Uncertainty — Brian Romanchuk

The coronavirus news flow is getting worse, and generating corresponding news flow. I just want to make a couple comments that stick close to my limited expertise. From a markets standpoint, the market that matters is the credit market, and not equities. I am not plugged into the credit market news flow, but I do not see anything that indicates that anything is irreversibly broken. Otherwise, the situation underlines the big difference between randomness and uncertainty. This is a geeky distinction, but is one of the things that distinguishes post-Keynesian thinking from neoclassical....

Bond Economics
Uncertainty
Brian Romanchuk

The Effects of Uncertainty on Economic Outcomes — On the Economy

How does uncertainty affect the economy? The authors of an Economic Synopses essay examined this question, and their findings support the view that firms and households delay spending when uncertainty increases.

The essay was written by Laura E. Jackson, an assistant professor at Bentley University; Kevin L. Kliesen, a business economist and research officer at the St. Louis Fed; and Michael T. Owyang, an economist and assistant vice president at the St. Louis Fed....

As Keynes said.

FRBSL — On the Economy
The Effects of Uncertainty on Economic Outcomes

Lars P. Syll — a question of economic methodology

Radical uncertainty is feature of a complex adaptive system a chief characteristic of which is emergence. Emergence is at the heart of evolution theory. Emergence in this context means that there is no way to predict what will emerge from a complex adaptive system based on investigation of the past and present state of the system. This implies that surprise is a characteristic of such systems.

This also implies that complex adaptive systems are like open systems rather than closed, receiving input exogenously, although in reality the additional input arises endogenously through the system dynamics, e.g., through reflexivity that engenders feedback and learning, but it a way that cannot be foreseen based on the present and past system states and operations.

Treating social systems as if they conformed to the structure and dynamics described theoretical in natural science, e.g., based on endogeneity, involves oversimplification. There is a strong tendency among rationalists that prefer formal solutions to adopt methodological assumptions based on mathematical tractability and convenience instead of accepting the empirical limitations of complex adaptive systems like human societies.

This has resulted in what Michael Hudson has dubbed "junk economics." Elegant but wrong.

It's long past time to admit that Keynes and Knight were correct and that Ramsey and Savage were wrong.

Lars P. Syll’s Blog
Radical uncertainty — a question of economic methodology
Lars P. Syll | Professor, Malmo University

Andrew Gelman — Our hypotheses are not just falsifiable; they’re actually false.

On the practical side of philosophy of science. Adding nuance to Karl Popper on falsification.

Further argument for the view that theories are useful but not "true." This may seem to contradict the realist view that theories are general descriptions of causal relationships. But I don't think that this is what is is implied. Rather, useful theories can be viewed as fitting the data because they reveal underlying structures that are not observed directly but only indirectly. 

There is a often a tendency to transfer simple analogies too complicated and complex situations and events. Some causal relationship are observable, as it a hammer driving a nail, with the physical theory explaining it in terms of simple variables related in a function. 

But most interesting issues are much more complicated and nuanced and may be complex, e.g., subject to emergence owing to synergy. There may a constellation of factors involved, and this may be difficult to order in a hierarchy. Some factors may be catalysts that are necessary for an operation but do not themselves enter into it. These may be presumptions that are hidden assumptions.

In addition, statistics is by definition "inexact" in that it deals with probabilities, unlike deterministic functions in which the variables are all known and measurable, and are expressible in terms of a simple function.

While physics is mostly tractable other than at the edges, life sciences are less so, and social sciences and psychology even less. Economics combines social science and psychology, especially macroeconomics and political economy. Economic sociology and economic anthropology take this into account, global economic history also demonstrates it.

This is coming to the fore now as some critics of MMT, the Green New Deal, and "socialism" demand to see data-based model that "prove" proposed solutions have worked in the past. Of course, the record is important, but the demand for "proof" requires a degree of stringency that is not applied in social science and psychology because it is unattainable. Nor is this standard applied to conventional economics either, its econometric approaching being based on formalism rather than being empirically based.

Another important point that Andrew Gelman makes is the futility of pitting theories against each other. That is a recipe for disagreement in that the party that determines the framing wins. Whose assumptions are going to set the criteria? Why?

And, no, I don’t think it’s in general a good idea to pit theories against each other in competing hypothesis tests. Instead I’d prefer to embed the two theories into a larger model that includes both of them.

This is a good suggestion but it is general. Often, the disagreement is over fundamental criteria that determine a frame of reference. This should be obvious in the different approaches to economic theory and economic practice., e.g., econometric and institutional, static and dynamic, simple and complex, natural and historical.

Obviously, a short post like this can only suggest matters that need deeper reflection, open inquiry and sincere debate aimed at solutions to pressing design problems. This is no long just "theoretical." Humanity has to get this right to survive, let alone prosper. We have seemingly dug ourselves into a hole based on policy that is has turned out to impractical in the extreme, such as socializing negative externalities that have led to environmental degradation and threaten ecological collapse if not addressed successfully in a timely fashion. So, let's get with it.

Statistical Modeling, Causal Inference, and Social Science
Our hypotheses are not just falsifiable; they’re actually false.
Andrew Gelman | Professor of Statistics and Political Science and Director of the Applied Statistics Center, Columbia University

Duncan Green — Please help me answer some scary smart student questions on Power and Systems

Uncertainty and emergence in huge complex adaptive systems.

To what extent can reflexivity anticipate emergence anticipated and reduce uncertainty by applying creative and critical thinking?

Oxfam Blogs — From Poverty to Power
Please help me answer some scary smart student questions on Power and Systems
Duncan Green, strategic adviser for Oxfam GB

Tom Luongo — Trump Learns Markets Don"t Like Uncertainty

If there’s one thing I’ve learned in my twenty plus years of market-watching it is that markets hate uncertainty. Uncertainty breeds volatility and volatility usually prefaces a panic.…

No matter how powerful you are, you can’t dictate to markets for very long without there being a comeuppance. Even the Fed understands this. That’s why for the past ten years central banks have embarked on a communications policy to massage markets first, to prep them for any changes in monetary policy.

Because shock policy moves cause shocking amounts of money to move, creating panics both up and down. Trump thinks he can conduct foreign trade like he conducts a real estate deal – shock and awe up front to create chaos during negotiations and then settle. But you can’t negotiate with investors and fund managers.

They simply react to chaos with pulling their money off the table and looking for safe places to hide it. And that’s the lesson from this period of volatility in the global markets....

Failing to take the big picture into account, the "master persuader" makes the wrong moves.

Strategic Culture Foundation
Trump Learns Markets Don"t Like Uncertainty

Tom Luongo

Hites Ahir, Nicholas Bloom, Davide Furceri — Global uncertainty is rising, and that is a bad omen for growth

The global economy is growing, but so is uncertainty. This column presents a new quarterly index of uncertainty for 143 countries. The World Uncertainty Index reveals how uncertainty in the world has evolved over time, whether it is synchronised across countries, and how it compares across income groups and political regimes.

Voxeu
Global uncertainty is rising, and that is a bad omen for growth
Hites Ahir, Senior Research Officer, IMF; Nicholas Bloom, Professor of Economics at Stanford University, and Davide Furceri, Senior Economist in the Research Department, IMF

Ugo Bardi — Should we Prepare for a New World War? Answers from the Patterns of Past

Systemic uncertainty in a complex adaptive system. Spontaneous natural order is messy.

Cassandra's Legacy
Should we Prepare for a New World War? Answers from the Patterns of Past

Ugo Bardi | Professor in Physical Chemistry at the University of Florence

See also

Statistical Modeling, Causal Inference, and Social Science
Hey! Here’s what to do when you have two or more surveys on the same population!
Andrew Gelman | Professor of Statistics and Political Science and Director of the Applied Statistics Center, Columbia University

See also

Strategic Culture Foundation
We Are Heading for Another Tragedy Like World War I
Eric S. Margolis

Lars P. Syll — Truth and probability

Keynes and the fundamentals of probability.

Lars P. Syll’s Blog
Truth and probability
Lars P. Syll | Professor, Malmo University

Andrew Gelman — N=1 survey tells me Cynthia Nixon will lose by a lot (no joke)

One way that heuristic thinking works.

Statistical Modeling, Causal Inference, and Social Science
N=1 survey tells me Cynthia Nixon will lose by a lot (no joke)
Andrew Gelman | Professor of Statistics and Political Science and Director of the Applied Statistics Center, Columbia University

Diane Coyle — Finance, the state and innovation

Yesterday brought the launch of a new and revised edition of Doing Capitalism in the Innovation Economy by William Janeway. Anybody who read the first (2012) edition will recall the theme of the ‘three player game’ – market innovators, speculators and the state – informed by Keynes and Minsky as well as Janeway’s own experience combining an economics PhD with his experience shaping the world of venture capital investment.

The term refers to how the complicated interactions between government, providers of finance and capitalists drive technological innovation and economic growth. The overlapping institutions create an inherently fragile system, the book argues – and also a contingent one. Things can easily turn out differently.... 

Bingo.

The fundamental assumption of a free enterprise system ("capitalism") is that entrepreneurship drives innovation, which accelerates growth and overall prosperity.

Looking at the historical record, this is obviously true. But it is more complicated than that, and a lot things can go wrong if all the gears in the machine are not always in sync. History also shows that they are not as evidence by cycles, where all cycles are a combination of business (economic) and financial factors that are influenced by a number of contingencies in a dynamic environment, including policy and its application.

The Enlightened Economist

Finance, the state and innovation

Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

also

The problem I have with this type of reasoning is that assumes away contingency. Technological innovation land the creation of a consumer society through marketing and advertising lead to the creation of mass markets, which changed the dynamic in a way that models did not anticipate and likely could not have because the new technology that made this possible was emergent and foreseeable in advance.

I don't think that this vitiates Marx and Engels' approach, but rather strengthens the argument for the need for conceptual models that are based on "fuzzy logic" to complement formal modeling based on technically defined analytical concepts and precise measurement to delimit the boundaries of sets.

Contingency implies uncertainty. Uncertainty implies the need to use fuzzy logic rather than the strict formalization that conventional economics as "science" demands. Both are necessary tools, especially as scale increases — which is what the fallacy of composition is about. Macro is not and cannot be scaled up micro analysis.

Of course, what can be formalized usefully should be used. But not everything is capable of being modeled formally in a dynamic way when contingency is involved, and static models are mostly gadgets when cet. par. is assumed.

Michael Roberts Blog
The fallacy of composition and the law of profitability
Michael Roberts

Brian Romanchuk — Business Sector Is The Main Source Of Modelling Uncertainty

From the perspective of those who work or are interested in finance, it seems obvious that business decisions are a major driver of the business cycle, assuming that policymakers are not doing anything particularly stupid (as in the Euro area in the post-crisis period). The important exception is the housing market, which is dependent upon the willingness of households to borrow insane amounts of money. (However, even this exception is dependent upon the decisions of the financial sector to extend the insane loans.) Conversely, one of the advantages of a mainstream economics education is that common sense is buried, and the view is that the primary driver of the business cycle is households' decisions to optimise consumption choices over time. The result is that the difficulty of forecasting business sector decisions is swept under the carpet....

Bond Economics
Business Sector Is The Main Source Of Modelling Uncertainty
Brian Romanchuk

Peter Radford — 1937

Hayek, Coase and uncertainty.

In any case I find it fascinating that the two, Hayek and Coase, both in their own way, brought the impact of uncertainty to the fore in the same year.

It’s a shame that economics has never fully embraced, nor realized, the full richness of their ideas. Neither author was willing to step into the world that they clearly understood existed. Hayek was right about universal central planning: it is an impossibility. He was wrong to assert that this implied anything about the market place or prices. By his own argument we simply cannot know whether something is optimal. Uncertainty makes such a thing inscrutable too us. And Coase was equally correct when he saw the need for local central planning: it is the only way we can organize production adequately in the face of uncertainty. But his focus on transactions was a legacy of the classical emphasis on exchange. It ignored the need for active coordination. He missed the requirement for management. He should have talked about “management cost” not “transaction cost”. They’re different animals.

So: an interesting question is this: what happens to Coase’s “institutional structure of production” when information, and by association knowledge, is less clumpy in the economic landscape? Does something like the Internet, which is a vector for information and knowledge, obviate the need for such structure? Does it smooth that landscape out sufficiently for firms not to exist?

We need to think about that.

We need a new version of the discussion that ought to have taken place in 1937.

The Radford Free Press
1937
Peter Radford

Myles Udland — A major psychological shift is occurring across markets and the economy

Markets and the economy are increasingly being characterized by one word: certainty.

This is likely to worry some investors and market watchers who see over-confidence in the future as a sign that things are about to change.

On Wednesday, the latest consumer sentiment survey from the University of Michigan indicated that while overall confidence in the economy is sitting right near a 13-year high, “what has changed recently is the degree of certainty with which consumers hold their economic expectations.”...

Yahoo Finance
A major psychological shift is occurring across markets and the economy
Myles Udland | Markets Reporter

Lars P. Syll — Hicks on neoclassical ‘uncertainty laundering’

A good example of this is the phrase, "the new normal." At first, economists and policy makers were surprised and perplexed when policy predictions of their models based on historical trends did not turn out. So then they dragged in the concept of "the new normal" in stead of admitting they didn't have a grip on what is actually going on. We see this recently in Janet Yellen's statement that the Fed didn't really understand inflation, like it's not doing what it is supposed to be doing. 

The problem with admitting uncertainly is psychological. It is upsetting. Human are very good at fooling themselves by creating conceptual constructs that secure their place in a known structure. Without this humans feel as though at sea in a storm.

For the ancients this was accomplished through myth and magic. For moderns it is done through models and math. Neither approaches are capable of overcoming uncertainty. The latter does a better job, but it still leaves gaps that few are willing to admit and risk psychological upset that affects "expectations."

Lars P. Syll’s Blog
Hicks on neoclassical ‘uncertainty laundering’
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Putting predictions to the test

Proof of uncertainity.

Lars P. Syll’s Blog
Putting predictions to the test
Lars P. Syll | Professor, Malmo University

Olivia Goldhill — A philosopher who studies life changes says our biggest decisions can never be rational

At some point, everyone reaches a crossroads in life: Do you decide to take that job and move to a new country, or stay put? Should you become a parent, or continue your life unencumbered by the needs of children?

Instinctively, we try to make these decisions by projecting ourselves into the future, trying to imagine which choice will make us happier. Perhaps we seek counsel or weigh up evidence. We might write out a pro/con list. What we are doing, ultimately, is trying to figure out whether or not we will be better off working for a new boss and living in Morocco, say, or raising three beautiful children.

This is fundamentally impossible, though, says philosopher L.A. Paul at the University of North Carolina at Chapel Hill, a pioneer in the philosophical study of transformative experiences. Certain life choices are so significant that they change who we are. Before undertaking those choices, we are unable to evaluate them from the perspective and values of our future, changed selves. In other words, your present self cannot know whether your future self will enjoy being a parent or not....

Having established the epistemological significance of transformative life choices, there still remains the question of how, exactly, we should make such decisions. Paul is still figuring this out. So far, her best proposal is that, while you can’t know which choice you’ll prefer, you can at least decide whether you want to experience a transformation.

Perennial wisdom suggests the principle, It is always reasonable to go beyond reason to love. The transformational power of love is the strongest force in human life.

From a systems perspective, this transformation involves emergence, and emergence involves uncertainty.

Quartz
A philosopher who studies life changes says our biggest decisions can never be rational
Olivia Goldhill

Brian Romanchuk — Science And Economics

I had largely managed to avoid writing about the latest angst in the economics blogosphere regarding mathematics, science, and economics. I am not a fan of mainstream economics, but at the same time, I question some of the broad brush attacks on economics. The quest to pretend that economics can be a science like physics is doomed, and does not take into account the nature of what is being studied.

Bond Economics
Science And Economics
Brian Romanchuk

Lars P. Syll — What is Post Keynesian Economics?

Paul Davidson's view.

Lars P. Syll’s Blog
What is Post Keynesian Economics?
Lars P. Syll | Professor, Malmo University

Peter Cooper — The Confidence Fairy and Formation of Demand Expectations Under Uncertainty

From a broadly Keynesian viewpoint, output is demand determined. This suggests that fiscal policy, by affecting demand, can affect output and employment. At the same time, however, many Keynesians emphasize fundamental uncertainty. Firms’ output decisions depend upon expectations of future demand, and these expectations must be formulated under conditions of uncertainty. It can be wondered how the efficacy of fiscal policy squares with the presence of uncertainty....

heteconomist
The Confidence Fairy and Formation of Demand Expectations Under Uncertainty
Peter Cooper