicago economist who has gone on to make his mark in the world. His thesis was on rational expectations. After he’d left, Friedman...

Evidence-based theories and policies are highly valued nowadays. Randomization is supposed to control for bias from unknown confounders. The received opinion is that evidence based on randomized experiments therefore is the best. More and more economists have also lately come to advocate randomization as the principal method for ensuring being able to make valid causal inferences. I would however rather argue that randomization, just as econometrics, promises more than it can deliver,...

August’s Employment Report showed the unemployment rate fell to 5.1 percent and creation of 173,000 new jobs. Predictably, the decline in the unemployment rate has triggered calls for higher interest rates from Wall Street Hawks on grounds that higher core inflation is just around the corner. That is the same call we heard when the [...]

The false analogy between private and public debt One of the most effective ways of clearing up this most serious of all semantic confusions is to point out that private debt differs from national debt in being external. It is owed by one person to others. That is what makes it burdensome. Because it is interpersonal the proper analogy is not to national debt but to international debt…. But this does not hold for national debt which is owed by the nation to citizens of the same nation....

Rational expectations — a monstrous assumption ‘Rational expectations’ remains for me a sort of monster living in a cave. I have never ventured into the cave to see what he is like, but I am always uneasily aware that he may come out and eat me. If you will allow me to stir the cauldron of mixed metaphors with a real flourish, I shall suggest that ‘rational expectations’ is neo-classical theory clutching at the last straw. Observable circumstances offer us suggestions as to what may be the...

Economics — a rogue branch of applied mathematics A lot of people complain about the math in economics. Economists tend to quietly dismiss such complaints as the sour-grapes protests of literary types who lack the talent or training to hack their way through systems of equations. But it isn’t just the mathematically illiterate who grouse. New York University economist Paul Romer — hardly a lightweight when it comes to equations — recently complained about how economists use math as a tool...

‘New Keynesian’ models are not too simple. They are just wrong. Simon Wren-Lewis has a nice post discussing Paul Romer’s critique of macro. In Simon’s words: “It is hard to get academic macroeconomists trained since the 1980s to address [large scale Keynesian models] , because they have been taught that these models and techniques are fatally flawed because of the Lucas critique and identification problems … But DSGE models as a guide for policy are also fatally flawed because they are too...