Racism is a framework, not a theory — Andrew Gelman

I am posting this for its relevance to philosophy of logic and philosophy of science rather than specifics. It draws a useful distinction between frameworks that generate theories and which are themselves not testable (hence falsifiable) and the theories a framework is used to generate.

This is obviously relevant to philosophy of science, but why philosophy of logic? In his later work, Ludwig Wittgenstein sought to show that the overarching frameworks of a culture as a way of life are deeply embedded in the structure and function of ordinary language.

Such frameworks are "world pictures (Weltbilden) that function as a world view. Although many of the propositions they generate appear to be descriptive, many are normative in operation. For example, the fundamentals of a world views are criteria for valuation and judgment, hence, they are stipulations that cannot be falsified from within that world view. For example, in doing science methodological naturalism is fundamental.

As a result many make the illogical jump from a methodological assumption to a metaphysical assertion (materialism) in neoclassical economics methodological individualism, microfoundations, rational maximization, market forces and equilibrium are key fundamentals that are assumed as criteria. This is a reason that neoclassical economists reject "heterodox economics" out of hand.

World views and ideologies are similar and need to be distinguished. A world view is a way of seeing the world that is embedded in ordinary language based on interpretation of context. They are subconscious and very difficult to articulate since they are the basis for using a language to communicate. This applies even to formalizations to the degree that assumptions are stipulated that link that symbols to life. (Pure math says nothing about the world. It is about how the rules for sign-use work in a particular syntactical system.)

Conversely, ideology is articulated at least in outline and people within a single world view can recognized differences of expression based on competing ideologies. Politics functions in this way, for instance. American liberals and conservatives degree but they function within the same framework.

So the application of the point that statistics professor Andrew Gelman is making goes far beyond the context of racism.

Statistical Modeling, Causal Inference, and Social Science
Racism is a framework, not a theory
Andrew Gelman | Professor of Statistics and Political Science and Director of the Applied Statistics Center, Columbia University

Bill Mitchell — Understanding what the T in MMT involves

I’ve been meaning to write about this topic for some time, but a Tweet the other day reminded me that there was still major misunderstandings of what Modern Monetary Theory (MMT) represents and that it was time to clarify some of those errors in comprehension. Specifically, there is a current out there that considers MMT to be incorrectly labelled because according to the argument there is no theory involved. It’s hard to imagine why anyone would think that but the fact that they do tells me that I should write this blog post. As I noted yesterday, our Macroeconomics textbook to be published by Macmillan Palgrave in February 2019 is full of theory. It has a lot of description, taxonomy, accounting, history, and philosophy, but also a lot of theory that ties some of those other components together in a meaningful way. The T in MMT is not a misnomer. The Tweet I saw the other day also said there was nothing new in MMT so what’s with the modern bit! I have already dealt with that issue in the past....

"First they ignore you. Then they laugh at you. The they fight you. Then you win." Misattributed to M. K. Gandhi.

Bill Mitchell – billy blog
Understanding what the T in MMT involves
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Noah Smith — "Theory vs. Data" in statistics too

Important.

I think Noah has this right. Fit the tool to the job, rather than the job to the tool.

Aristotle defined speculative knowledge in terms of causal explanation. This definition stuck although Aristotle's analysis of causality did not.

In the Posterior Analytics, Aristotle places the following crucial condition on proper knowledge: we think we have knowledge of a thing only when we have grasped its cause (APost. 71 b 9–11. Cf. APost. 94 a 20). That proper knowledge is knowledge of the cause is repeated in the Physics: we think we do not have knowledge of a thing until we have grasped its why, that is to say, its cause (Phys. 194 b 17–20). Since Aristotle obviously conceives of a causal investigation as the search for an answer to the question “why?”, and a why-question is a request for an explanation, it can be useful to think of a cause as a certain type of explanation. (My hesitation is ultimately due to the fact that not all why-questions are requests for an explanation that identifies a cause, let alone a cause in the particular sense envisioned by Aristotle.) — Stanford Encyclopedia of Philosophy

There is a distinction between reasons and causes. Some types of explanation seek only reasons, while other seek causes. Causation subsequently came to be viewed in terms of articulating mechanisms or lines of transmission (models) that are substantiated in evidence.

Explanation by reasons is different since the strict criterion of articulating mechanisms or lines of transmission that can be checked against evidence is not required.

Explanation by reasons rather than strictly by establishing causation is based on the principle of sufficient reason, which is usually credited to Spinoza and Leibnitz.

In philosophical logic, two negative criteria are foundational. Valid reasoning is vitiated by 1) arguing in a circle and 2) infinite regress.

Without recourse to checking against evidence there is no stopping point in assigning causes other than stipulation, e.g. of a first cause.

However, there may be a reason for a stopping point that doesn't involve causality based on evidence from observation or only stipulation, for example, principles that are "self-evident" based on intuition such as Aristotle's conception of intellectual intuition, or Kant's synthetic a priori propositions as articulated in the Critique of Pure Reason. 

On the other hand, Hume argued that causality is merely over-interpretation of constant correlation, there being no knowledge of the world other than that based on sense data. There is no observable causal link.

Cutting to the chase, scientific explanation based on causality is grounded in models that articulate causal mechanisms or lines of transmission that show how things change invariantly, which is the basis for deterministic functions. Where this is not possible, then there are two other avenues. The first is explanation by giving reasons, which is the domain of speculative philosophy. The second is employing statistics to explore patters of correlation. The question then is to what degree causal models can be gained from statistical methods, or whether it is possible at all. 

This is the issue that Noah Smith's post is getting at.

Noahpinion
"Theory vs. Data" in statistics too
Noah Smith | Bloomberg View columnist

Andrew Gelman — Why they aren’t behavioral economists: Three sociologists give their take on “mental accounting”

The other thing—and this is important—is that the perspectives coming from these three academic disciplines are not competing; they’re complementary. It’s important that money in different bank accounts is liquid—or, to be more precise, it can be liquid for those people who choose to let it be so. It’s important that people often seem to behave as if there are walls between the accounts, restricting their transactions and “freezing” the money, as it were. And it’s important to understand the social context of these behaviors.

Analogously, in section 5.2 of our paper on rational-choice models of voting, Edlin, Kaplan, and I discuss how the rational model is complementary with a psychological understanding of voters. It’s my impression that Bandelj, Wherry, and Zelizer are in agreement with me on this general point, that patterns of human behavior can be usefully understood in different theoretical frameworks. There’s no “right” or “wrong” framework (although one can come to correct or incorrect conclusions within any framework), rather, each framework gives us a way of thinking about the behavior, and entry points into studying it further.

I talk more about frameworks, and how they differ from theories, here.*

Statistical Modeling, Causal Inference, and Social Science
Why they aren’t behavioral economists: Three sociologists give their take on “mental accounting”
Andrew Gelman | Professor of Statistics and Political Science and Director of the Applied Statistics Center, Columbia University

* Philosopher of science Karl Popper and others have criticized such theories as being nonscientific because they are non-refutable, but I prefer to think of them as frameworks for doing science. As such, Freudianism or Marxism or rational choice or racism are not theories that make falsifiable predictions but rather approaches to scientific inquiry. Taking some poetic license, one might make an analogy where these frameworks are operating systems, while scientific theories are programs. That’s why I wrote that I can’t say that Wade is wrong, just that I don’t find his stories convincing.…

I respect the effort to push such theories as far as they can go, but I find them generally less convincing as they move farther from their home base. Similarly with economists’ models: they can make a lot of sense for prices in a fluid market, they can work OK to model negotiation, they seem like a joke when they start trying to model addiction, suicide, etc.

All-encompassing frameworks are different from scientific theories. Both are valuable — frameworks motivate theories and help us interpret scientific results — but I also think it’s important to be clear on the distinction.

Jason Smith — Stock-flow consistency is tangential to stock-flow consistent model claims

Critique of Godey & Lavoie and MMT based on an analogy with electrical circuitry.

As I mentioned above, the results of SFC analysis have little to do with the SFC itself, but instead depend on the assumptions about the behavior of the "circuit elements" (firms, households, government) about which SFC analysis tells us almost nothing. 

SFC is an operational description of financial flow — LHS and RHS must balance just as electrical charge in a circuit, that is, sum to zero. No causality implied.

Similarly, the electrical charge in every operable circuit must sum to zero — positive and negative charges much cancel.

But in every circuit the actual components have a use to perform that his not revealed by the circuit diagram but the use to which the circuit is being put.

This corresponds to the theoretical aspect in economics. Accounting identifies are the boundary conditions and reveal nothing about causality. Causation requires theoretical interpretation.

The point of using SFC models, like drawing circuit diagrams in electrical and electronic systems, is to ensure that the boundary conditions are observed on the analogy that Jason Smith provides in terms of conservation in physics.

But to say that SFC is a truism and dismiss it as irrelevant would be applicable only if there were not violations in attempted applications.

Just as conservation laws are the framework for theories about natural sciences, so to is accounting with respect to finance. Economics uses finance as its basis insofar as it uses monetary units —economic units (actual) are converted to financial expressions in a unit of account. Finance underlies economic in in a monetary production economy. For one thing, it is not possible to do mathematical calculations with different real units — add apples and oranges — but it becomes possible by reducing both to price.

This relationship between economics (actual entities like goods and workers) and finance (nominal and real value expressed in price and wages) is where many of the issues in economics arise. to begin with, nominal value is an observable, while real value depends on calculation based on assumptions.

SFC deals with the financial side of economics expressed in nominal units, the operational basis of which which many economist not only do not pay much attention to but also don't seem to understand very well.

For example, at the macro level conventional economics doesn't take history into consideration, e.g., the result of switching from a gold standard to a fiat monetary regime regarding monetary and fiscal policy. This was a chief MMT criticism of the Reinhart & Rogoff study that was used to argue for the fiscal austerity that undermined demand prolonged the Great Recession. Because the monetary units were the same, R&R assumed that conditions were comparable, which they were not, as the MMT economists pointed out.

Under a fixed convertible system, monetary policy takes precedence of the currency issuer will lose control of the value of the currency. This doesn't apply in a fiat regime, greasy increasing fiscal space. This has nothing to do with individual agents or their behavior since it is a policy choice. However, it has a great deal to do with what individual agents can do based on policy choice consequent on that initial policy choice.

Fixed and floating rate monetary system operation under the same SFC principles, however, they different theoretical in terms of causality. In a fixed rate system, the currency issuer is constrained operationally in a way that it is not in a floating rate system. That is to say, different initial policy financial choices impact non-financial behaviors.

For instance, the ideal of macro as a policy science is to reconcile the trifecta of growth, employment and price stability. This is impossible in a fixed rate system where the currency issuer must protect the value of the currency using the interest rate. However, it becomes possible in a floating rate system where that constraint is removed, as MMT analysis shows based on the government balance being the inverse of the nongovernment balance at full employment using functional finance and an ELR (employer of last resort),with the fiscal authority  operating similarly to the monetary authority (central bank) acting as LLR (lender of last resort).

While an electrical circuit diagram may look the same for different devices, the actual devices and components and what they can do will be different in the case of different power sources and inputs. The laws of electricity that apply are the same across devices, similar to the financial conditions applying to SFC, but the uses are varied and must be approached specifically.

Similarly, a monetary production economy is powered economically by energy, work, and natural resources and financially by money. Insufficient funding results in idle resources and deflationary pressure, while funding in excess of production increase results in inflationary pressure building. SFC models are useful in modeling this.

Perhaps most important for the study of economics, physical laws are applicable always and everywhere — they are timeless. But since economics in monetary production economies is based on finance and finance is based on institutional arrangements that are arbitrary rather than fixed, there are no financial laws that natural rather than positive, hence to economic laws that are natural to the degree that finance (nominal values based on a unit of account) that are natural rather than positive either. Economics is not a natural science or even like a natural science. It is social and historical.

Because economics is social an historical, there can be no timeless laws regarding causation that obviate assessment of changing conditions (context). SFC states no more than that the accounting procedures in force in a jurisdiction must be adhered to.

While these may differ among jurisdictions, there is common agreement that accounts must balance in accounting periods, e.g., for financial institutions that generally means daily. While variations may exist over the day, at the end of day accounts are settled and must balance. Bank tellers don't do home until they do.

Information Transfer Economics
Stock-flow consistency is tangential to stock-flow consistent model claims
Jason Smith

Jason Smith — The scope of introductory economics

Basically, economics isn't approached as an empirical theoretical framework with well-defined scope. It is not set up from the beginning to be amenable to experiments that control the scope and produce data (quantitative or qualitative observations) that can be compared with theory. I'll try and show what I mean using introductory level material -- even qualitative.

Information Transfer Economics

The scope of introductory economics

Jason Smith

Beatrice Cherrier — Theory vs data, computerization, old wine and new bottles: Morgenstern and Econometric Society fellows, 1953

[Oskar] Morgenstern proposed that candidates be required to“have done some econometric work in the strictest sense” and be “in actual contact with data they have explored and exploited for which purpose they may have even developed new methods.” Though remembered as the coauthor of one of economics’ most prominent theoretical treatise, The Theory of Games, Morgenstern also had a longstanding interest in statistical work. His feeling was that the Econometric Society and Econometrica editors overvalued “purely abstract work,” while stimulus should be give, to “papers involving data.”

The Undercover Historian
Theory vs data, computerization, old wine and new bottles: Morgenstern and Econometric Society fellows, 1953
Beatrice Cherrier

Lars P. Syll — Keynes vs. Wicksell on loanable funds theory

"The fundamental difference between Keynes and Wicksell and in general the supporters of the LFT [Loanable Funds Theory] lies in the specification of the consequences of the presence of bank money.…

In contrast, Keynes states that the spread of a fiat money such as bank money changes the structure of the economic system. He underscores this point by introducing the distinction between a real exchange economy and a monetary economy.…

Keynes notes that the classical economists formulated an explanation of how the real-exchange economy works, convinced that this explanation could be easily applied to a monetary economy. He believed that this conviction was unfounded …" — Giancarlo Bertocco

Lars P. Syll’s Blog
Keynes vs. Wicksell on loanable funds theory
Lars P. Syll | Professor, Malmo University

All Tools, Math & Theory ... and forgotten operations? Why ... THAT SOUNDS LIKE ORTHODOX MACROECONOMICS!!!!

   (Commentary posted by Roger Erickson)



Who's tugging your aggregate's policy? To where? And WHY?

Jim Valensi writes:   Social theory vs Un-Social Outcomes  (Ok, it gets a bit smarmy, but the message starts out well.)
 
Well duh! This is both tragic & comical. Can't see an operation for the theory? Economists have forgotten that behind all the theory, there are real people there?

The fact that people even have to be told the obvious ... questions the changing meaning of what really is obvious!

When the obvious is no longer obvious, what does that say about the observers? Can't see a context for the operations? So they make up a bunch of BS theory, and theorize that it needn't be tested against real outcomes? Sounding more orthodox all the time! Anything to sell more theory, and tools. (Oh yes, don't forget to blame the stagehands for accepting the script. They just used to work ... here & elsewhere.)

All tools, math & theory ... and forgotten operations? Why ... THAT SOUNDS LIKE ECONOMICS!!!!

WHY Do We Keep Electing Overly Isolated Theorists To Policy Responsibility Positions, OVER Involved Practitioners?

Commentary by Roger Erickson

Here's another example of very clear thinking by Warren Mosler, ..... pointing out shamefully MUDDLED discourse on fiscal & monetary policy by those who know economic theory ... but NOT banking methods and practices.

Comments on Volcker article

Mosler makes some killer points here. Points that every American deserves to hear made.

The upshot? As always, the difference between theory & practice is smaller in theory than in actual practice. :( Volcker is clearly talking isolated ideology. 

Volcker & Mosler should have been WORKING TOGETHER, INTIMATELY, the past 20 years! Instead, Volcker has remained isolated in his exalted ivory tower, and the US Middle Class has paid the penalty for the resulting policy clumsiness, and missed outcomes.

Sadly, the ruling theorists never catch on.

Even sadder, WE keep electing overly isolated theorists to policy responsibility positions, OVER involved practitioners.

WHY do we do that?

That's our $100 question. We need a balance of operations/practitioner/theorist staff in all operations, just to chase changing context fast enough to matter.

EVERY system process is too important to be left to the presumed process owners. That is the very definition of a system - use of cross-process feedback to coordinate multiple processes into a whole. Why? To produce a whole that is greater than the sum of it's parts. This ain't rocket science, folks. We've always known this. For whatever reason, we're just not doing the obvious.

What idiot would ever ADMIT that keeping emerging theorists & emerging practitioners in isolation from one another is a pragmatic, adaptive idea? None? Because the missing feedback always kills those who remain uncoordinated ...  if any opponents anywhere actually do get a bit more coordinated?

So why is isolation a FEATURE of our class-based approach to self-governance?

If you can suggest ways to get more Americans back to talking more frequently with more Americans .... then for heaven's sake, please start!

Matias Vernengo — What killed theory? What theory?

So Noah Smith and Paul Krugman are again trying their hand at the history of economic ideas to understand what happened with the profession in the last three decades....

Naked Keynesianism
What killed theory? What theory?
Matias Vernengo | Associate Professor of Economics, University of Utah

Scientific models are (supposed to be) general descriptions of some segment of reality. Their connection with reality is buttressed by correct predictions. But theories are never finally confirmed, since general assertions regarding unbounded sets, and future information is unbounded, are always open to disconfirmation. A single solid disconfirmation is sufficient to falsify a hypothesis, whereas theories are not disconfirmed as such. When problems develop, at first ad hoc solutions are devised within the theoretical framework, but when problems mount or a single issue calls the whole way of looking into question, then theorists look for a better instrument for seeing, i.e., a new theory.

Theories are ways of seeing reality from a particular perspective. The closer they are to a general description that is borne out by testing, with major hypotheses surviving attempts at falsification, the more scientific they can claim to be. Regardless of past successes, anomalies often arise that the theory does not explain, and these become the problem set that defines the cutting edge of the discipline.

No model can be representational for other than a simple bounded system, where anomaly is ruled out. As complexity increases, the potential for representational modeling decreases owing to the uncertainty introduced by unknown unknowns that cannot be foreseen prior to their emergence from analysis of the system based on existing information.

The way of seeing embedded in a theory that attempts to generally describe a complex system is scientific to the degree that it enables accurate prediction and unscientific to the degree it doesn't. The latter condition arises owing to two chief reasons. First, emergence, and secondly, assumptions that are not empirically testable or which testing tends to call into question if not disconfirm. Emergence is not controllable, but assumptions are, at least to a degree.

To the degree that a theory is unscientific and the approach is uncritical, it can be described as mythological. And to the degree that a mythological way of seeing is accepted, the field is dominated by magical thinking.

However, a purely empirical approach focusing only on data is unsatisfactory for it offers no way of seeing the entire data set scientifically, i.e., in terms of a general description. It is not possible to have an integrated field of study without presuming some way of seeing, that is organizing raw data into information. Hence, ignoring the operative way of seeing in using a purely empirical approach invites magical thinking as the method and mythology as the POV.

This is a knotty issue in social science, and conventional economics is deeply affected by it. The assumption of the market as a "natural" phenomenon is a myth based on magical thinking, i.e., "the invisible hand," whose basis is "rationality," functioning as deus ex machina. Homo economicus is a mythological creature.

Winterspeak— Intentionality and Accounting

Some weeks ago I had a good back-and-forth with the indomitable JKH in the forums about how useful Mosler's "paradigm shift" approach was vs JKHs "strictly the accounting" strategy. Mosler plays fast and loose with the language a little at time to better get his point across, and my position was (and remains) that if your goal is to knock people out of one way of thinking and into another, then sometimes you need to hit them over the head. But I don't think anyone has quite cracked that nut (no pun intended).

And yes, the term "paradigm shift" is grotesquely over and mis-used, but I think in term of MMT/PK vs standard academic economics, it is the correct term as we really are talking about taking an entire worldview, not just an isolated theory, and all of the implications that come with it; and jettisoning it for something else. This is a multiple-organ transplant procedure here, not a buttock lift, so roll up your sleeves.

Conceptualization counts when one is bucking the mainstream model.

Winterspeak
Intentionality and Accounting

Philip Pilkington — Even the Statisticians Are Highly Dubious of Applying Their Methods in Economics!

Lars Syll just ran a rather amusing quote from a handbook on mathematical statistics in which the author — a mathematical statistician — lays out all the cop-out arguments used by those who apply these methods in a dubious manner in the social sciences. I looked up the original book and I think that it might be worthwhile outlining another quote which is, in a sense, even more damning to those who try to use these methods in socials sciences and, most especially, in economics.

Fixing the Economists
Even the Statisticians Are Highly Dubious of Applying Their Methods in Economics!
Philip Pilkington

Lars P. Syll — What makes a good explanation in economics?

Philosophy of economics and social science, or do you know what you are doing? Economists especially attempt to emulate or even mimic physics, but the social sciences are inherently different from the natural sciences because the subject matter is inherently different. Therefore, explanation will be different in the social sciences, including economics, than it is in the natural sciences.

Lars puts forth a realist theory in opposition to positivist and subjectivist theories. These are the dominant theories at present, but they are not the only possible ones, such as semiotic, pragmatist and idealist. All of these views have something to contribute, and none of them has proved itself to be so compelling as to exclude the others. History shows that different approaches exchange dominance. This is as a result of changing context, and it also shapes context.

Lars asserts that only one approach is to be preferred as optimal, otherwise relativism results, and that approach is "realism." In the absence of an absolute criterion, I don't see "relativism" as a problem. Lars would say that "reality" is that criterion, but what "reality" may be is one of the perennial questions on which there is no universal agreement, and some (Ludwig Wittgenstein) hold that the question is not answerable at all in that this lies beyond the limits of language to capture.

Then there is the idealist view expressed by Max Plack based on his view of quantum mechanics as foundational:

I regard consciousness as fundamental. I regard matter as derivative from consciousness. We cannot get behind consciousness. Everything that we talk about, everything that we regard as existing, postulates consciousness. • As quoted in The Observer (25 January 1931)

"As a man who has devoted his whole life to the most clear headed science, to the study of matter, I can tell you as a result of my research about atoms this much: There is no matter as such. All matter originates and exists only by virtue of a force which brings the particle of an atom to vibration and holds this most minute solar system of the atom together. We must assume behind this force the existence of a conscious and intelligent mind. This mind is the matrix of all matter." • Das Wesen der Materie [The Nature of Matter], speech at Florence, Italy (1944) (from Archiv zur Geschichte der Max-Planck-Gesellschaft, Abt. Va, Rep. 11 Planck, Nr. 1797)

"Science cannot solve the ultimate mystery of nature. And that is because, in the last analysis, we ourselves are part of nature and therefore part of the mystery that we are trying to solve." • Where is Science Going? (1932)

From Wikiquote.

Lars P. Syll's Blog
What makes a good explanation in economics?

Lars P. Syll | Professor of Social Studies and Associate professor of Economic History at Malmö University

David Hales — Lies, Damned Lies and Big Data

Almost everything we do these days leaves some kind of data trace in some computer system somewhere. When such data is aggregated into huge databases it is called “Big Data”. It is claimed social science will be transformed by the application of computer processing and Big Data. The argument is that social science has, historically, been “theory rich” and “data poor” and now we will be able to apply the methods of “real science” to “social science” producing new validated and predictive theories which we can use to improve the world.

What’s wrong with this?...

Looking for “patterns or regularities” presupposes a definition of what a pattern is and that presupposes a hypothesis or model, i.e. a theory. Hence big data does not “get us away from theory” but rather requires theory before any project can commence.

What is the problem here? The problem is that a certain kind of approach is being propagated within the “big data” movement that claims to not be a priori committed to any theory or view of the world. The idea is that data is real and theory is not real. That theory should be induced from the data in a “scientific” way[1].

I think this is wrong and dangerous. Why? Because it is not clear or honest while appearing to be so. Any statistical test or machine learning algorithm expresses a view of what a pattern or regularity is and any data has been collected for a reason based on what is considered appropriate to measure. One algorithm will find one kind of pattern and another will find something else. One data set will evidence some patterns and not others. Selecting an appropriate test depends on what you are looking for. So the question posed by the thought experiment remains “what are you looking for, what is your question, what is your hypothesis?”

It seems to me that one must at least try to answer this question if one is to pursue social science. Not just because it is good science but also because it has ethical and political implications.

The view one takes of social phenomena, either consciously or through algorithms and data, frames what is and is not conceivable for past and future social reality. If you doubt the importance of such ideas one should look that the history of the 20th century. Ideas matter. Theory matters. Big data is not a theory-neutral way of circumventing the hard questions. In fact it brings these questions into sharp focus and it’s time we discuss them openly.

Synthesis
Lies, Damned Lies and Big Data
David Hales

Economics: A Gaping Separation Between Theory and Operations

commentary by Roger Erickson



I've posted a longer essay on this topic, at Global Economic Intersection.

Since the two sites attract different readers & comments, the link is also posted here.

Which Part of "Dynamic Systems" Don’t These People Get?

In a comment at WWS, one F. Beard clarifies a key Luddite rallying cry:
”loans create deposits” = counterfeiting.

It's the new mantra of the slow & left behind.

How else does he imagine a fiat currency system works?  Agile exploration of national policy options is not counterfeiting, it's adaptation & survival.

Statements like F. Beard's miss the point completely. Truth is that an increasingly complex national economy demands increasingly agile & complex policy decisions. There's a time element to agility. Making an increasingly complex system increasingly agile requires making all operations increasingly dynamic - while ALSO independently tightening tolerance limits on ALL our increasingly distributed processes.

That's the only way we can explore our options as fast as they keep expanding.

Throughout history, the slow have always been easily daunted, and left not believing that progress is possible. However, the very existence of history refutes them, immediately & utterly.

One billion years ago, flatworms couldn't imagine that mammals, primate & humans were possible.  Luckily, some fraction weren't cowed ... and here we are, nonetheless.  Rest assured that the future will proceed regardless of F. Beard's advice to deny & ignore it.  That's the comical part.

The sad part?  That we're even continuing a discussion with the F. Beard's of the world.  Must we all also be left behind in the dustbin of history, dragged down by the slow & left behind? As usual, it's a policy choice. Gentlepeople, start your decision engines!  In a complex, dynamic culture such as ours, all distributed decision-making sums to a survive-or-not outcome in each, fleeting context.

We have to choose to embrace the future & move forward - RAPIDLY - or submit and relegate our children as well as ourselves to being left behind with the Luddites.

It's your choice, and this is the last year it matters.  Maybe the last month.

ps:  Policy displays many analogies to sport.  Both require agility in competitive  situations, seconds count, "losing" habits acquire their own institutional momentum, and the glory goes to those unafraid to seize new opportunities ... by embracing new, more dynamic methods.  So why is there a whole field of sports kinetics, while we have no comparative field of Policy Kinetics?

For example, it's common to hear economists & politicians say "I don't deal with operations."  Have you EVER heard a sports coach say "I don't deal with fundamentals?"  Coaches or leaders in any other setting are rapidly fired if they only draw up plays and don't worry about execution.

What the heck has happened to our economics, general policy and especially fiscal policy staff? They're all making the one mistake Napoleon noted as terminal: "paint an imaginary picture of a situation and accept it as real."   In short, they've abandoned the adaptive yoke linking theory & practice, imagination and reality.  Theory is something you diversify to excess, and then select from - but NEVER SETTLE ON!  The only purpose of theory is to compare to operations.  Yet here we are, in the USA, in the 21st century ... idly sitting by while our own policy twits say with impunity "I don't do operations."


Fine.  We don't hire them!  That's the only survival option.  When we have that many schizophrenic thinkers at large, YOU and you alone must select to NOT vote them into either legislative or teaching positions.  It's your choice, and you must select as though it matters.  Because it does.

Noah Smith — "Science" without falsification is no science

So as things stand, macro is mostly a "science" without falsification. In other words, it is barely a science at all. Microeconomists know this. The educated public knows this. And that is why the prestige of the macro field is falling. The solution is for macroeconomists to A) admit their ignorance more often (see this Mankiw article and this Cochrane article for good examples of how to do this), and B) search for better ways to falsify macro theories in a convincing way.

Of course, if people also read heterodox macroeconomists, then they would know that some macroeconomists actually did get it right, and they also explain why mainstream economists get it wrong.

See James K. Galbraith, Who Are These Economists, Anyway? And it is not like Prof. Galbraith is an unknown upstart, either. Don't these people go outside, once and awhile at least.

Read it at Noahpinion
"Science" without falsification is no science

by Noah Smith | PhD candidate in economics at the University of Michigan. (In the fall he will start as an assistant professor of finance at Stony Brook.)

Noah Smith is an economist with a background in physics.

I left this comment there:

Tom Hickey 11:48 PM
Actually, some macroeconomists did get it right and explained why the mainstream was getting it wrong. Notably, the late Wynne Godley. For his approach to macro using stock-flow consistent modeling and sectoral balances, see Godley and Lavoie, Monetary Economics (Elgar, 2007, 2nd ed. 2012). See James K. Galbraith for some economists who did get it right — "Who are these economists anyway?"

UPDATE:

Simon Wren-Lewis has an equally uniformed post at mainly macro

What microeconomists think about macroeconomics

I left this comment there:

Tom Hickey 29 June 2012 21:24

Simon, have you read much Wynne Godley, especially Godley and Cripps, Macroeconomics (182) and Godley and Lavoie (2007, 2nd ed. 2012)? Or did you see James K. Galbraith, "Who are these economists anyway?" I am afraid your comments reflect the ignorance of the profession about Post Keynesianism. OK, you are an Oxford prof, and Cambridge was the citadel of PKE, and Godley there. But to miss or dismiss major economists since Keynes, really now.

The descriptive v. the normative in MMT as a macro theory

Distinguishing the descriptive (positive) from the prescriptive (normative) in MMT is theory-dependent. A theory is a generalized explanation that leads to predictions based on putative causation. Testing predictions formulated as hypotheses is the experimental aspect of the theory and it is part of the descriptive (positive) aspect, i.e., tests causal claims.

A scientific theory contains causal explanations that enable predictions. (There is a huge literature in the philosophy of science about nature of causality and its use as a theoretical tool.) This predictive capacity underlies the application of theory in engineering and technology. Broadly speaking, applied macro includes its application to formulating policy options. This application macro may result in a range of policy options. Options can be judged based on efficiency and effectiveness.

According Peter R. Drucker in The Effective Executive, efficiency is "doing things right,"  and effectiveness is "doing the right things." Assessing efficiency is a scientific (positive) concern, and the criteria for "doing things right' are generally clear and agreed upon.

Correctness wrt to effectiveness is based on the goals chosen. This is where the prescriptive (normative) enters. Economics does not supply policy objectives, which are a political matter, decided by representatives elected by citizens in a liberal democracy. Economists can only inform those responsible for governing about economic possibilities of various policy options.

The JG is part and parcel of the theoretical aspect of MMT as a macro theory that addresses reconciling the big three: production, employment and price. This is not a choice. Any macro theory that expects to seem credible in the currency academic universe of discourse has set these are priorities.

Take the JG out as a price anchor in addition to an employment buffer, and you don't have MMT as the macro theory it is. As Warren Mosler has said, the JG can be eliminated in making policy decisions, but don't then blame MMT economists if inflation results. One is just not following MMT as a macro theory anymore if one make that decision.

Of course, anyone can take other aspects of the MMT description and try to build another macro theory with knowledge that MMT economists have uniquely contributed. But it won't be Mosler-Wray-Mitchell (in temporal order) MMT macro, as amplified by MMT economists that have followed them in developing MMT as a macro theory.

That is say, the JG is not a normative policy option that is optional along a spectrum of policy options to choose from. It is part of the macro theory as a generalized description that enables prediction. MMT economists are firm in stating that if you want full employment and price stability, this is the only existing theory that shows the way to achieve it in the existing monetary and economic framework. Not that there cannot be others. But as of now, there aren't any.

It is also important to note that the JG is not an independent proposal. There have been JG type programs already, but they are not MMT JG because they have not been implemented as part and parcel of the MMT macro paradigm, which includes monetary theory, SFC macro modeling, Minsky's approach to finance, and Lerner's functional finance, integrated into a coherent and comprehensive macro paradigm.

As the MMT economists have said, if one rejects the JG, then one must either accept a buffer stock of unemployed as a default, or else provide alternative buffering solution to the JG that obviates the buffer stock of unemployed. The MMT economists remind that in accepting a buffer stock of unemployed one is simultaneously accepting significant inefficiency that results in economic underperformance, idle resources, and massive waste over time. This is an externality of the existing system that as costly as any of the other large negative externalities such as environmental pollution and degradation.

So to successfully attack the JG, one would need to show that a buffer of employed is less efficient and effective than a buffer of unemployed even with the enormous waste, or else provide an alternative buffer.

Let me emphasize — This is a macro problem, not a political one, not an ideological one, and not a micro one, which is the way most people on the blogs are addressing in the recent debate. It is claimed to be straight up macro, which requires knowledge of the history of the debate since the days of Classical Economics if one is going to join the debate, let alone advance it.

Finally, it is necessary to point out that some of the criticism of the JG-ELR, as well as other aspects of MMT such as fiscal policy, is based on the view that adopting such an approach undermines "capitalism," e.g., by destroying motivation, enlarging government intervention, and so forth.

Some of these issues are empirical claims that can be assessed through economic data as well as the finding of other branches of science like psychology, sociology, anthropology and evolutionary theory.

However, many of these issues are not decidable empirically. These are ideological issues rather than macroeconomic ones or scientific ones. This is the stuff of philosophy.

Some ideologies reject the very concept of macroeconomics as a valid discipline. So the contentiousness of the issues goes far beyond the JG or any specific aspect of MMT. In this regard the debate becomes a philosophical one rather than an economic one.